Perspectives

Ask Stuart Ritter, CFP

Gregg Wolff’s Question –  I’ve seen various financial calculators estimating how much you should save for retirement, but I haven’t seen any adjustments for pretax money, post tax money and Roth money. Thoughts? 

Gregg’s Answer:  Different tax treatments have the potential to impact  how much to save, but not that much.  We believe you should target at least 15%.  Use a tax-advantaged account (pre-tax or Roth IRA – Roth tends to be the better choice for most people).  You’re right that $1 in a Roth IRA is worth more than $1 in Traditional since you’ll get to spend the full amount in the Roth IRA (whereas you may lose part of what’s in a Traditional to taxes).  At the same time, it’s impossible to know exactly what your tax situation will be at and through retirement.  So stick with the 15% to keep yourself on track – and you can use tools like our Retirement Income Calculator (RIC) to get a more personalized number.

Linda Rhythmroads’s Question: Is it wise to stop contributing into a 401k and use that money to bank 8 months of cash reserves? Which is most important? 

Linda’s Answer:  No.  We feel you should contribute to both simultaneously.  First, you need about 3-6 months in your emergency fund.  Eight would be appropriate if you feel that your job is particularly vulnerable and it would take you an extended period to find a new one.  At the same time, you shouldn’t neglect other important goals.  In addition to building an emergency fund, you should simultaneously be saving for retirement (in an effort to take advantage of both any match that’s offered and to start the compounding process as soon as possible).  You should also ensure you have the insurance you need and that you’re paying down consumer debt.  Your target for retirement saving should be at least 15%, including any employer match.  If you’re not at that now, increase your savings by 2 percentage points each year until you get there, using tools like our Retirement Income Calculator (RIC).  As your emergency fund gets built and as your debt gets paid down, you’ll have more resources available to commit to the retirement goal.

Matthew Brown’s Question: for people in their late 20′s, early 30′s, is it better to have a tax sheltered ret acct like a 401k or to take the tax hit now with a Roth IRA? 

Matthew’s Answer:  We think Roth is better for most people – and almost assuredly for those in their 20s and 30s.  First, though, get any match that your employer offers.  Second, your employer may offer a Roth option within your 401(k).  If not, investigate a Roth IRA (there are income limitations to being eligible to contribute).  And if the 15% you’re saving means you need to save more than the $5,000 allowed for a Roth IRA, use your employer’s 401(k) offering.

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