Question: Love your show! It’s interesting to hear all the different financial scenarios that are out there and to hear the solutions to each one. I was looking through the archives hoping to find an answer to my question but to no avail and was wondering if you can help me out.
Here’s my situation: I am currently 28 years old and married. I have been contributing to my company’s 401(k) plan for about 4 years and I’m fortunate enough that my company matches a 3% salary deferment with 4.5% (every 3 dollars I put in, they match with 4.5). My wife also has a 401(k) plan where her employer matches about the same. As we’ve progressed through the years our debts have gotten smaller. Our current liabilities include 16k combined on student loans, a mortgage, a vehicle loan and no credit card balances.
So here’s the question: I want to increase my retirement contributions to 10% of my current salary to take advantage of the 30 years that I will have for the money to grow. I’m not sure what I should do with this 10% though. The first thing I considered was increasing my salary deferment to 10% all into my 401(k). This wouldn’t exceed my maximum annual contribution limit and our current finances would not be affected if we never saw this money however I don’t know if this is keeping all of our eggs in one basket. Should we divide that 10% up or not? Richard, Waukesha, WI
Answer: It’s a good question. I’m going to suggest a three-step process. See what you think. First, I would go ahead and take the opportunity to hike your 401(k) contributions to the maximum. My advice assumes that you like your employer’s plan–the investment choices and associated fees. And, as you say, you won’t really even feel the difference in your everyday lifestyle.
Second, once you’ve hiked your contributions into the 401(k) I would then focus first on paying off your debts–except the mortgage.
My third step addresses your question about putting all your savings eggs in one retirement basket.To some extent you would be doing that.It doesn’t concern me too much since the underlying investments are diversified. It’s also a simple, painless way to boost your contributions. And then you’ll be raising other savings by eliminating debt.
But by all means open up a Roth-IRA if you want when you can. The advantage of a Roth is that any gain comes out tax free when withdrawn during retirement. (This assumes that you met the Roth income requirement.) It diversifies the tax treatment of your retirement savings.
If you want to reverse step two and three that’s fine. You and your wife are good savers.
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