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- The best way to save for retirement depends on a few different things, says one financial planner.
- If you aren't taking advantage of any retirement matching at work, he said, that's the best place to start. And if you don't have an emergency fund, you'll need to prioritize that first before focusing on your retirement savings.
- If you have taken advantage of any employer match and you have emergency savings, the next option to consider is a Roth IRA, a tax-advantaged retirement savings account.
Are you ready to start saving money, but not sure what to do? We asked Brian Face, CFP, CRPC, and founder of Michigan-based Face 2 Face Planning, for advice. "Having a mission to save more is great, but the best steps depend on a few questions," he said.
Question 1: Have you taken advantage of retirement match at work?
Many employers will offer to match contributions to your retirement plan up to a certain percentage of your paycheck. "If a company matches the first 3% that you contribute, that is a 100% return on that 3% without the stock market even moving," he said — a deal that's not to be missed.
To take advantage of employer match, you don't have to max out your 401(k) if you'd rather not. You only need to contribute as much as your employer will match.
If your employer doesn't offer retirement plan matching, though, you might be better off investing the money on your own and avoiding 401(k) management fees.
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Question 2: Do you have 3 to 6 months' worth of expenses saved?
That brings us to Face's second question: "Do you have 3 to 6 months saved in a liquid savings account?"
If you don't, you'll want to prioritize your liquid savings before turning your attention to saving more for retirement.
Commonly referred to as an emergency fund, these savings help to ensure that a major financial event like a job loss or big medical bills doesn't force you to dip into your retirement savings. You'll want to keep that money somewhere that it's safe, but relatively easy to access, like a high yield savings account — one that earns at least 2% interest.
Several online banks and credit unions offer interest rates above 2%, including Ally Bank, which is a favorite among financial planners.
If you answered yes to both: Consider a Roth IRA
"If both of those steps are done, I would look next to a Roth IRA," said Face. "Roth IRAs are great because the money you put in has already been taxed, so it grows tax-free and can be taken out tax-free when you retire."
Roth IRAs also offer some flexibility if you think you may need access to the funds before retirement, since "any money you put in a Roth can be taken out without penalties," Face said. "However, be careful, because any growth in the Roth IRA has different rules." While the principal (the money you contributed, on which you've already paid taxes) can be withdrawn at any time, any investment returns and dividends may be subject to taxes and fees if withdrawn early.
That doesn't mean you should count on a Roth IRA to hold savings you need in the short term — a high-yield savings account is a better fit for money you know you'll need soon. Retirement savings depend on compound interest to grow over time, so generally, you want to leave any funds in retirement accounts untouched until retirement age.
A Roth IRA also isn't an option for everyone, since there are income limits for the people who can contribute. Only individuals with a modified Adjusted Gross Income of less than $137,000 a year can take advantage in 2019.
It's because of these considerations that Face recommends anyone seek advice from an expert before deciding to open a Roth IRA. "Whether to invest in a Roth IRA or not will depend on your tax bracket and retirement plan at work," he said. "Always talk to your tax professional before you decide what is the best option for you."
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