Okay, I think we are well on our way to saving for retirement. In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement. In Part 2, I talked about the different options that exist for retirement savings. In this installment, I will show you how to efficiently use the options that exist for your retirement savings.
In order to make an informed decision, the first thing you need to do is decide how you see your lifestyle during retirement. There are three options:
1) You will not work at all.
2) You will work in some capacity.
3) You are not sure if you will or will not work after retirement.
Your retirement savings decisions are highly dependent on which of these categories you see yourself in.
If you are not going to work and will live solely off your retirement income, it makes more long term sense to max out your 401K, 403B or traditional IRA before investing in a ROTH IRA.
If you are going to work or are not sure if you are going to work in retirement, it makes more long term sense to contribute to your 401K/403B up to your company match, then max out your Roth IRA and then max out your employee sponsored plan. If you do not have an employee sponsored plan, max out your Roth IRA first and then max out your Traditional IRA.
These assumptions are made based on the current income tax rates. If these were to increase significantly, my advice would be very different. If you are not sure if you are going to work in retirement or you are wary of income tax increases in the future – by all means utilize the ROTH IRA after taking advantage of any free money match from your employer. It is a way to diversify your tax risk. But if you know you want to relax on the beach, not work, and are confident that tax rates will stay constant or decline than make the most of your employer sponsored plan or Traditional IRA before participating in the ROTH IRA.
Now you know that you should save for retirement, you know what vehicles are out there and what make the most sense for you to use – In Part 4 I will show you how to sign up for these retirement vehicles and get in the game. Stay Tuned!
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