Dave Ramsey: How Do I Invest 15% for Retirement?
When it comes to saving for retirement, money expert Dave Ramsey knows exactly how much you should be setting aside. Ramsey’s recommendation, which he shared on his website Ramsey Solutions, is to invest 15% of your gross income into your 401(k) and IRA every month.
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There’s a good reason you should invest 15% of your income. The math breaks down as follows. According to Ramsey, the median U.S. household income is about $70,800. Investing 15% of this amount would be $10,620 a year, or $885 a month. Over 30 years, and assuming an 11% return, this grows to $2.48 million in your nest egg. By consistently investing 15% each month, you put yourself on track to retiring as a millionaire.
Now that you know how much you need to save, how can you reach this 15% goal? Follow these three steps to properly invest 15% of your gross income for retirement.
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Pro Tip: Don’t Invest Until You Do These Two Things
Before you start your investing journey, Ramsey recommends paying off all outstanding debt and setting aside three to six months’ worth of savings into an emergency fund — these are steps two and three of the 7 Baby Steps, respectively.
Once you take care of both these items, you can begin to invest.
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1. Invest Up to the Match
Does your employer offer a workplace retirement plan, like a 401(k), 403(b) or Thrift Savings Plan (TSP), with a match included? If you answered yes, take advantage of this plan to start investing.
According to the post on Ramsey Solutions, those who like the investment options offered by their employer can invest the entire 15% of their income there. This is especially true of Roth 401(k) and Roth 403(b) offerings.
What if you only have traditional 401(k), 403(b) or TSP options? If you find this is applicable to you, take this next step.
2. Fully Fund a Roth IRA
After you invest up to the employer match in your company retirement plan, it is recommended that you fully fund a Roth IRA. Remember there’s an annual contribution limit for the amount you can invest in it each year. In 2023, the cap is $6,500 a year if you’re under age 50 and $7,500 a year if you’re age 50 or older.
Why would you want to fully fund a Roth IRA? The post on Ramsey Solutions reads that a Roth IRA allows money invested in it to grow tax-free, since you’re contributing after-tax dollars to this account.
3. Keep Bumping Up Your Workplace Contribution
Still haven’t met your 15% investment goal? The post on Ramsey Solutions recommends going back to your traditional 401(k), 403(b) or TSP workplace retirement plan. Keep bumping your contribution up until you hit 15%.
While you’re there, make sure you have your account set up for automatic withdrawals. Doing this means your money goes straight from your paycheck to your retirement account and keeps you from spending the money meant for investing on things you don’t need. If you receive a raise or bonus at work, it’s recommended that you automatically withdraw a percentage of your income from your paycheck to increase your overall retirement savings.
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This article originally appeared on GOBankingRates.com: Dave Ramsey: How Do I Invest 15% for Retirement?
