I have 30 years until I retire, what is the best method to save for retirement?

Asked by Apryl

1 Answer

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Answered by David Meyers, Financial Adviser in Palo Alto, CA
Assuming a few things: (a) you have an emergency fund (3-6 months of cost of living in highly liquid risk-free savings of some sort); (b) you've paid down all credit card debt and are paying off credit cards monthly

The first place to look is your employer's 401k (or 403b, etc). If the employer matches contributions - that's free money for the taking. If, say, the employer matches 50% of the first 6% you put in, it's a no-brainer to put in that 6% of your pay to get an instant and risk-free 50% return on that money!

However, before maxing out that 401k -- make sure it's a great plan with low expenses, good funds, etc. Even if it's not a great plan, certainly put in enough to get any employer match, but only continue to add above what's needed for the match if it's a good plan (and/or you have already maxed out other retirement savings options.

Consider a traditional IRA -- or a Roth IRA -- depending on your income. You may not be permitted to contribute directly to a Roth if your income is above the thresholds, and if you have an employer plan, you may also not get the up-front tax deduction for contributions for the traditional IRA. It's very likely still a great idea, even if you don't get the up-front tax break, to contribute to the traditional IRA. The assets in there continue to grow tax-deferred, there may be Roth conversion opportunities (which would allow additional growth to potentially be tax-free), etc.

Remember - money in IRAs and 401ks (and similar) have substantial advantages over money outside of those plans. Tax deferral or tax-free growth is only one part. Money in those plans also is better protected from creditors, is generally not considered when applying for college financial aid for your kids, etc. Definitely try to get as much as you can into these types of "qualified" plans.

If you've already maxed out your 401k, your IRA/RothIRA, and have run out of options -- or are planning for things other than retirement -- there's nothing wrong with plain old traditional taxable brokerage accounts. With some care, you can put together a phenomenal low-maintenance tax-efficient portfolio.

Beyond all that, there are some additional options to consider, but for most people they fall way down on the list. (Variable annuities of any sort, cash-value life insurance of any sort, for example -- if you're not already maxing out 401k and IRAs, most folks should not be worrying about these things. There are some exceptions, of course, but for most people, the traditional retirement accounts should come first).

Additional -- make sure you have adequate disability insurance, look into long-term-care insurance (may be a harder argument to make -- and there are some long-term-care/life insurance hybrids which look pretty good right now) -- and if you have anyone financially dependent on you, life insurance, too (check first to see if your employer is offering a life insurance benefit, and even then it may be worth considering a directly purchased low cost level premium term policy).
| 10.01.15 @ 19:44
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