Step 4: Aim to Retire

YES, WE’RE ONLY ON step No. 4—and we’re already talking about retirement. There’s a host of reasons saving for retirement should be a top priority. But two reasons stand out.

First, retirement is easily our most expensive goal, and it takes decades of saving diligently and earning investment returns to amass enough. By starting to save for retirement as soon as we enter the workforce, the sum we need to sock away each month will be far more manageable.

Second, if we have a 401(k), 403(b) or similar plan at work that offers an employer match, we should make sure we collect that full matching contribution—because it’s the best deal in savings. Suppose our employer kicks 50 cents into the plan for every $1 we contribute. That’s like an immediate 50% return on our money. Throw in the tax advantages, including either an initial tax deduction from funding a traditional 401(k) or the tax-free growth offered by a Roth 401(k), and failing to contribute to a 401(k) is probably the biggest financial mistake we can make.

What if our employer doesn’t offer a 401(k) or 403(b)? We should strive to save on our own, including funding either a tax-deductible or Roth IRA. If we’re early in our career, with a relatively modest income, a Roth—with its tax-free growth—will likely be the best option. But if we find ourselves in the 22% or higher federal tax bracket, we might favor a tax-deductible IRA, assuming we’re eligible. The reason: Given our higher tax bracket, the deduction will deliver handsome immediate tax savings, plus there’s a greater likelihood our tax bracket will be lower once we’re retired.

Next: Step 5: Shed Bad Debt

Previous: Step 3: Doctor’s Orders

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