The latest question into Walter Updegrave comes from a recent college graduate who wants to make sure he’s on the right track to retirement. Richard in Washington DC contributes 5% to his 401(k), which is matched in full by his employer, and puts $200 a month into a stock fund. So, what did Walter say about his current plan?
It’s great and the key to an early retirement is to start saving as early as you can and as much as you can because an early retirement hurts your retirement plan in two ways: you need more money (since you’re retiring early) and you have less time to save it (since you’re retiring early!). So, what did Walter recommend?
- Double check that you are getting the maximum from a company match. 5% is great if that’s the maximum (which it probably is), but it’s not great if the max is 6%. If he’s leaving money on the table he should contribute more to the 401(k) and contribute less to that stock fund.
- Contribute to a Roth. Instead of putting the money into a regular stock fund, putting it into a Roth lets it grow tax free and it’s something you should try before going with a taxable brokerage account. If you don’t qualify for a Roth, you can always do a traditional IRA and then convert when the income limits are raised.
- Pad your emergency fund. The last bit of advice Walter gives is that our friend Richard should pad up his emergency fund in the event of… well, an emergency. A few months of expenses is always a good idea, it lets you weather the storms without having to dip deep into the red.
Source: CNN Money