Save your first

— or NEXT


Get our free weekly newsletter and MoneySchool: Our FREE 7-day course that will help you make immediate progress on the money goals you’re working toward right now.

No, thanks
Subscribe now

How Much Should You Contribute To Your 401(k)?

A 401(k) is an important tool for maximizing your retirement savings. But it’s not the only one. We break down how much you should contribute to your 401(k), how much should go to other vehicles like IRAs, and how to balance retirement savings with other priorities like paying down debt.

How much should you contribute to your 401(k)?Ten percent? Twenty percent? More?

I’ve written a lot about the benefits of both 401(k)s and IRAs. We’ve also looked at the emerging Roth 401(k) option and when it makes sense for young investors.

But everybody’s next question is: “Okay, okay, but how much should I put into my 401(k)?”

Table of contents

    There’s no one-size-fits-all answer

    One of the most popular posts in this blog’s ten-year archives is “How Much Should Be In Your 401(k) At 30?”

    I was 25 when I wrote it, trying to decide how much to contribute to my own 401(k).

    But what I learned from over 200 (sometimes nasty) comments is that setting a savings benchmark by age alone is silly; no two savers are the same. You can’t compare the engineer who graduated at 22 into a $65,000-a-year job with no student loan debt to a doctor who starts practicing at 29 and has $200,000 in loans. Or the social worker earning $35,000 a year and needing all of it just to eat.

    Today I want to provide slightly more tactical advice. As a percentage of your income, how much should you contribute to your 401(k)?

    • If you’re in debt?
    • If you can also do a Roth IRA?
    • If your employer does not match funds?

    The two fundamental rules of retirement savings

    Here are two rules that will apply to almost everyone:

    1. If your employer matches 401(k) funds, contribute enough to get the full match. Do this first. Even if you’re in debt. Even if you don’t put in a penny more. It’s free money, and you should take it.
    2. Next, if you can contribute to a Roth IRA, work on contributing the full $5,500 a year to that account before you contribute any extra to your 401(k) (aside from what’s necessary to get the employer match). This will give you a nice cushion of tax-free cash in retirement.

    Figure out the ratio you’re the most comfortable with—but keep upping your savings

    There are lots of ratios out there recommending how to divide up your income. Some are as simple as spend 50 percent, save 50 percent. Although an admirable goal, most people will have a hard time with this. Especially in your twenties. I like 75/20/5.

    • Spend 75 percent
    • Save 20 percent
    • Give 5 percent

    But figure out the ratio you’re comfortable with. You may want to defer charitable giving until you’re debt-free. If you need most of your income to eat, it might be spend 90, save 10 or even 95/5. That’s okay. But you should reevaluate this as your financial situation changes and aim to get to at least 80/20.

    In this example (75/20/5), if you earn $40,000, you would spend $30,000 or $2,500 a month, save $8,000 a year, or $667 a month, and—if you want—set aside $2,000 a year for your chosen causes. Note that we’re working off of before-tax income, so that $2,500 a month for spending might be more like $2,000 after taxes).

    Working backwards from this, let’s say your employer will match up to half of a six percent contribution to your 401(k). So six percent of your pre-tax income is $3,000. Your employer throws in $1,500. You put that in, and you have $3,500 left in your savings budget.

    If you don’t have a fully funded emergency fund, this comes next. Open a simple online savings account—they’re boring, but safe—and load it with cash.

    If you have plenty for a rainy day, then you return to your retirement options. If you qualify for a Roth IRA, that’s probably where the $3,500 should go. If you don’t qualify or have more than $5,500 left to spend, return to your 401(k) and up your contributions.

    The four levels of retirement savings

    The lesson is: Figure out what percentage of your income you can save in total, and allocate it appropriately:

    Level 1: Max out your employer match in your 401(k). (Free money!)

    Level 2: Max out your emergency savings (about six months’ living expenses).

    Level 3: Max out your Roth IRA (up to the $5,500 annual cap).

    Level 4: Max out your 401(k) (up to a total of $18,500 in employee contributions).

    This flowchart from my post on creating an automated investing program will also help:

    An automated investing plan ensures your money is always flowing into the right investments.

    Get help with your 401(k)

    Already have a 401(k)? While you’re researching contributions, take a minute to analyze your current holdings too—there could be big savings to be found.

    Personal Capital is a free app that creates easy-to-understand visuals of the investments you own in your 401(k), IRA, and other investment accounts. It then provides recommendations for how to rebalance your portfolio for maximum results and reduced expenses–it can even show you how changing funds within your existing 401(k) might save you thousands. Try Personal Capital now or read our review.

    Blooom is a new tool that can automatically manage and optimize your 401(k) for just $10 a month. Designed especially for 401(k) accounts, Blooom works with your available investments to find the lowest-cost and best allocation for your goals. You can get a free 401(k) analysis from Blooom or learn more in our review.

    If you’re in debt, focus on high-interest balances while you save

    If your employer matches 401(k) contributions, put in enough to get that match, even if you’re in debt.

    Next, if you’re in credit card debt, stop. Put your extra money towards paying that off before making additional retirement contributions. Focus first on getting out of credit card debt and then come back.

    Got student loans? Follow the above schedule anyway. Unless your private loans have double-digit interest rates, I don’t recommend repaying student loans early.

    It never hurts to save more

    Twenty percent is a great goal, but some retirement experts actually suggest saving more like 25 percent or even 30. Why?

    You know that saying, “Past returns are no guarantee of future performance”? That’s why. It’s true that the annual average return of the S&P 500 between 1928 and 2014 was 10 percent. But that doesn’t mean we’ll get that average return over the next 86 years.

    Jack Bogle, the father of index funds and founder of Vanguard, says that “investors should plan on lower returns in the coming decade” and other commenters suggest lower yields even beyond that.

    We have no way of knowing what future returns will be—they could be 8 percent, they could be 4 percent. But the only way to hedge against an uncertain future is to save more money. The more you have, the less you need jaw-dropping returns to meet your goals.


    Everyone’s financial situation is different, and thus everyone’s retirement contributions will also be different. The key is to find a ratio you’re comfortable with, but that also encourages you to save a little extra than you might otherwise. We suggest aiming for a ratio of 80/20 to start with, and upping as you can.

    Read more:

    Start investing today

    Low-fee roboadvisor with no minimum investment. Creates fully-automated portfolios based upon your desired allocation.

    Ally is our recommended online broker for more frequent trading. Pay just $4.95 per trade. Open a new account with at least $25K and get a $200 cash bonus! Open an account with at least $10K and enjoy 90 days of free trades!

    For investors looking for a one-stop full-service broker, Fidelity offers thousands of direct mutual funds, commission-free iShares ETFs, and reasonable $4.95 stock trades.

    Save or share! Email this page »
    About David Weliver

    David Weliver is the founding editor of Money Under 36. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


    We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 36.

    1. Dan says:

      I had a question. I work for the state and am 28 years old. I automatically have 10% of my gross paycheck taken out for a pension plan. How much should I be putting away towards a 403b? (no match as Im a state employee). This past year I put away a little more than 15% but I’m looking to put in less this year in order to pay for other expenses (student loan debt, perhaps an investment property etc). Would 5% be enough? 10%? I currently have about $25k in the 403b.

      • jaques says:

        Katilyn wants to save $ 2500 over 3 years for

        a down payment on a car. How much should she save each month?

    2. mel says:

      You emphasize a lot on allocating the amount that your employer will match for a 401K. I think this is wise, however it must be noted that companies often have vesting schedules. So even if your employer is matching you at 3%, say you leave after 2 years you may not be “vested” and will then lose that money that they put up to match. I have heard of some companies on 5 years vesting schedules, so this is important to note.

    3. DG says:

      Solid article, but I disagree about not paying student debt early. I owe 3 debts: mortgage at 4%, auto loan at 1.9% and student loan at 6.8%. To my mind, it makes sense that the highest interest debt should be eliminated first. Is my thinking wrong on this?

    4. Rachel says:

      My question,

      I am 25, the job I work only pays $9.00/hourly with absolutely no benefits. What should I be aiming for here? I live alone and am also a full-time student.

      • TB says:

        Kudos for thinking about your long-term finances as a young professional. Just aim to minimize discretionary spending (coffee, eating out etc.) and creating a slush fund/safety cushion in case of an unexpected emergency (injury, illness, job loss). In the future, any time your income rises save a little bit more toward paying down debt and then saving for retirement/house down payment.

    5. jessica says:

      I have put 3% of my check for the past two years. And I have student loans. I don’t know if i should start paying off my loan?

    6. Shane says:

      The age at which you retire shouldn’t be about an age so much as it should be about a dollar amount. How much money do you think you’ll need/want to support the lifestyle in which you want to lead. $75k per year withdrawals for 20 years of retirement is 1.5 million dollars. Sure the account will still grow and it will last a little longer than 20 years but that doesn’t account for the curve balls life may throw at you, like major medical issues or other emergencies.

    7. Travis says:

      This is good advice, but what about keeping some of your savings liquid? Especially for those of us in our twenties with goals of one day buying a house or a new car shouldn’t we be putting some moeny into a brokerage account as well? I am fortunate enough to match my employers contribution, max out the Roth IRA and still have some left over. With the extra I put most back into the 401k and put some into a brokerage account that is invested in the Vangaurd Life Strategy fund (thanks for that advice as well David). By being more liquid I am able to focus on short term goasl without the penalties of taking money out of retirement accounts early. Do you really think that it is more important to max out the 401k (17,500 for 2013) or keep some of your money more accessible?

      • David E. Weliver says:

        You’re right, Travis, I think in financial advice (mine included), we’re guilty of sometimes over-emphasizing retirement accounts. I’m working on a post soon about balancing retirement savings with saving for shorter-term goals. Stay tuned and thanks for the input.

    8. John says:

      I put 16 % into my 401 K and 9 % into a roth IRA for a total of 25 % of my gross which is 98 K. I recently just made this increase from 16 % overall after a raise. Based on the limits you outlined, not sure if my change will be rejected by the company if I hit the max. My employer match upto 5 % and I have one credit card that I plan to payoff by in three months from my current salary. Should I maintain these level or is it smarter to invest elsewhere? My concern is I have no self control and if I place it in an accessible account, I will spend it.

      Thank you,

    9. Cobo says:

      Im 28 dept free, and I wonder if its wise to invest so heavily in retirement accounts. Because its a very long time before you can use it without incurring penalties.

      Don’t get me wrong I religiously add to my retirement accounts. I put 6% (employer match 50% on first 5%) in my 401k , and 5k into a Roth IRA each year. And despite the recession its grown to a healthy number (~75k), But I still keep getting told that I should put more into retirement!

      The way that I see it is that there are a lot of big expenses down the road that I need to save/invest for. Like vacations, a new computer, a home (condo or house haven’t decided), car repairs, and a little further down the line, a wedding, and kids, and stuff. If I put 20% (which is my max) into my 401K it would be impossible to build the kind of life that Im working so hard for.

      Maybe there should be an article about life/retirement savings balance. For those who have embraced 401ks & IRAs.

      • David E. Weliver says:

        Thanks for the feedback, Cobo. I agree that we, at a young age, have lots of other pressing goals aside from retirement. I’ll take this under consideration to examine for future posts. In the meantime, I think it’s advisable to start with retirement accounts for the tax advantages (in other words — at least contribute to a 401k up to your employer’s match and put at least a little into a Roth IRA). But after that, it may not be such a bad thing to focus on any important shorter-term goals.

        • Adam says:


          I too am having the same debate with myself. I understand the important of saving for retirement. My parents told me “You will never say you over saved for retirement”. Right now I contribute about 13K a year to the 401K and 5K a year to the Roth. My Roth and 401K is increasing and growing nicely for a 29 year old. However, I am a little irked that I am focusing on my 60’s with most of my savings. My expense ratios are 1.5-1.8 for all my 401K funds, which is very high. I am debating only contributing my employer match and putting the rest into a taxable account where my expense ratios are .07-.20

          I have an emergency fund and small amount in a taxable brokerage fund but who wants to live life preparing for their 60’s and 70’s. I understand I need a balance.

          The 401K offer a nice benefit of investing pre-tax dollars but the way our economy is increasing taxes and If I have an increasing income WHO KNOWS what my tax rate will be when I start withdrawing? I would like to learn more about the benefits/drawbacks to how increasing tax brackets and what the government might do in 20-30 years…How will this affect 401K’s??

          There probably is no specific answer for flexibility but investing into a taxble brokerage account will give me the options to use that money for the purchase of a house, starting my own business, investing in other arenas, weddings, kids, college, etc….There is definitely a value to that. It seems each individual has to figure that out on their own.

          What do you think?

    10. Billy says:

      I’m 28 and have been married three years. Our total annual household income is about $175,000. We have recently built a new home that we plan to live in a long time (ideally forever), and have a $227,00 mortgage after paying down 20% of our our construction loan to avoid private mortgage insurance. Our only other debt is $51,000 in federal student loans which has been consolidated and set up on a 30 yr note with at 6.25% fixed. We have about $55,000 between our 401k accounts. We will be increasing our contributions to reach the max on my wife’s 401k and while mine won’t be maxed out I’m still investing 15% of my gross income. I also opened a Roth IRA two years ago with $5000 but have been reluctant to continue funding it. We maintain a fairly strict budget and are usually able to save around $3000 a month. We have accumulated $50,000 in cash which is in a savings account that earns almost no interest.

      I would like to get some advice on what direction we should be going in with our disposable income each month. An emergency fund of at least $30,000 is what I’m estimating would cover 8-10 months of our expenses. We don’t make additional principal payments to our student loan or mortgage, however I have been thinking we will payoff the student loan all at once in December of 2013, provided we’re able to maintain our current monthly savings rate. Is there something we should be doing with our cash savings as opposed to just hoarding it in a low(almost nothing) interest savings account? Also we both have plenty of life insurance coverage. I would greatly appreciate any opinions.

      • Matt says:

        Hey Billy,

        You were smart to purchase property/house that leaves you with a mortgage of about 1.5X your income. And your perspective of attempting to live there forever is great and justifies that decision. Your biggest issue is your student loan debt. I would say you prematurely purchased a home and that you would’ve been better off renting until your student loan debt was payed off.

        As for your current situation. I would recommend a balanced approach to your finances. Of the 3k you save each month (I presume this is all post tax, non-retirement savings) I would immediately increase your student loan payments by $1500/month. This will put you on pace to payoff the student loans within 3 years. As for the other $1500 this is a matter of preference. If I were you I would keep 2-5k in a savings account. The rest I would take to an investment broker and inquire about their low cost managed accounts. You can get a moderate risk diversification and they will manage it for a nominal fee. I would contribute the other 1500 dollars to this account every month. With every raise/bonus/windfall of money I would equally split it between 401k until it’s maxed by both of you, student loan repayment, and your investment account. If you do this for 3 years you will wake up one day with over 100k in your investment account, a large 401k and no debt. Also, do not be afraid of contributing to your Roth IRA. It is probably the second best investment account you will ever have access to and if your income continues to increase you will eventually be phased out from contributing to it. (The best being an HSA IMO)

        You will notice I don’t recommend keeping an “emergency fund.” That is something that is way too hyped. You have 50k, and that will just continue to grow as you add to it. You will always have access to cash if you ever need it. Yes it may take a week to get it, and yes the market might go down, but that is why you have 2-5k for quick access. If you need more you can get it. If you get a proper risk/diversification you will be at significantly reduced risk for crazy swings in the market.

        There are other approaches, and it’s possible that you come out ahead in other scenarios but this reduces your risk and gives you the most flexibility throughout the process.

        • Billy says:

          Many thanks for advice which makes a ton of sense to me. You mentioned flexibility, which is something that helps me sleep better at night. With that said, what would be the disadvantage pumping all of our post-tax/post-retirement savings into a reduced risk brokerage account, then paying the student loan off in one lump payment once that becomes possible? And then take that same approach with our mortgage? Thanks again for the reply.

          • Matt says:

            There are many approaches and you could do it that way but I wouldn’t.

            I would not do that for your student loans because you are paying 6.5% interest on them and would have to beat that in an investment account to come out ahead. And even then, you’d still have to pay capital gains on any earnings. Everytime you put money towards your student loans you are getting a guaranteed 6.5% return because the interest is recalculated at every month. Do the math of total cost of paying the minimum payments for x number of years until you expect to lumpsum payoff the student loans. And then total cost of making minimum payment + 1500. If your payoff dates are the same, you will come out ahead with the 1500 extra payments.

            Your mortgage, it depends. If the mortgage is not re-amortized with an additional payment, then there is no advantage to paying extra periodically. You would want to wait until you have a lump sum and either pay it off entirely, or use that lumpsum with a refinance.

            Your focus right now really should just be the student loans.

        • Kate says:

          I see that this is an old thread, but I just have to make a remark about your statement that people are better off renting (as opposed to buying a home) before paying off student debt. That seems like really poor advice and I disagree. Obviously being house poor is a bad idea, but if you are buying within your means then it’s so much better than renting! We all need someplace to live, and unless you are living in your mom’s basement, it’s going to cost money….why would you discourage someone from building equity by funneling those rent payments toward ownership of their own home?? Are people supposed to delay their lives until they are completely free of student debt???

          • Dennis says:

            I think Matt’s answer is all centered around maximizing your rate of return on the money you have to spend. He is saying that whatever you put towards your loan is guaranteed to have a 6.5% return (minus what you pay in rent), because that is interest that you no longer have adding up on your due amount for your loan. If you decide to put that money towards a house, who knows what your rate of return will be on that money. Depending on the interest on your mortgage, the housing market where you live, etc, it may be hard to realize more than 6.5% (minus what you pay in rent) in residential housing. I’m not an expert in residential real estate, but that 6.5% goal might be a bit high.

            Of course it all depends on your individual situation such as what you pay in rent, your housing market, a prospective mortgage rate, and the interest rate on your student loan. It could be better or worse to pay off your loan first. At least I think that is what he is saying.

    11. Nick says:

      I think something that should be mentioned more is a roth 401(k) option if the employer offers it. This way, you get to take advantage of a company match as well as have the advantages of paying taxes now as opposed to later.

    12. Ryan says:

      My company matches my 401(k) 40% up to 15% of my salary, which is a large percentage of my income. I have college and some credit card debt. Should my priority still be to get to this maximum 401(k) match before really tackling my debt or even considering a Roth IRA? It seems like that would make sense since its free money, but I haven’t found any other advice on this matter. Thanks.

    13. Marc says:

      So you think I should, drop the investment in my retirement all together until my student loans are completely paid off?

    14. Matt says:

      I do not understand the perspective that one should focus on their retirement savings over student loan/debt repayment from a strictly numbers perspective. The case being that just because the interest rate on your student loan debt is less than the “average historical return in the stock market” is silly. By that logic, anyone with any equity in their house should go to a bank, open a revolving HELOC on their house with a lower rate than 7-8% and invest it all into their retirement accounts. Show me the financial advisor that is actually suggesting that. It’s silly. Debt is bad, all of it, and it will enslave you until you pay it off.

      Not to mention that this 7-8% figure comes with the exact same disclosure as a prospectus does. “Past performance does not guarantee future performance.”

      If I told you, ANYONE, in any point in their life, “I have a 100% guaranteed way for you to get a 4% return on your investment (4-5X the interest rate on a savings account) would you be interested?” Of course you would, because the one thing paying back your student loans gives you is a 100% GUARANTEED RETURN. These things don’t exist anywhere else in the investment world. That is the reason it is smarter to payback the student loans first.

      • Ryan says:

        There is a major flaw in this logic that I see people espouse constantly. The problem is that interest on a loan and interest on an investment are two completely different things. Most often, loans utilize a simple interest calculation. The interest is added every month on a decreasing principal amount, meaning that every month you pay the loan you are paying less and less interest. Compare this to the compound interest calculation used to compute your return on an investment. In this case, as you earn interest, your principal grows, meaning that interest earned in the future is on a larger principal balance. They are simply two different calculations entirely, they yield completely different results, and they are not interchangeable.

        Now, I am not saying not to pay off your loans. I am just stating that paying your loans off early (assuming they are calculated using simple interest, as most are) does not provide a return. It provides a savings in interest expense and should be considered such. A cost savings on interest is not going to yield the same result as investing the money and gaining compound interest. However, you are absolutely correct that under most circumstances this cost savings is guaranteed. In general, however, if you are paying 5% on a 10 year $25,000 loan calculated using simple interest you will pay around $6820 in interest (ouch). However, if you were investing $25,000 into the market, you would need only make roughly 2.45% average over that 10 year period to realize a return of around $6820. At 5% your investment would have made a little over $15,000. To pay that much in interest on a simple interest loan you would be paying a rate of over 10% for that 10 year period. In that case, it generally does make sense to pay the loan off early and save the interest costs, but typically when loan rates are that high it is also a reflection that the market is producing strong returns. There are a lot of variables to keep in mind.

        These are quick calculations using simple vs. compound interest, but I hope it helps illustrate my point that it is not appropriate to relate interest cost savings to interest gained on investments.

    15. Marc says:


      I am 26 yrs old and I have about 85,000 in debt, between about 10% credit cards and 90% student Loans. My student loans are private and have variable interest rates. I currently make 43,000 a year with a job a just got. I don’t make quite enough money to make even the minimum payment on all my student loans. I contribute 6% of my salary to a 401(k) that is match up to 6%.

      So that is where my question starts, Should I…

      1. stop contributing to my 401(k) in order to make the payment on my student loans.

      2. I am thinking about just not making payments on my private student loans and letting them charge off. Then setting up a payment plan once the it is settled in court. I will not have to pay interest on the Loans correct?

      3. Pay off my credit cards while ignoring my loans, then once they are paid off attack the loans?

      I need some good advise because I really do not know what to do. I have found that you cannot consolidate private student loans but you can with federal student loans. I have those as well. The break down is like this. 60,000 in private student loans. 25,000 in Federal student loans.

      • David E. Weliver says:

        Hi Marc

        Thanks for reading. I would stop 401k contributions if you are finding yourself unable to make the student loan payments. I would look for a second job.

        But I would think very carefully about defaulting on student loans…even private ones. Although defaulting on private loans does not carry the same unavoidable consequences as defaulting on federal loans (tax refund garnishment, denial of federal benefits, etc.), judges are not very lenient in student loan default cases. The best case scenario is you get out of the loans with ruined credit after seven very painful years of collections and lawsuits. More likely, you’ll still end up paying those loans back plus extra interest and even legal fees.

        If you find yourself truly unable to make all your payments, I would talk to a bankruptcy attorney. Getting on a repayment plan you can afford under Chapter 13 might be your best bet.

    16. Sabrina says:

      Hey There,

      What about us folks who are way over the hill..and are trying to catch up after devastating the retirement funds in the last couple of years?

      I figured that I need to contribute $30,000 a year until I am 70 in order to live at 70% of my current lifestyle(I am 50 now). Even with a 4.5% match I am not sure I can put that much in my 401k? What would be the priority given that I don’t think I will qualify income wise to contribute to a IRA. What would be a non-retirement account I could put money in? Just a savings account or?

      Thanks much!


    17. Ryan Stone EA says:

      I figured I would provide an opinion on this subject from a tax perspective. I have seen man different tax situations and retirement and paying off student loans are areas that younger individuals have some options.

      Keys to remember

      Student loans are typically going to provide you with a tax deduction. I am personally a fan of paying off debt as soon as possible however emergency fund and possibly funding a Roth IRA first can be good options. The reason, student loans are flexible on repayment. In th event that you lose your job and are unable to pay on them for time you have the option of applying for forbearance. Most lenders won’t give you a year off without payments but the student loans will. This means funding an emergency fund may be a good option because it is cash you can access in an emergency and you can put off paying on the loans until your in a better financial position.

      Regarding Roth vs traditional Ira and 401k vs Roth 401k. In your twenties, and depending on income, I usually recommend Roth. The reason is simple, typically your income at the point in your life is on the low end of what you will earn long term. Unless your a professional athlete you will likely see your wags increase. As you climb into higher tax brackets you will want to transition over to the traditional products. Early on though you are likely being taxed at 15-25 percent as opposed to rates in the 30s. This means that the long term savings will be greater with the Roth. Additionally a interesting feature of a Roth that many people don’t remember is that money usually can be withdrawn from the Roth up to the amount contributed without penalty regardless of age and rason.

      For example over the last 4 years you have put 5000 into your Roth every year and with market growth it is now worth 22000. Since you contributed 20000 after tax dollars you can usually take our that money at any time without penalty or interest. Meaning the Roth can be a ultimate backup emergency fund,

      Just some thoughts on the subject from someone who deals with this all the time. If anyone has questions feel free to shoot me an email [email protected]

      Ryan Stone
      Schneider & Stone PLC
      3125 S Price Road
      Chandler, AZ 85248

      IRS Circular 230 Disclosure: To ensure compliance with requirements imposedby the IRS, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

    18. Kaitlyn says:

      My employer matches 6%. I currently contribute 10%. I am set to achieve my Emergency Fund goal this month (thanks to the 6 1/2 steps). I have about 70K in student loans (about half at 3.5%, half at 6.125%), paying slightly above the minimum. Now that I will have several hundred more a month, I’m thinking of upping my contribution to 15%, and putting the rest toward increasing my loan payment.
      For only 26, I think I am doing a pretty darn good job.

    19. John says:

      Don’t count on that $750,000 that your parents have in the bank and their house that is paid for and worth $250,000

      The value of the house went down to $110,000 in the past 4-years. We just sold it for $100,000 cash. Nicer homes on the street are selling for $120,000.
      Most of the $750,000 was spend on nursing home bills as dad had a stroke and mom’s alzheimer’s required us to put her in a nursing home as well. Dad died after paying $350,000 in cash to the nursing home and mom’s bill has cost us almost $160,000 and that leaves $240,000, but mom’s is still very healthy other than the severe alzheimer’s and the doctors say she might live 3 more years. We can’t get any help from the tax payers until she spends her money down to almost nothing.

      I know this is poor planning on their part, but they were both very healthy and they both went down in a matter of a few months from both of them still working part time and driving all over the country on vacations to 100% care.

      I am an only child and 55 years old with a wife that make 60K-pre tax and I make 60K pre tax, we are putting 4-kids through college and cars for each. We have nothing.

      Just don’t count on money that your parents may have, even if your an only child.

    20. Stevie Z says:

      I need some opinions here. I just turned 27 last month, am not married, and make about to $150,000 pre-tax after wages, share grant, etc. I am renting right now as I just relocated for work, and am looking to buy a house next Spring when my lease is up. I have about $42,000 in my 401k and $75,000 in cash saved up (as I have been aiming for that magic 20% downpayment for a house and better mortgage rate). My debt is about $80,000 in student loans (half are at 4.7%, half at 6.8%) from grad school and $15,000 on an auto-loan at around 4%. A – What are the thoughts on what/if I should pay down fast before investing more. B – What are my best options for investing, as I don’t qualify for Roth IRA’s, etc. I’m sick of not having my money work for me, but other than getting more personally involved in the stock market I’m a little stuck.

      • Stevie Z says:

        FYI I’m contributing the max my employer will match to the 401k as well…

      • Matt says:

        1) Enroll in a High deductible health plan and max out the HSA portion, never take money out of it and pay for any medical expenses with post tax money. This is probably the greatest investment account you will ever own, better than a Roth IRA, IMO. But it’s full potential can only be used by those with higher incomes that can afford the out of pocket costs without touching the HSA account until old age.

        2) Pay off your debt. Doing this will give you a guaranteed 6.8 and 4.7% return on your money. You have no other investment options in the world that can give you a 100% guaranteed rate of return that high.

        3) Do not even consider buying a house until you are debt free.

    21. Hailey says:

      Hi, I invest 15% of my paychecks in my 401k with my employer matching 6%. I also contribute the minimum amount of $5k to a Roth IRA. I have $40k in student loan debt (6.8% interest rate) upon graduating this past May. I have been with same company for several years. I have $0 in credit card debt since I pay full balance on due date (if I use them). I want to buy a house soon since rent is a waste. Should I focus on paying off my student loan prior to focusing on saving for a downpayment on a mortgage? Or should home ownership be priority? I am 60% spend, 40% save.

    22. Nick M. says:

      I have a semi-complicated question that I will do my best to properly articulate. If someone could help me understand this better it would be GREATLY appreciated.
      I am currently investing 4% of my pay into my company’s Roth 401K because that is the max they will match. However, the company’s matching investment must go into standard 401K apparently. That’s all fine and well by me, not ideal but if they’re giving me the 4% anywhere I’ll take it. My question is if my investment is put in after taxes at $75, then shouldn’t the company’s match be higher than that since it is matching me in a standard and therefore before taxes? To me it wouldn’t make sense for them to match my after tax contribution since it is just going to get taxed again when I retire and take it out. That wouldn’t be a true match by my logic. Anyone have any way of either confirming my suspisions or telling me why that isn’t the case?

    23. Dave says:

      Start off small if you must and make incremental increases…it will shock you. First I matched at 5% because not getting the match is like telling your company to keep 5% of your paycheck. Then I paid off a stupid high APR credit card (Missed several payments so I was at about 25%… no brainer) Then I got my 6 months emergency fund and maxed out my roth. After that I began hitting other credit cards. APR also about 5% BUT like my student loans, they are variable. I may lose the avg. 3%, but I figured guaranteed 5% savings was better than a possible avg of 8%. Now, I have 15,000 in student loans and 15,000 on a 0% credit card. (I transferred half the student loan over, but hear me out first) 0% for 1 year and 0% transfer fee (Navy Fed.) When I transferred the money I put about 10,000 (earmarked for the card payoff) in a 1 year bond to hopefully gain interest before I threw it at the credit card. Now, I am waiting for the year to be up, with $16,000 in bonds waiting for the day 0% is up, but I have realized something important along the way. It turns out that if I have too much money just sitting around, I will spend it. (assume you have too much until you don’t make it through the month without borrowing more) Do I really need an I-phone/ tablet/ new dress shoes/ etc? The answer was eventually always yes. To avoid this, I keep on increasing my 401k by a little each month. ($50) It tightens my belt just enough each month to keep me vigilant, but not enough to really have to change my lifestyle too much. I have gone from $350 a month to $700 a month so far. Over time I eat out a little less, hang on to shoes, clothes and electronics a little longer, and buy much less junk. (1 or 2 less beers at happy hour, less blu-rays/DVD’s, cable, desserts, split meals sometimes) I don’t know how, but it doesn’t feel like a $350 difference. (More like $150) I don’t know when I’ll make it to $1416 a month in 401k (=17000 over a year), but even if I don’t, the continued increase pushes me to invest more. Once I do make it there, I will try to keep living smaller than I have to and add $50 extra to my student loan each month. After that is done Small steps in non-retirement savings… Final note, I recommend rewarding yourself after each accomplishment. Life is precious don’t spent you vacation days on the couch or doing things you could have done on weekends. Go out, life life enjoy…think of it like a cheat day on your diet.

    24. Nick says:

      Can I invest my self-directed IRA into investment property and defer all income, etc?

    25. Dan says:

      Hey there. Great post and interesting comments. I’m 24, no debt, and have been working about 2 years since graduating college. Currently, my total assets are approx. $58K. Here’s the breakdown:

      Checking/money market: $21K
      Taxable brokerage: $20K
      401K: $6500
      Roth IRA: $10K

      I’ve found that aside from investing in stocks, choosing mutual funds and/or ETFs with low expense ratios can go a long way in improving capital gains. Also, most providers offer commission-free funds which is great for just starting out. Be careful of “load fees” as they can be pretty significant hidden costs.

      For me, the keys to building a strong financial position are a combination of cost control, debt reduction, and market timing.

      Are there any other ways to help maximize tax efficiency other than increasing 401k contributions? I’m far from having children, but would a 529 be an option considering compound growth and rising tuition? Thanks.

    26. Matt says:

      Hello, not sure if this topic is still active, but I think the advice is great and is almost a replicate of what my financial adviser (FA) just told me. I have one question about home ownership, what are your thoughts on purchasing a home? My FA told me don’t bother, you are doing much better by renting, but I think I’m stuck in that old mentality that home ownership is a must. He made strong arguments about not having to pay insurance, a broken water heater, a new roof. What is your take? And when is a property/home once again an investment?


    27. Tom says:

      Hey guys. I am 22 and just started working full time. My original plan was to invest in my 401k up to the match of 6% (in this case $3900), and then put an additional $5000 into a Roth IRA. However, I just found out about the option of a Roth 401k, which I had never knew existed. So now I am wondering if I should still continue with the Roth IRA, or if I should instead invest that $5000 in my Roth 401k instead? OR should I just take the entire $8900 I planned on investing and put it all in a Roth 401k (and forget about the traditional 401k)?

      Basically I have a set amount of money that I am looking to put away for retirement, and I am just wondering what the best way to allocate that money would be (among traditional 401k, Roth 401k, or Roth IRA). Any advice would be much appreciated!

    28. Matthew says:

      I am 24 year old a recent graduate from an engineering school earning 55,000 a year starting with 25,000 in student loans at 6.8% interest but down to 15,000 currently.

      I am saving the below monthly;
      $415 Roth IRA (5000 annual max)
      $220 max company Roth 401k
      I am also paying roughly $750 a month to student loans though the min monthly payment is 225 currently.

      The question I have is where should saving for a house down payment fit into all of this. I realize I can take $10,000 from my Roth IRA but if I am hoping to purchase a $200,000 home in the next 6 years I will still need to save $30,000 somewhere. That’s $5000 a year or another $415 a month.

      Should I draw down the Roth IRA contributions or just pay the minimum on student loans?

      Similarly what should I invest this money into? Its hard finding anything reliable these days. Should I just put it in a money market fund to be safe since it is only a 5 year investment and I have a low tolerance for risk to meet my goal? Or put it into higher risk bonds/equities and learn to be flexible with my goal?

    29. Matthew says:

      Hi Amy,

      This is just my personal opinion but I think it is important for us young people not to ignore the lessons of our fathers.

      You dont have to look very hard to find a ‘company man’ who worked for the same firm for 20+ years and retired expecting his company to support him only to be burned by more and more reduced benefits.

      Dont expect any government agency or company to support you in retirement. You hit the nail on the head when you said you have no clue what life will be like in 40 years. That is why it is important to save your money now when you are in good health. It will prepare you to handle any future financial turmoil with minimal stress

    30. Amy says:

      My problem with this article is the fact that as a 23 year old who just started working, I have absolutely no clue what sort of spending habits I’ll have 40 years down the line. I don’t know if I’ll have kids, parents, grandparents, a house, medical problems, etc. And on the note of medical problems, are 401(k) contributions supposed to pay for medical insurance or will my company continue to offer medical insurance benefits after I’ve retired as well?

    31. Nishi says:

      When you are starting out, I say the best percentage to give to charity is 0. Why not give it all to yourself? The best thing you can do is make sure you’re taken care of first. Once you’ve got a good sized nest egg, then you can think about helping others.

    32. Jen says:

      I am fortunate to work for a company with a very nice retirement plan. I contribute 6%, they match the first 4, and then we get an additional amount deposited equal to 10% of our salary, so effectively 20%.

      I do appreciate you putting the “give” into the equation, my husband and I didn’t think of it too much last year (the first year we were working) and ended up with less than 1% of our money going to charity, it is so easy omit that from your plan, throw $20 at something here and there, but then to break it down to see it is really not adding up.

    33. Tom says:

      My employer matches up to 5%, and I am currently contributing 6% to my 401k. I donate 10% (after taxes) to my church and am able to save another 10%. We had a 6 month emergency fund, but dipped into it for the down payment on a house. We now have a 2 month emergency fund. I want to build the emergency fund back to 6 months while contributing to a Roth IRA. Should I pull back on my contributions to only 5%? Do you have any suggestions as far as what percentage should go where? Any advice would be appreciated.

    34. Matt says:

      I totally agree with investing in a Roth IRA as a means to grow my money through compound interest over time. I do not agree with investing in a 401K during these stagnant economic times. A 401K will only make your money “work” if the market is making your money “work.”

      • Colin says:

        I fail to see the difference between the two Matt, maybe you can explain more.

        The only differences between a Roth IRA and a 401k (either traditional or a Roth 401) is that: a) a 401k is limited to the mutual funds/other investment options that your employer chooses which may be limited or may be diverse but is not as varied as an IRA, b) contributions to your 401k are made pre-tax (if it’s just a standard 401k) or after tax (if it’s a Roth 401k which makes it no different than a Roth IRA except for point #1), and c) the 401k max is $17k as opposed to the $5k IRA max

        So you’re right that a 401k will only make your money work if the market is making your money work because you’re limited to a few mutual funds…but what are most people investing their IRA $ into? The same market, and maybe same funds, that the 401k is in.

      • Tom says:

        I don’t understand how contributing to a 401k is a bad thing right now. I don’t plan on retiring soon, so I am able to purchase more shares at a lower price and let them appreciate in value as the economy recovers. Is there something that I am not understanding?

    35. Nicole C. says:

      If I remember correctly: the interest you paid for student loan is tax deductible, I think it can be another reason why we should fund our retirement first before paying off student loan.

      • Tim says:

        Yes – student loan interest is tax deductible; but the dection is capped at $2,500. Someone who has $40k in student loan debt that is paying 6.25% interest will reach that mark. Now what does that really translate to in actual dollar amounts? Maybe $700 extra dollars in your pocket in your tax returns. Or, looking at it another way, you have lowered the effective interest rate from 6.25% to 4.5%. This is the best you can possibly do. Now, for anyone who has more than that amount in loans–which is becoming more and more common–the deduction becomes less valuable. Owe $100,000 and pay $6,250 a year in student loan interest? Sorry, your capped at $2,500. Your effective interest rate only moves from 6.25% to 5.5%. Also, there is an income limit in place to actually qualify for the deduction in the first instance. For more info., see http://www.irs.gov/publications/p17/ch19.html

    36. aaron says:

      Hannah, that’s super impressive!

      Steve and Carrie, I’m right there with ya on the 70/20/10.

      I had the privilege of hearing Truett Cathy (the founder of CFA) speak years ago and he shared his plan for every paycheck: “Save 10%, give 10%, and work 10% harder.” Sounds like wisdom to me.

      I do think, though, that 20% is about the right level of prudency. Gotta exercise those delayed gratification muscles.

    37. amber says:

      Yes, my question is similar to Geoff’s. I had been doing 15% to my TSP (the government 401k) and if anything left over the rest going to Roth IRA. I just bought my first car though, and I actually have a car loan for the first time in my life. I am wondering if it is better to divert some of that 15% or IRA money for a little while towards paying off this loan more quickly? I’m thinking of dropping my TSP down to 8% and sending the rest of the money to the loan.

      • amber says:

        Just to add some details, my loan is 5 yrs 3.99%

      • Cole says:

        I would highly recommend that you don’t divert money from your TSP to the car loan, if you can make your payments on your car loan without taking on any other types of debt.

        Assuming you saved 15% of your income for 30 years, and you return 5% after inflation (this number is aggressive) (both before and after retirement), you would have enough money to withdrawal about 60% of your pre-retirement salary for 30 years.

        It really takes a lot of savings to cover a retirement, its best to not short change yourself.

        In the future, consider your contribution to the TSP off limits and untouchable.

        If you told me your car loan as at a high interest rate, then maybe it might make sense, to bite the bullet and learn from this experience. If not, I’d suggest giving up your morning latte, or buying yoga videos (instead of going to classes). (if your having a hard time making the payment without changing your retirement contributions.)

        • David Weliver says:

          Yes. What Cole said!

          • David says:

            I’m currently investing 25% from my reserve military training into TSP. In addition, I am investing 9% civilian employee matched into a 401k. Should I not use my TSP since it is a similar account or will it hurt to have both? Also, should I increase my contribution percentage every year to stop at maybe 15% considering yearly cost of living increase?

    38. Geoff says:


      Thanks for this post, very helpful.

      If I am meeting my employer’s match, and have sufficient cash in case of an emergency, how can I figure out an appropriate allocation between retirement accounts and other accounts I have to help meet other savings goals like a house, car, and kids’ education? Surely the 20% savings target in your scenaeio is not solely for retirement, is it? Any advice would be greatly appreciated.

      • Taylor says:

        Great post David, I appreciate the information.

        My question is similar to Geoff’s as well. I am meeting my employer’s 401K match, maxing out my Roth IRA, and have a savings account with 6 months of expenses saved. My question is what to do with the remainder. The chart says to go back to the 401K, but I want access to money for near to mid term expenses (car, house, education).

        My current approach with additional funds is putting half in a savings account for near term expenses and the other half in a personal investment account. Is this the right approach, or should I increase my 401K contribution? I will not be able to max out my 401K contribution with my current monthly budgets. I know that situations vary, but do any general rules of thumb apply? Isn’t the investment account surving the same purpose as the 401K (ignoring tax implications) if I don’t touch it until retirement, with the benefit of being able to withdraw before retirement without penalty?

        I guess the overall question is: can the “Invest in a nonretirement account” option come before maxing out the 401K, and in what situations is that advisable.


      • David Weliver says:

        Hi Geoff and Taylor,

        You’re right—you definitely don’t have to max out both an IRA and a 401k if you have mid-term savings goals. The chart here only looks at retirement investing, but this post about steps to financial stability takes everything into account and, as you’ll see, does advocate that middle step of “saving for life”.

        I think it’s reasonable—after you’ve grabbed any employer match and put $5k into a Roth—to put the rest towards those mid-term goals: homes, cars, weddings, vacations, etc. Many of these are front-loaded when we’re young anyway, so you’ll naturally have more to put in the 401k down the road.

    39. Jacob @ iHeartBudgets says:

      I don’t make enough money to quite cover my bills (long story [don’t worry i have plenty of savings]), but am putting away 3% with a match in my 401k. It makes a small dent in my net income, but the tax savings helps so I can withhold less from my gross. I like your flow chart and I would say that I agree! I started a Roth when I was 18 and dropped and 11k in before I stopped investing to pay down debt. But I will continue my small 401k contribution because of the match and compounding interest.

    40. Cole says:

      I like to consider myself a 50-50er (half savings – half spend)

      For our savings category:
      25% to retirement
      5% to children’s college savings
      20% to Extra Principle Payments on house (technically this isn’t savings, but is the safest return on investment, because it saves me 4%)

    41. David Weliver says:

      Hi Carrie, Yes, you can both have IRAs under your circumstances. This article explains the specifics well, I think: http://www.smartmoney.com/retirement/planning/spousal-iras-7956/

    42. Carrie says:

      We contribute 10% to my husbands 403b

      Question. I’m a stay at home mom, and my husband makes 62K a year. I know you can only put money that you’ve earned into an IRA. Can we open two IRAs, one in his name and one in mine? His employer doesnt do % matching on the 403b (it’s a flat % after 2 years working! Yay!), so if we could max out one Roth and the put some more in a second one, that’d be ideal for us. Thanks!

    43. Steve says:

      We’re doing 70/20/10 (living/saving/giving) right now and we have a full-funded emergency fund.

      We’d like to buy a home in the next 3-4 years, so my biggest debate is how to split up the 20% we’re saving. We put 12% toward retirement (5% into a 401k with a 2.5% employer match, 7% into a Roth IRA) and 8% into a liquid savings account to build up the down payment on our future home.

      Any thoughts on whether we should be doing it differently?

    44. Tb says:

      Currently I have 10% going to a roth 401K. Employer match of 50% of the first 4% (2% of my salary). They also do a 4% contribution regardless of if I contribute anything. We also get a 401k bonus at year end which is between 0 and 6% but has never actually been less than 4.5%. Last year was 6%, so in effect I received 12% from my employer. Makes up for the so-so salary. I also contribute 4% to a stock purchase program which the emplyoer matches 50% of the first 4% (again 2%) so I am just contributing the minimum to get the full match.
      I’m currently enrolled in an MBA program part time with 30K already in loans at 7.25% and the potential to have to take another 45K at the maximum. (With my employer paying for some of my education, it is more realitsic to think I will only have to take out another 15-20K in loans.) I have a rainy day fund I am comfortable with, but contribue $100 dollars a month to and will for the next year. I also Have 2 seperate Roth IRA accounts with about 1k in each. My question, is should I lower my roth 401K contribution to the 4% and then use the remaining 6% that I have been contributing to put into my exsisting IRA’s. What is the difference between using a 401k vs. IRA as far as tax implications (to the best of my knowledge I thought they were virtually identical)? I guess the only difference I could think of is the limited investment options on the 401k retirement account platform, but I work for a well known and well respected mutual fund company and have access to all of their funds through my 401K.

    45. Hannah says:

      I’m 22 with a $30k/yr job (have only been at this job for a year post-college). No employee match to my 403b. No debt. About $15k in my money market. I’m trying to save because in the next few years I’ll be going back to grad school and getting married, which are major expenses.

      This is my breakdown: 10% – 403b, 30% – money market, 60% – spend

      I realize this is a tight budget for most people, but I’m lucky enough to have only the most basic expenses at this point in my life (rent, food, gas, insurance). I figure, if I’m going to live way below my means at some point in my life, now is the time to do it (as opposed to when I’m married with kids).

      In addition to my 403b, I have $1300 in an IRA that my dad opened for me for tax return purposes. Should I be putting additional $$/yr in my IRA?

      • Mark says:

        Since there is no matching, I would forget the 403b and put it into a Roth IRA. Since you already have 15k in a money market I would start diverting more into your Roth IRA, maybe maxing it out.

        Also, money markets are safe but they give lousy returns. I used short and intermediate indexed bond funds when I saved for my down payment and it worked well. If you are nervous about bonds, stick with the short term bonds, they are very stable and earn 3-4%. I don’t put emergency funds in bonds, but that’s where I would recommend putting longer term savings.

    46. Owen says:

      I made the mistake after college of paying off my $12K in student loans right before interest kicked in on them, instead of paying them off over a longer period of time. The main reason I think this was a mistake was because I cashed in some savings bonds before they reached full term to do it, so I’m sure I would have had a net gain if I had paid the loans off more gradually with mature bonds.

      As far as current savings, I am 26 and I keep changing my contribution rates as I do more research, but I am contributing between 10% and 15% going into a 2050 target date 401k. I split that up between a traditional and roth for tax diversification purposes, but most of it goes to the roth. My company adds in 2% as a match, and then profit sharing has been between 2% and 4% during the recession, also going into the traditional 401k. I am not good at designating money specifically for emercency funds or targeted savings, but I do end up saving an additional ~15%-20% of my income in online savings accounts. Some of that goes to big purchases, but most of it is there for emergency or an eventual house purchase.

    47. Dburr99 says:

      I contribute up the match amount in my 401(k) which is 6%. My husband is union and currently has a defined benefit pension plan. His situation makes it confusing for us to plan for retirement savings. Once we get our emergency fund completely funded, we want to start saving for a new home, but I don’t want to be under-funding our retirement. I guess my only option is to begin contributing to a Roth IRA for one or both of us?

      • Dburr99 says:

        Also, most likely we will only be eligible to contribute a Roth IRA for another 3-5 years before we make over the Contribution limit- is it still worth starting one if that’s the case?

        • David Weliver says:

          Sure. Let’s say you get $15k in over the next three years and it grows to $75k by retirement…$75k that you can withdraw tax free. Plus if you get in a pinch and fall short of down payment savings in a few years you can take out your Roth IRA deposits penalty free if you must.

    48. RL says:

      I started my Roth IRA in 2009 and have contributed the max each year. I get the full match up to 5% from my employer. I paid off all my credit cards (2 of them) today from an insurance check I received from an accident, my car was totaled. I save about $250/check going into 3 different accounts, $25 to the credit union savings, $100 to USAA, and $125 into ING savings. The credit union and USAA accounts are for emergency/rainy day funds and the ING savings is strictly for the Roth IRA contribution. 27, no student loans but went to college and finished. DC area.

    49. Steve says:

      I am in a similar situation to LG, except I have 128k in loans at 7.625%. I am not eligible for a 401k at work, but have been maxing my Roth out despite the high interest rate on my loans. To me, the compounding from saving for retirement earlier in life (I’m 29) is more important than the extra interest I am paying by not putting that money towards my student loans.

    50. Rob says:

      I think I have 9% go to my 403(b). I get a full match up to 6%. I chose 9%, because that allows me to contribute about $2000 a year (I don’t make that much money–I work at a nonprofit) myself and another $1000+ from my company. I’m only 27, and I’m on pace to have at least $10000 in my account by the time I turn 30. I know I’m behind, but hopefully interest cooperates!

    51. LG says:

      Help me understand WHY I should not attack my student loans (after contributing to my employer match) vs. increasing my retirement savings?

      “Got student loans? Follow the above schedule anyway. Unless your private loans have double-digit interest rates, I don’t recommend repaying student loans early.”

      Why should I follow the above schedule in stead of paying off my $65,000 in student loans? My interest rate range from 4.5% to 2%. I am currently building my emergency fund and then plan on attacking my 4.5% and 3.75% rate loans. I don’t plan on paying more to my 2% loans. Also, I am 30 years old and married.

      The way I think about it is by having my loans paid off in a few years, I will free up a lot of monthly income. I will then have cash flexibility. I can increase my retirement and also cover life costs (will be starting a family in a few years).

      Please provide any advice or explanations. Thanks!

      • David Weliver says:

        Hi LG, There are a couple of reasons I say this.

        1. Long-term investors can reasonably hope to get an average annual return of at least 6 to 8%. That beats the “return” you get by paying of a 4.5% loan early.

        2. Most of us have seen the charts that show the benefits to saving for retirement early. Because of compounding, a few dollars saved in your twenties is worth hundreds saved in your 40s.

        3. You won’t forget to pay off the student loans. They’re due, and they’ll always be a priority. But retirement saving often gets pushed to the back burner. It’s rarely a priority. By committing to saving for retirement before repaying loans early, you make it a priority and get into the habit of setting that money aside. It’s a psychology thing, and it’s important.

        That’s my take anyway.

        • LG says:

          Thanks for the comment.

        • MoneySmartGuides says:

          This is always an interesting debate: save vs pay off debt. It’s why the word personal is in the phrase personal finance. At the end of the day, you have to do what is most comfortable to you. I can easily make an argument for either side of the debate. But it comes back to you.

          For example, I recommend investing primarily in stocks when you are young. But some people are more risk adverse than I am. So, I tell them to lower the percentage of stocks to 60% or 50%. If they are more comfortable doing it, the likelihood that they will continue increases. As they become more comfortable with the stock market, they can then adjust their allocation as they see fit.

          My advice is to pay off your student loans. That seems to be what you are passionate about and would make you the happiest. The key though, as you point out, is to still invest and save while doing this.

        • Matt says:

          I do not understand the perspective that one should focus on their retirement savings over student loan/debt repayment from a strictly numbers perspective. The case being that just because the interest rate on your student loan debt is less than the “average historical return in the stock market” is silly. By that logic, anyone with any equity in their house should go to a bank, open a revolving HELOC on their house with a lower rate than 7-8% and invest it all into their retirement accounts. Show me the financial advisor that is actually suggesting that. It’s silly. Debt is bad, all of it, and it will enslave you until you pay it off.

          Not to mention that this 7-8% figure comes with the exact same disclosure as a prospectus does. “Past performance does not guarantee future performance.”

          If I told you, ANYONE, in any point in their life, “I have a 100% guaranteed way for you to get a 4% return on your investment (4-5X the interest rate on a savings account) would you be interested?” Of course you would, because the one thing paying back your student loans gives you is a 100% GUARANTEED RETURN. These things don’t exist anywhere else in the investment world. That is the reason it is smarter to payback the student loans first.

        • Jason says:


          4. Student loan interest is tax deductible up to 2,500 per year under certain income levels roughly 80k single, more for married.

      • Colin says:

        I think the argument to increasing your retirement savings is two-fold.

        1. The earlier you start, the more you’ll have when you retire. Compounding returns and dividend reinvestment are powerful forces when it comes to building your retirement savings. Plus, you can pay those loans over in time but if you retire and don’t have enough to live on, no bank will give you a loan to afford the every day necessities.

        2. Average annualized returns beat the interest rates you’re paying on your loans (though the market action this week would have you question why you’re in the market at all). Like I said, average annualized returns on the stock market (which probably are 7-8%) are better than the interest rates on your loans. You’ll have some stinker years and some years better than average. Heck, plenty of folks that could pay for a new house in cash still take out a mortgage for some of the balance because they know that if they can get a mortgage at, say, 3.8%, and they think they can get 7% putting the money that would’ve otherwise gone to paying for the house in cash, they’ll get a 3.2% return on their money by going w/ a mortgage for some of their house cost rather than pay it all in cash.

        Again, not everyone is the same so you should do what you think is right for you…but to contribute up to your employer’s 401k match (if you get one) you may not even really see a noticeable impact to your paycheck

      • GN says:

        I am 24 years old. I have started my first real job with a big corporation. This year they started a matching program with up to 5%. I was already contributing 7% when I joined because I was living at home and just had student and car loans to pay. Now after moving out I continue to pay the minimum on my student loans and then pay small amounts to all my principles. I have been with my my company for just over a year and I raised my contributions to 9%. At the moment with my employer matching 5% I am at 14% total contributions with 8956 and change in my retirement. I continue to watch my account grow and it is just amazing watching all the hard work pay off. I would rather contribute what I can now and in the future I will benefit from the hard work. It’s amazing how the system works. Thank you for the page I really enjoyed reading

    52. Leave a Reply

      Your email address will not be published. Required fields are marked *