The Order of Retirement Investments: Be Old (But Wealthy)

Pretty much everyone knows that they should be investing into retirement in some form or fashion. That is probably not ground-breaking information to you. However, most people have NO IDEA how to start or the order of retirement investments. There are so many options from all of the different retirement accounts, cryptocurrency, commodities, real estate, businesses, farming, and dozens more. 

A lot of these options won’t pertain to the masses. Certainly most people have the opportunity to save for retirement in most, if not all, of these mediums. However, most people will simply use “stock market” mediums to save for retirement. This means that most people will use their:

1. 401k, 403b, SIMPLE IRA, etc.
2. Roth options
3. HSA
4. IRA
5. Simple brokerage account

And that is completely okay! Millions of others do the exact same!

So for today’s article, I would like to help with the muddied waters of your retirement savings. I would like to help you understand where to start and where to go when it comes to saving for retirement. Here we go!

(1) Caveat Alert!

While I mentioned that there are dozens (if not hundreds) of ways to save for retirement, I am going to only talk about the ways to save for retirement that affect MOST people. I will not be covering HSAs (even though they are awesome) because there are many people who do not have a high-deductible health plan. I will also not be covering business or farm investments because those vary wildly from situation to situation. And lastly, I will not be covering cryptocurrency, commodities, or real estate because they can all be purchased through a retirement plan itself (as well as several other issues). 

I will focus on the major retirement accounts that most people have available to them either through their job or individually.

(2) How Much Should You Invest in a Retirement Account?

You should be investing into your retirement account(s) consistently. The percentage of your income you should be investing is debatable. People like Dave Ramsey say you should invest 15%, The Money Guy Show says you should invest 20%, people like Graham Stephan says you should invest 25%, and the FIRE (Financial Independence Retire Early) group say that you should invest more than 50%. So what should you do?

Well that depends on your goals. Do you want to retire in 3 or 4 years? If then you should probably be saving a LOT of your income. But if you are young and have a long time until you retire you can save less. 

My advice is to save AT LEAST 20%. Try to make it up to the 25% mark as soon as you can. So for example, if you are saving 20% right now, bump it up to 21% next year, 22% the following year, and so on until you reach 25%. 

I know that might seem easier said than done. I get it. I didn’t start by saving 20%. I started by saving 1%. For real. 

And after a while when I realized I could live on what I was making I bumped it up to 2%, then 3%, and so on. 

It might take time and that is okay! Don’t beat yourself up over it. Just make it a priority to get it up (insert Michael Scott joke) over time. 

(3) Order of Investments in a Retirement Account

All of these numbers will be dependent on how much money you make personally. However you should follow the percentages that I give. 

Step 1: Roth or Traditional 401k or Roth or Traditional 403b Up To Your Employer Match

If you do not have a Roth 401k match or a Roth 403b match available at your work then invest in your Traditional 401k or Traditional 403b up to the employer match.

This one is the MOST important step in the order of retirement investments. That is because you are getting FREE MONEY! Free money is the best. 

Here’s how it works: Adam makes $100,000 per year and his employer matches 6%. This means that if Adam contributes 6% of his pay ($6,000 annually), his employer will also give him $6,000 to his retirement account. This is the best thing around. It is AUTOMATICALLY a 100% rate of return. Above all else, make sure that you are doing this. It’s important to note that all matching funds will be deposited into a Traditional 401k or Traditional 403b. (It’s not a huge deal, just be aware of it.)

The reason for investing in the Roth 401k or Roth 403b is because it is taxed up front. That means that when you retire you will owe no taxes on it. It’s a really good deal. And that is why investing in the Roth 401k or Roth 403b is preferable to investing in the Traditional 401k or Traditional 403b.

Once you have your employer match, stop and take a breath because it is time to move on to step 2.

Step 2: Invest in Your Roth 401k or Roth 403b Above the Match

If you do not have a Roth 401k or a Roth 403b available at your job at all, skip this step and move on to step number 3.

The second step in the order of retirement investments is to invest in your Roth 401k or Roth 403b ABOVE the match.

The beauty of the Roth 401k or Roth 403b is that you will pay taxes on the seed but not the harvest. You will pay taxes on all Roth monies when you put it in your account but not when you take it out. This means that all of the growth that the account has over the decades that it compounds is NOT TAXED! Woo hoo! 

As of 2022, the maximum that you can contribute to a Roth 401k or a Roth 403b is $20,500. Determine the percentage of your pay that you want to contribute. Once you have an idea you can contribute up to $20,500 into a Roth 401k or a Roth 403b.

Let’s say that Josh makes $150,000 per year (good for you, Josh!). Josh wants to contribute 20% of his pay (which is $30,000). He also gets the same match as Adam (6%). 

This means that Josh will contribute 13.66% of his pay into his Roth 401k. This will max him out at $20,500. His employer will match the first 6% of his contribution into a Traditional 401k at the amount of $9,000.

But if Josh wants to contribute 20% of his pay he isn’t quite there yet. He is only at 13.66%. Then he needs to move on to the next Step 3.

Step 3: Invest in a Roth IRA

The third step in the order of retirement investments is to invest in a Roth IRA.

A Roth IRA is very similar to a Roth 401k with a few exceptions. A Roth IRA is not associated with your job and it has income limitations (unlike the Roth 401k). You can open a Roth IRA at any brokerage house or investment firm that you wish.

If you are above the income limitations, then you can skip this step and move onto Step 4.

A Roth IRA works mostly the same way as a Roth 401k. You will be paying the taxes up front so all of the money is post-tax. This is a beautiful thing! 

The contribution limit for a Roth IRA is $6,000 in 2022 (unless you are over 50 in which case it is $7,000).

So in the case of Josh, he has another $9,000 left to invest for retirement. He can then max out a Roth IRA at $6,000 (so long as he does not fall above the income limitation). 

This still leaves him with $3,000 left to invest somewhere. 

In this case he should move on to step 5 (he will skip Step 4).

Step 4: Invest in a Traditional 401k or 403b Above the Match (if you do not have a Roth 401k or Roth 403b at your job)

If you make it past step 3, first of all, AWESOME! You are doing great and are well along your path towards being really really wealthy! Let’s move on to the next step in the order of retirement investments.

If you can’t make it to this point, that is totally okay as well! Just make sure that you are investing into your retirement savings (hopefully at least 20% over time). 

This is where things can diverge a little bit. 

If you have already maxed out your Roth 401k or Roth 403b you can not contribute any more to a 401k. The IRS allows for a maximum contribution to a 401k (whether it be Roth or Traditional) of $20,500 (in 2022). Someone can contribute all of their money to the Roth, all of their money to the Traditional, or some combination of the two so long as that amount does not exceed $20,500.

So if you have already maxed out the Roth 401k or Roth 403b move on to Step 5.

A Traditional 401k and Traditional 403b are like the Roth versions except for that you put money in pre-tax. That means that you won’t pay taxes on the money when you put it in. But you will pay the taxes on the money when you pull it out during retirement. This is less favorable than the Roth counterparts but it is still good.

If you do not have a Roth 401k or a Roth 403b option at your job, contribute money to your traditional 401k or traditional 403b once you have maxed out your Roth IRA.

If you then max out your annual contribution to your Traditional 401k or Traditional 403b ($20,500 in 2022), then move on to Step 5.

Step 5: Contribute to a Traditional IRA

Whew. We’ve reached the next step in the order of retirement investments. If you have reached this point, holy cow. You are doing great!

If you are at the point where you have gotten your employer match, maxed out your Roth 401k or Traditional 401k, and maxed out your Roth IRA you are ready to move to a Traditional IRA.

Likely, if you make it to this point, you probably make a lot of money (or are a super aggressive saver). There are probably some tax scenarios that you might need to hire a CPA for. Some of your contributions might not be tax-deductible if you make too much. But that is outside the scope of this article.

Once you have completed all the aforementioned steps, it is time to contribute to a Traditional IRA. The maximum that you can contribute is $6,000 (in 2022). Contribute all that you can up to the maximum allowed contribution.

If you find that you STILL have money to invest for your retirement move on to Step 6.

Step 6: Invest in a Standard Brokerage Account

This step might seem counterintuitive to some. A brokerage account is not a retirement account. However, in my opinion, this is the next best step in the order of retirement investments. 

A brokerage account is simply an investment account that is NOT a retirement account. Unlike a retirement account where you have to wait until at least 59 ½ to pull out the money, with a brokerage account you can take money out the very next day.

Yes, you could open something like a variable annuity but in most people’s situation if they are contributing so much money to their retirement savings that they have maxed out all available options they should move to this one.

If you are maxing out all of your retirement contributions (which would be AT LEAST $32,500) you need to have some money that you can get if you decide to retire early. If you decided to retire at 50 instead of at least 59 ½, you could tap into the brokerage account to live on for 9 ½ years when you would be able to get into your retirement accounts.

Also, there is no maximum amount that you can contribute to a brokerage account 🙂

Summary

1. Invest up to your employer match.
2. Invest in your Roth 401k or Roth 403b to the maximum ($20,500 in 2022).
   1. If you don’t have a Roth 401k or Roth 403b skip this step.
3. Invest in a Roth IRA up to the limit ($6,000 in 2022).
4. If you don’t have a Roth 401k or a Roth 403b, invest in the Traditional 401k or Traditional 403b up to the maximum ($20,500 in 2022).
5. Invest in a Traditional IRA up to the maximum ($6,000 in 2022).
6. Invest in a brokerage account (unlimited).

Final Thoughts

We have covered a lot of ground today. But there are a couple important things to remember. 

First, you don’t have to make it through ALL of these steps. Not a lot of people will make it all the way to Step 6. Just make sure that you are putting an adequate amount of money away for your future. I suggest at least 20%. If your salary means that you only make it to Step 2, that is okay! In fact, that is still great! You are investing in your future, which is the most important thing.

Second, all of these retirement accounts I have mentioned are not investments themselves. Think of them as buckets. What you put inside of the buckets are the investments. Mutual funds, index funds, ETFs, commodities, REITS, common stock, preferred stock, etc. Those are the investments. 

Make sure to do your research on the different investments that you can partake in or reach out to someone who can help you.

And lastly, you can do this!

Yes, saving for retirement can be difficult. But unless you want your grandchildren to take care of you when you are old, you HAVE TO save for yourself.

You can do this. 

I’ve got your back and I’ll do my best to give you the tools to become financially savvy.

If there is any way I can help, please leave me a comment or send me a DM. I’ll do my best to help you out.

Until next time!