If you’re a follower of Dave Ramsey’s baby steps, you’ll definitely come across his baby step 4 that recommends investing 15% of your household income in a retirement portfolio.
This baby step is the first baby step that helps you to directly plan for the future. It’s a baby step that you should be serious with as it helps you to take steps that are guaranteed to make your retirement a more glorious one.
However, this baby step will definitely raise some questions in your mind. We’ll take on some of those questions below.
Why Does Dave Ramsey Want You To Save In A Retirement Account?
In Dave Ramsey’s article titled how to save for retirement, Dave Ramsey suggests that your retirement account has a lot of features designed to help you save money, and reach your financial goals faster. Dave Ramsey expresses his beliefs that retirement is not just age, but the right financial number.
To motivate users to use a retirement account, he explains the benefits that a retirement account has to offer. Some of the benefits he touched on include:
1. It exempts you from tax
Saving in your retirement account affords you the opportunity to enjoy both tax-deferred accounts and tax-exempt accounts. Tax-deferred accounts help you get immediate tax deductions on your contribution; however, you’ll be required to pay tax on ordinary accounts. Dave noted that the most common type of tax-deferred retirement account includes 401 (k) plans and traditional IRAs.
Saving in some type of retirement account also allows you to enjoy tax exemption; this is because withdrawals made are not taxed. In this type of retirement account, you won’t enjoy any immediate advantage on your tax payments. The benefit you’ll enjoy stems from having your investment grow without being taxed. Dave Ramsey noted that some of the best tax-exempt accounts that you can subscribe to in the US are Roth 401(k) and Roth IRA account. If you make too much to do a Roth IRA, I put together a guide to do a backdoor Roth IRA conversion with Schwab.
2. It’s not as accessible
Dave Ramsey noted that another reason why his listeners should opt for a retirement account is that the rules are stringent enough to prevent you from withdrawing from the account before the stipulated period. This helps you to be disciplined enough to save reach your retirement financial goals.
What Your Retirement May Look Like if You Save 15% as Dave Ramsey Recommended
Dave Ramsey’s recommended style of savings is one that guarantees you a very noteworthy retirement that affords you the opportunity to enjoy your old age in the aptest way possible.
One of the most essential benefits is peace of mind. Your stress level won’t just reduce in old age, but even in some years preceding it.
For a more direct idea of what your retirement will look like, you can get a picture of that by clicking here to use Dave Ramsey’s retirement calculator.
What Age Should You Start Saving For Retirement?
Ideally, it’s best to start saving up for retirement as early as your 20s. The moment you start working full-time and earning checks, that’s the most ideal time to open a retirement savings account. Why that soon? This is because when you begin to save as early as possible, you can have enough time for your money to earn enough interest for your preferred lifestyle.
For example, if you begin to save at 25, and you commit $3,000 years for a period of 10 years, and you stop saving. If the investment is made in a tax-deferred retirement savings account, when you’re 65, your $30,000 savings would be worth $338,000 if you get an annual return of 7%.
However, if you begin saving by 35 and you save the same 3,000 yearly for the next 30 years, then you’ll have saved a total of $90,000 and your investment will worth $303,000 if your annual return is 7%.
What Are Dave Ramsey’s Approved Retirement Accounts?
The process of sorting through the retirement account option is somewhat confusing and daunting. Your banker or finance advisor will start showing you accounts like IRA, 403(b), and 401(k). However, let’s consider what Dave Ramsey says about two of these retirement accounts, and also help you understand what they truly mean.
Understanding Roth Accounts
In Dave Ramsey’s article titled “what is Roth IRA?” Dave Ramsey clearly elucidated on the account. He explains that a Roth IRA is an account that allows you to pay the tax on your retirement account upfront. You won’t be taxed on your Roth IRA growth and the withdrawals that are made after the age of 59 ½; this privilege remains if you’ve had the account for more than a 5-year period.
Roth IRA’s has an incredible gamut of benefits.
One such benefit is that it allows your savings to grow tax-free. Also, you won’t be required to pay any tax anytime you withdraw your money during retirement.
An awesome thing about Roth IRA is that it doesn’t require that you have a lot of money to start. You can open a Roth IRA account with as little as $50.
Understanding 401(k) Accounts
In one of Dave Ramsey’s shows, and in his article titled what is a 401 (K), Dave Ramsey defined a 401 (k) retirement plan as one that gives employees the opportunity to withdraw their retirement savings before calculating their taxes.
Workplaces that give employees the opportunity to fill their enrollment packet to feature some information on beneficiaries, investing options and beneficiaries.