2. Use Tax-Advantaged Retirement Plans
Yes, we used the T-word, but don’t zone out! This is one time when talking about taxes can be exciting—or at least advantageous. Split your 15% retirement investing budget between tax-deferred retirement plans like your 401(k) and/or after-tax plans like a Roth IRA. It works like this:
- If your employer offers a 401(k) match, invest enough in your plan to receive the full match. That’s an instant 100% return on your investment!
- Invest the remainder of your 15% in a Roth IRA. You and your spouse can invest up to $5,500 a year in Roth accounts—$6,500 if you’re 50 or older. When you retire, you can use the money from your Roth tax-free!
- If your employer doesn’t offer a 401(k) match, Dave recommends you first max out your Roth, then invest in your employer’s retirement plan to meet your 15% goal.
- If your employer does offer a match with a Roth 401(k) option and the plan includes high-quality mutual fund choices, you can invest your entire 15% in your workplace Roth 401(k).
3. Spread Your Money Around
The biggest risk you can take with your retirement money is to put it all in one place. That’s why we never recommend single-stock investing. If that stock takes a hit, it may never come back—and neither will your money.
With mutual funds, however, you can invest in the largest and most recognizable brands as well as new companies you’ve never heard of but that have plenty of growth potential. Choose growth-stock mutual funds with a history of strong returns for both your 401(k) and Roth IRA investments.
You can diversify—spread your money around—even more by choosing high quality mutual funds in these four categories:
- Aggressive Growth
- Growth
- Growth and income
- International
Investing this way lets you use the power of the stock market to build your retirement nest egg without all the risk that comes with single-stock investing.
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