Without fail, at the beginning of each year, the office buzz is about 401ks and Roth IRAs. The reason here is simple – it’s performance review/bonus time. The conversations are always interesting. I’m all too happy to give my opinion, but what interests me even more is I get insight into how others prioritize their savings. I hear a little bit of everything – “I saw what happened to Enron, it’s not going to happen to me!” or “I put my money into my online savings before my 401k”. There is a lot of discussion around where to put your money first, so you may not share my opinion. I try to look at this as objectively as I can.
My company’s 401k provides a 100% company match up to 3%, so I prioritize my savings with that 3% first. There’s no place around you can get that kind of return on your investment. Anything more I can come up with to save gets funneled into my Roth IRA. My thinking is that the Roth IRA provides tax free growth, no required minimum distributions, and if you’re in a real bind, you can take out the money you originally contributed without penalty.
This is also the time of year where most companies hand out performance reviews, and if you’re lucky, a raise. It’s the perfect time to increase your 401k contributions. If you receive a 3% raise you can drop an extra 1% into your 401k and still see an increase in your paycheck. It’s a great way to build up your 401k contribution level. Before you know it you’ll be with the company for 10 years and have a nice nest egg building in your 401k. And don’t forget to look at it once in a year to determine if you need to re-balance your investments, but that’s a whole other post.