Getting to 15%: How to determine the best investment vehicles

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I believe that the optimal target when saving for retirement is to put away 15% of your income. Potentially more, but certainly not less. Here’s why.

Getting to the point where you’re ready to put down 15% is hard. You don’t want to do it when you have debt, because you’d be better off putting that money toward the debt. And even afterward, 15% is a lot of money.

And then, once you’re ready, what should the 15% be comprised of? The alphabet soup of 401(k)s, IRAs and the like can make it impossible to know how to proceed.

I can help with that. In this post you’ll learn my preferred way to allocate your 15%.

Start with the free stuff

I like free money. Don’t you?

I think you should start with the option that gives you free stuff first, maximizing that. Wouldn’t you?

And the best free option I can think of is the employer match on the 401(k).

Many employers will match your contribution dollar for dollar on your 401(k) up to a certain percentage. So if your employer offers a 3% match, and you contribute 3% of your salary, your employer will throw in 3%.

That’s free money. That’s 100% return on your investment no matter what you choose to invest in.

Not everyone has this option, but if you do, take it.

After-tax-advantaged options next

Once you’ve exhausted your free money options, the next step is to move on to tax-advantaged options. There are generally two categories: pre-tax and after-tax.

After-tax plans usually have the word “Roth” in them. Most commonly, the Roth IRA.

I’m a big fan of the Roth plans for lots of reasons, so I think these should go next in your plan. The IRA is directed by you, the money you put in is yours, and you’ll never have to pay taxes on it if you do it correctly. That’s pretty cool.

Pre-tax-advantaged options next

Once you have maxed out your options there, if you haven’t yet gotten to 15%, you can move on to pre-tax-advantaged options.

For most people, this involves returning to your 401(k). It’s not as great when the match isn’t there, but it’s still tax-advantaged, in that the money grows tax-free. And 401(k) plans have a much higher contribution limit than IRAs (at the time of writing, $18,000 versus $5,500), so all but the most high-income folks will be able to run out their 15% here.

Plain old taxable accounts

Only after you run out of tax-advantaged options do you move on to the more general taxable investment accounts. These offer no tax benefits, but at least you can still invest there. Over time, the amount you earn through investment will more than offset the taxes you pay.


So if you’re deciding between investment options, ask yourself, which one are you likely to benefit from more? Start with that one first.

Here’s my suggested order of operations:

  • Take the match (401(k) match)
  • After-tax options (Roth IRA)
  • Pre-tax options (401(k) again)
  • Non-tax advantaged options (plain investment account)

You go down the list, utilizing every option that’s applicable to you, until you hit your 15% mark, and then you stop.

Have you read my Disclosure Policy recently? Just thought I’d throw that out there.

One Comment

  1. Joe

    I don’t like the last 4 words of your piece above “and then you stop.”

    Why stop there??

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