Saving for Retirement
Most people will never have permanent financial independence, so most retirement plans focus on building temporary financial independence that will last as long as you do (or longer, so you have something to give to your children). To do so effectively, you should invest as if you were building permanent financial independence. This means investing in appreciating assets, like mutual funds or index funds, so that the amount you save grows until you spend it.
The advice given throughout these pages assumes that you will work a job for about 30 years. If you have a job that pays you a significant amount of money, but only for a short period of time, then you should be saving as much as you possibly can while you are working to create permanent financial independence, instead of the way most people achieve retirement, through temporary financial independence. These jobs are things like being an actor in a TV show, touring as a musician, or joining a big law firm before working as an attorney for a non-profit.
Save before you Spend
The most important part of saving for retirement is saving before you spend. You should a set aside your savings first, putting it in a fund that you do not pay attention to. That way, you learn to budget and spend as though you earn a lower salary than you do.
Maxing Out Employer Contributions
Your employer will probably offer some retirement savings vehicle, and they often offer to match a certain percentage of your salary saved. MAX OUT YOUR EMPLOYER CONTRIBUTION. I cannot stress this enough. Getting your employer to contribute as much money as possible to your retirement savings is giving yourself a bonus for being responsible. Literally.
Paying off Debt
Much ink has been spilled on whether to pay off debt or save for retirement. The reality is, they are the same thing. Paying off debt is a type of savings—after all, it increases your net worth (which, for the accounting nerds out there, is your personal assets minus your liabilities; paying off debts decrease your liabilities and therefore increase your total net worth).
The real question is how quickly to pay off your debts. And that comes down to a couple of factors. First, are you maxing out your employer contribution to your retirement savings? Do that. Second, do you expect to be in a new tax bracket in the next few years? Paying off debt is done with after-tax dollars, which means that you should pay off as much as you can while you are in lower tax brackets and focus tax-deferred retirement saving on higher bracket years. Third, are you able to afford food and clothes? You shouldn’t sacrifice your needs to pay off debt more quickly, although it will benefit you to keep those needs budgeted tightly.
Ultimately, paying off debt versus putting more money into retirement savings often comes down to uncertainty versus returns. Most index funds have higher rates of return than debt does interest, but they also have more uncertainty. If you are extremely risk-averse, then you will want to focus your saving on your debt before you shift to contributing to your Roth IRA. If you are more comfortable with risk, then you will probably get more overall by investing it in index funds.
If you are paying a mortgage on a house, then you also might be able to wrap student loans or credit card debt into your mortgage and get a tax deduction for paying it off. Ask your banker for the details on this.