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Which bucket do I fill first?

Which bucket do I fill first?

| May 04, 2024

A frequent question I've gotten over the past 18 years in practice is what bucket do I fill first in the savings - retirement compendium. I will try to share my thoughts here and welcome your insight and input.

Not surprisingly, I recommend filling your emergency reserve bucket first. This is likely a savings account at your bank, for example. This is money you can put your hands on immediately. This type of account may be a low-risk/ low-return sort of account.

How much should be in the savings bucket? At least three to six months of living expenses. This is your rainy day account. It may take some time to build up to the desired level but keep at it. And yes, do your budget to figure out your monthly expenses.

Next, I suggest contributing to your work place retirement plan up to the match (assuming one is offered). A match, to my way of thinking, is free money. Any objections to free money? Haven't heard that in 34 years in the industry.

I then focus on any high-interest debt the client may have. Also, take a look at your current workplace retirement plan account. If you can borrow from that account, it may be at a lower rate than the high-interest debt you may have. The general rules on retirement plan loans are you may borrow up to 50% of your balance (capped at a maximum five-year repayment) subject to a $50,000 maximum loan. $50,000 in loan implies your retirement plan balance is $100,000 or higher.

A quick note on retirement plan loan repayments. These typically come out of your paycheck so factor that into your budget. Also, if you quit or are terminated from your current workplace and you have a loan outstanding, the loan becomes due in short order.

The next bucket to fill could be additional savings to your retirement plan or even a Health Savings Account. Low interest debt followed by the IRA bucket (subject to IRA phase out limits) is next. And last but not least, you might have a taxable brokerage account where you are able to invest in what catches your eye.

I take a conservative approach of having ready cash on hand in the case of an emergency. Don't pass up the free money in the 401k, of course. And note how far back IRAs are in my scheme of things. All of my retirement plans offer pre-tax and Roth contributions. Combining that with the phase-out limits, and an IRA may not make sense. Finally, the maximum 401k/ 403b contribution for 2024 is $23,000 for those under age 50; 50 and older, $30,500. Might it make sense to try to fully fund the workplace retirement plan on a pre-tax/ Roth/ both business before trying to fill the IRA bucket to the tune of a maximum of $7,000/ $8,000 for 2024.

And yes, for many of my clients based on where they are living, they do not have the financial wherewithal to contribute to both the workplace retirement plan and an IRA.

Please share with me your order of bucket filling!