How To Max Your Retirement Savings


Ramit Sethi, author of ‘I Will Teach You To Be Rich,’ shares his best tips

Whether you’re a financial whiz or you can’t tell your 401(k) from your IRA, figuring out the best way to save for retirement can be intimidating. That’s why we talked to Ramit Sethi, author of the 2009 New York Times bestseller, I Will Teach You To Be Rich. He breaks down where to put your money — so it grows the way you want it to.

Wake-Up Call: There are so many different types of retirement accounts. Can you explain the difference between a 401(k) and an IRA, and in what capacities people should use either of those?

Ramit Sethi: What people really want to know is: “Where should I put my money so that it grows and it does the things that it needs to do?” I have a ladder of investing that explains where your money should go — which accounts it should go into in order to grow. If you want to invest and you have a 401(k) match, you want to put your money there. Now a 401(k) is a retirement account and a match means they’re going to take your money and match it. Basically, it’s free money.

Number two, if you’ve got credit card debt, pay it off. Number three, look into an IRA — another type of account that gives you more control than a 401(k). It lets you choose more investments and typically has lower fees. Then if you’ve still got money, you want to go back to your 401(k) and max that out. Finally, there are two more steps on the ladder of investing. Check out the HSA, if you have access. And then finally, if you still have money left over after all of those accounts, then you can just open up a taxable account and continue investing.

But for those of us who are at the beginning of their retirement savings, what should we consider when we are trying to figure out how much to put aside?

The usual advice is that they give you some complicated formula and you can just see people’s eyes glazing over, right? If that worked, people would have already done it. So I’m going to give you a different way of looking at it.

The goal is you should be spending less than one hour per month on your finances. That means you need to set up automatic systems to do the right thing for you. Number two, you should know exactly when you’re going to have $500,000 or $1 million, or whatever the number is that you want in your retirement account, and you can do this mathematically. Same thing with people in debt. The number one question I ask them is, “Do you know how much you owe?” 90% of people don’t know. And then I say, “Do you know when your debt is going to be paid off?” 99% of people don’t know. You should be able to know which month and year your debt will be paid off.

And the third thing about retirement in terms of goal-setting is — you shouldn’t be waiting around until you retire to live your rich life. In fact, I was just posting on Instagram yesterday about people who wait. “I’m going to take that cruise when we retire,” they say, and suddenly their partner falls ill, or something happens. And so I’m an absolute huge believer: Do not wait to live that life. You can start living parts of it right now.

You already took us through your ladder, which is so fantastic. Do you have any other tips for saving for retirement that you would like to share?

There are some basic formulas for how much you want to be saving and investing — but it ultimately depends on your income, age, and goals. In general you should be investing a minimum of 10% of your gross income every month.

People will say: “I’ve cut to the bone, there’s nothing else I can cut.” And I have two responses to that. Number one, let me take a look at your spending and I can find some areas that you may not know you’re spending on. Typically when I work with people, I can find hundreds of dollars per month within just about 10 minutes. The second thing is there’s a limit to how much you can cut, but there’s no limit to how much you can earn.

When most experts talk about money, it’s all about restriction. “Don’t spend money on lattes, don’t go out to restaurants.” It never works. Nobody wants someone telling them what not to do. So I actually flip it and I say, “What do you want to spend on?” And then they tell me, you know, “I want to take a trip.” And the philosophy there is I actually want people to spend extravagantly on the things they love, but cut costs mercilessly on the things they don’t. So this is how we’re able to find hundreds of dollars of savings because people are like, I actually would love to travel more to see my grandchildren, but I actually really don’t care about these current things that I’m spending money on every day. And so that really changes their savings and retirement.

What might we be doing wrong when looking at our own retirement saving plans that we have right now?

Most people are asking $3 questions and they really need to be asking $30,000 questions. Most people are feeling guilty about spending $3 a day on lattes. It doesn’t matter. Buy as many coffees as you want. That’s irrelevant. That’s not going to change your retirement. What really matters is getting the five to 10 big wins in life, right. And that means if you’ve got high interest debt — it means paying it off, making a plan, knowing the exact month it’s going to be paid off. It means if you’re paying investment fees, you’re probably paying 50 to a hundred thousand dollars too much.

So I’m going to give you an example. Many people are uncomfortable with the idea of taking control of their own money, so they hire a financial advisor. Now there are some very good advisors, but no advisors should charge you a percentage. Many Americans are unknowingly paying thousands of dollars every year in unnecessary fees. There is no amount of coffee you can buy that’s going to add up to that.

This interview has been edited and condensed.

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