Dave Ramsey’s Baby Steps: Step 4 – Save 15% for Retirement

by Derek Clark

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Creative Commons License photo credit: tlwebb

Baby step four is to start saving money for retirement. Social Security and Medicare are basically bankrupt. If you are in your 20’s or 30’s you probably can’t count on too much help from Uncle Sam. Who knows if there will be anything there when you get to retirement age. This means that you need to save to take care of yourself. Dave Ramsey suggests saving 15% of your household income in 401k’s, Roth IRA’s.

Some people might be tempted to skip this step and work more on paying off the mortgage or saving for their kids college. Here’s what Dave has to say about that:

… the kids’ degrees won’t feed you at retirement, and if you throw all your money into your mortgage at this point, you’ll end up having to sell the house and buy the book 72 Ways to Prepare Alpo and Love It. Bad plan.

Compound interest is the reason you don’t want to put off investing for retirement. The following shows how much you would have at retirement based on investing 15% of a $50,000 household income for different time periods. This is also assuming you never get a raise. This assumes a 10% rate of return, which is about the average over the history of the market.

20 years – $422,062.50
25 years – $730,102.95
30 years – $1,226,205.17
35 years – $2,025,182.76
40 years – $3,311,944.17

If you plan on retiring at age 65, the difference between starting at 25 and 30 is $1,286,761.40. That is a huge amount of money and will have a big effect on your retirement.

As for what to invest in, Dave suggests mutual funds with 25% going to each of the following:

Growth
Growth & Income
Aggressive Growth
International

He doesn’t suggest that the average person invest in single stocks. I disagree with this advice, but only if you are willing to put a lot of time into studying the market. Most people won’t put in the time required or have enough interest to even want to try this. For those I think following Dave’s advice is the best plan.

What are your thoughts on this step? Anyone think you should invest more or less? Let me know in the comments and then check out the rest of the baby steps.

Step 1: $1000 Emergency Fund
Step 2: Get out of Debt
Step 3: 3-6 Months Emergency Fund
Step 4: Start Saving 15% for Retirement
Step 5: Save for Kid’s College
Step 6: Pay off the Mortgage as Fast as You Can
Step 7: Give, Save, Spend!

{ 2 comments… read them below or add one }

youngandthrifty March 25, 2010 at 11:52 pm

I would suggest siphoning this money away first, like “pay yourself first” so that the money could be designated for retirement, and not just money ‘left over’.

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Derek Clark March 26, 2010 at 7:10 am

That is a great point. Ideally you just have your company take it straight out of your check before you even get it.

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