Maximize Retirement Investing Using Your Income

How Does a 401(k) Work as a Retirement Investment Account?

Frequently Asked Questions

What isn’t retirement?

Retirement isn’t about running away from a job you hate. If you’re miserable, the solution isn’t to dream about quitting someday—it’s to change the work you’re doing now.

Retirement also isn’t a life of sitting still. Dave tells the story of Harold Fisher, a 100-year-old architect who kept working because he loved it, not because he needed the money. That’s the real picture: reaching the point where your money works harder than you do and work becomes something you choose, not something you’re chained to.

Retirement also isn’t automatic or guaranteed. Most Americans aren’t prepared, and many don’t believe a secure retirement is even possible. But it is—if you have a plan and take action. Retirement is not an age; it’s a financial number. When you have enough money to live and give like no one else, you’re ready.

How do I start saving for retirement?

If you have access to an employer-sponsored retirement account like a 401(k), it can be as simple as setting up automatic contributions. You can choose to have a portion of each paycheck automatically invested in the funds of your choice.

Otherwise, you can set up an Individual Retirement Account (IRA). These are available at a variety of financial institutions and take about as long to set up as a bank account. You simply transfer money into your IRA and use it to invest in mutual funds from right inside your account.

When should I start investing for retirement?

Ramsey’s path to financial peace follows the 7 Baby Steps. We always recommend waiting to start investing until you’ve paid off all debt (except your mortgage) and have a fully funded emergency fund with 3–6 months of living expenses.

The sooner you can start investing, the more time your money will have to grow. But it’s never too late to start! We’ve seen plenty of people become successful investors later in life.

Why should I pay off debt before investing for retirement?

Let’s get one thing straight: The only “good debt” is paid-off debt. Your most powerful wealth-building tool is your income. And when you spend your whole paycheck sending loan payments to banks and credit card companies, you end up with less money to save and invest for your future. It’s time to break the cycle!

Trying to save and invest while you’re still in debt is like running a marathon with your feet chained together. Get debt out of your life first and build your 3–6-month emergency fund. This frees up your income to focus on your future—not your past.  

Should I pause retirement contributions if I need to rebuild my emergency fund?

Your emergency fund (3–6 months of expenses) is your safety net. If you have to spend some of it on an emergency, your top priority is to restore it. So yes, you should pause all investing temporarily until your emergency fund is back to fully funded status. This isn’t forever—just long enough to get that cushion back in place. Once you’re fully funded again, jump right back into investing 15% of your income for retirement.

This protects you from having to go back into debt if another emergency hits. It’s all about financial security first, then building wealth.

How much should I invest in retirement each year?

We recommend investing 15% of your gross annual income (not your take-home pay) each year. For example, if you and your spouse bring in $100,000 annually, the goal would be to invest $15,000 a year.

If your employer offers a match, that’s awesome! But no, the money they put into your account doesn’t count toward your 15%.

When you invest 15% of your income, you’re investing enough to make good progress toward your retirement goals and still have money left for other money goals like saving for your kid's college (Baby Step 5) and paying off your home (Baby Step 6). 

Which retirement account types should I use?

Depending on your situation, you may want to use more than one type! As a general guideline, we recommend using the following formula to help you figure out which accounts to use:

Match beats Roth beats traditional.

If your employer offers a Roth 401(k) with a match of 4%, for example:

• You could invest all 15% in that plan up to the Roth 401(k) limit if you like the investment options you have there.
• If you reach the Roth 401(k) contribution limit before reaching 15% of your total income, you could invest the rest in a Roth IRA.
• If you’re not eligible for a Roth IRA, consider a traditional IRA.

If your employer only offers a traditional 401(k) with a 4% match, for example:

• Invest 4% in that plan to take advantage of the match.
• Next, invest in a Roth IRA until you either hit 15% of your income or the contribution limit for your Roth IRA.
• If you reach your Roth IRA contribution limit before reaching 15% of your total income, go back to your traditional 401(k) and increase your contributions until you reach 15% of your gross income or the 401(k) contribution limit.
• If you meet all your contribution limits and still haven’t reached 15%, talk to an investment professional about other options.

If you don’t have access to an employer-sponsored retirement account:

• There are several retirement plan options for small-business owners or self-employed individuals, such as SEP-IRAs, SIMPLE IRAs and solo 401(k)s—all of which come with a Roth option.
• You could also make contributions into a separate Roth IRA if needed to hit 15%.

How do I open an investment account?

It depends on the type of account! For instance, if you want to set up an employer-sponsored account like a 401(k), your human resources (HR) department should be able to walk you through the process.

These days, you can open a Roth IRA or traditional IRA on the website of any major investment firm. As a general rule, we recommend working with an investment pro, who will be able to help you explore mutual funds and understand how different accounts could fit your needs.

What should I invest in?

We recommend investing evenly across four different categories of growth stock mutual funds:

• Growth and income funds (large cap): These funds provide slow and steady growth by investing in large companies that are generally much more stable than smaller companies.
• Growth funds (medium cap): These funds invest in medium-size companies, which have moderate growth and volatility. 
• Aggressive growth funds (small cap): Also called emerging market funds, these funds are often the “wild child” of your portfolio. Usually invested in lots of start-ups with the potential for rapid growth, you could easily see big gains over one stretch of time and equally big losses in the next.
• International funds: Made up of companies from around the world, international funds help you further diversify your money by investing outside of the U.S.

What types of investments should I avoid?

• Crypto: It’s extremely volatile and unpredictable, with prices swinging wildly based on speculation and hype. There’s no proven track record, and people have lost tons of money in it. Crypto isn’t regulated, and it’s vulnerable to scams and theft. It’s more like gambling than investing.
• Single stocks: These are risky because your money is riding on the success or failure of one company. If that company stumbles—even just for a season—you can lose a big chunk of your investment. It’s like betting on one horse in a race, instead of owning the whole field.
• Commodities (like gold, silver or oil): These are unpredictable. Their prices swing wildly based on news, global events and investor emotion. They don’t produce income, and over time, they don’t build wealth like diversified mutual funds do.
• Gambling high-risk ventures:
  • Day trading (rapidly buying and selling stocks, hoping for quick profits)
  • Margin trading (investing with borrowed money)
  • Investing in unproven start-ups without research

Instead, focus on time-tested investments—like good growth stock mutual funds—that have a long history of building wealth for investors. That’s how you minimize risk and grow your money for the long haul.

Have a different question?

If you’ve got a unique question about saving for retirement or working the Baby Steps, try our Ask Ramsey tool, powered by Ramsey AI. And to keep your momentum during Baby Step 4, stay on track with your EveryDollar budget every month.