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Why You Need to Invest 15% of Your Income for Retirement

Here at Ramsey Solutions, we tell people that they need to invest 15% of their gross income to build wealth for retirement. So why is 15% the rule of thumb? Why not more? Or less? There are a couple of reasons. They’re called your mortgage and your kids.

Most people want to invest for the future, but they feel overwhelmed in the face of more pressing needs in the present. Chances are, you want to save up and buy a home. And at some point, a majority of Americans have kids. Kids mean college funds. Investing 15% of your gross income leaves you enough wiggle room to pay off your mortgage and save for your kids’ education at the same time.

How you invest that money depends on whether or not your employer offers a savings plan and a company match. Some companies match your contribution (to a point) when you put money into a retirement account. If you have the opportunity to participate in a match benefit, take it! That’s free money!

Investing With Roth 401(k)

If your company offers a Roth 401(k) option, you could invest your whole 15% there and not have to worry about investing elsewhere. With a Roth 401(k), you contribute after-tax dollars, so your money grows tax-free! You may get a match on top of your contribution, too. Talk about making saving for retirement super easy!

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Take it one step further by signing up for automatic withdrawal. This takes the money straight from your paycheck to your retirement fund. You won’t even see it. This keeps you from missing it—or wishing you could skip investing and spend it on something stupid. In my years of financial coaching, I’ve learned that stupid is waiting just around the corner!

Investing Without Roth 401(k)

If your company doesn’t offer a Roth option, start by investing up to the match. From there, invest the rest in a Roth IRA. For example, if your company offers a 3% match, invest 3% in that program and then put the remaining 12% into a Roth IRA. If that remaining 12% would put you over the annual contribution limit for a Roth IRA ($5,500 if you’re under age 50, $6,500 if you’re 50 or older), contribute the maximum amount to the Roth IRA and then go back to the 401(k) to save the rest there.

Here’s how that might look:

Gross income: $50,000

Amount to invest (15%): $7,500

401(k) contribution of 3%: $1,500

Amount remaining to invest: $6,000

Roth IRA investment: $5,500

Amount remaining to invest: $500

Addition 401(k) contribution: $500

Amount remaining: $0

You should notice two things: First, the 15% is calculated from your annual gross salary, not your take-home pay. Second, your company’s match does not count as part of your 15%. Consider that extra icing on the cake!

What to Remember When Investing

Remember, though, that you should pay off all debt (except the house) and have a full emergency fund of three to six months’ expenses before you start investing for retirement. It’s okay to put the retirement savings on hold temporarily until you’re debt-free and have your emergency fund intact. Then it’s full speed ahead!

Once your home is paid off, you can get intense about saving and investing for retirement. You can put away some serious cash when you’re debt-free!

One last thing to remember: Don’t try to navigate the waters of retirement investing alone. Get help from a professional who understands the ins and outs of the market. They can answer questions and suggest changes to make the most of your investments. Meet with them often to keep your plan on track and make any adjustments.

Stay inspired, work your plan, and make sacrifices today—and watch your retirement dreams come true!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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