In a world where the number of savings options people have exceeds the amount of time they have to review them, it’s best to have a basic idea of what the best option for them is right off the bat. Situations vary from person to person so no one solution can fit everyone. However, it is still worth being able to answer a quick question on how a client might want to get started on their annual contributions.
First item to focus on at the start of the year is to have the client stabilize their emergency fund. Life finds a way of surprising everyone and the last thing clients want to worry about while putting money away for retirement is not having enough money to cover major expenses. The emergency fund should account for their age range and overall income. 2-3 months of pay regardless of their regular income, to help tackle extraordinary circumstances which could dappen their ability to contribute regularly to retirement.
The next item, and the first step in contributing to their retirement, is to direct clients to pay into any available Defined Contribution Plan. The goal being not to maximize client contributions to this plan, but to take full advantage of any available employer match.
Then comes paying down certain liabilities, especially high interest loans, such as credit card debt or student loans. As with the emergency fund, this is meant to open up future contributions and allow clients to maintain a consistent flow of money into their retirement accounts.
Further payments to Defined Contribution savings should follow, as well as initial contributions to HSAs. HSAs offer a triple tax advantage: the money going in is tax free, the money grows tax free, and withdrawals for qualified health expenses don’t incur a tax penalty. This makes them useful retirement savings vehicle and next in line to receive contributions after DC Plans. It’s worth noting that clients are restricted to contributing to these accounts only if the health plan they are enrolled in is a high-deductible plan.
After addressing low interest loans and other low priority liabilities, clients can then be directed to contribute to any IRA accounts. This decision can be affected by the quality of the DC Plan available to clients. If that quality is lacking, it may be reasonable to start contributing to an IRA after an HSA, instead of maxing out the retirement plan. However, this is only if that is case. Otherwise, contributions to the Plan is still tax advantageous.