After building a fully funded emergency fund and clearing out debt, you’re ready to move on to an exciting new phase of financial freedom: investing. Step 4 focuses on preparing for a financially secure retirement by investing 15% of your income in retirement accounts. This may sound like a big commitment, but building a strong retirement fund is essential to achieving lasting financial security and independence.

In this post, we’ll cover why 15% is a powerful target, how to start investing for retirement, and tips for making the most of your investments.

Why 15%?

Investing 15% of your income for retirement is a strategic way to ensure a comfortable future. Many financial experts, including Dave Ramsey, recommend this amount because it’s high enough to allow you to build substantial savings over time without feeling overly restrictive in your current lifestyle.

Saving a smaller percentage could mean falling short of your retirement needs, while saving significantly more may strain your day-to-day budget, especially if you have other financial goals to achieve. By dedicating 15%, you’re striking a balance that helps you secure your future while enjoying the present.

How to Start Investing 15% of Your Income

If you’re new to investing, getting started can feel overwhelming. But by following a few simple steps, you can make the process straightforward and effective.

1. Start with Your Employer-Sponsored Plan (401(k))

If your employer offers a retirement plan like a 401(k), this is usually the best place to begin. Not only do these accounts allow you to invest pre-tax income (reducing your taxable income for the year), but many employers offer matching contributions. Employer matching is essentially free money—if your employer matches up to a certain percentage, try to contribute at least that amount to maximize this benefit.

2. Open an Individual Retirement Account (IRA)

If you don’t have access to a 401(k) or want to supplement it, consider opening an Individual Retirement Account (IRA). Traditional IRAs offer tax-deferred growth, which means you won’t pay taxes on your earnings until you withdraw the money in retirement. A Roth IRA, on the other hand, is funded with after-tax income, so you won’t owe taxes on your withdrawals later. If you expect your tax rate to be higher in retirement, a Roth IRA can be a smart choice.

3. Invest in a Diverse Range of Funds

Choosing where to invest your money is one of the most important parts of retirement planning. Most experts recommend investing in a diverse mix of mutual funds, which spread your investments across many companies and industries. Here’s a simple allocation strategy to get you started:

• Growth Funds: Aim for about 25-30% in growth funds, which typically include stocks from companies that are expected to grow faster than the overall market.

• Growth and Income Funds: Dedicate around 25-30% to growth and income funds, which combine growth stocks with more stable, income-generating stocks.

• Aggressive Growth Funds: Allocate about 20-25% to aggressive growth funds, which include smaller or newer companies with high growth potential. These tend to be riskier but can yield higher returns.

• International Funds: Put about 20-25% in international funds to add global diversification to your portfolio.

Each type of fund has a different level of risk and growth potential, so balancing them provides both security and growth.

4. Automate Your Investments

Once you’ve set up your retirement accounts and chosen your investments, automate the process. Set up automatic contributions to your retirement account with each paycheck. Not only does this make the process easier, but it also enforces consistency and prevents the temptation to spend money intended for your future.

Understanding the Power of Compound Growth

The key to building a strong retirement fund is to start early and be consistent. This is where compound interest comes in—your money starts generating returns, and those returns generate even more returns over time. Here’s an example of how compound growth can work in your favor:

If you start investing $500 a month at age 30, with an average annual return of 8%, your retirement fund will grow to around $1 million by age 65. That’s the power of consistent investing over the long term!

Even if you’re starting later, it’s never too late. The important thing is to start and stay committed to your 15% target.

Common Questions About Investing 15% for Retirement

What if I Have Other Financial Goals?

Saving for retirement is a long-term priority, but it doesn’t mean you can’t save for other things, too. With a well-structured budget, you can balance investing 15% for retirement with other goals like saving for a house, vacations, or an education fund.

What if I Don’t Have 15% to Spare Right Now?

If 15% feels like too much to commit right away, start with what you can afford and gradually increase it. Even a small percentage consistently invested will make a difference, and as you gain control of your finances, you can work up to that 15% goal.

How Often Should I Review My Retirement Plan?

It’s a good idea to review your retirement plan at least once a year to make sure you’re on track. If you get a raise or experience a life change, adjust your contributions accordingly. You might also consider speaking with a financial advisor to optimize your strategy.

Staying Motivated on Your Retirement Journey

Investing 15% of your income requires commitment, but knowing you’re building a secure future can keep you motivated. Each time you contribute to your retirement fund, you’re taking another step toward financial independence and peace of mind. Celebrate each milestone, whether it’s reaching your first $10,000, $50,000, or even $100,000 in retirement savings. Remember, every dollar invested is one more step closer to financial freedom.

Final Thoughts: Make Your Future a Priority

Retirement may seem like a distant goal, but the decisions you make today will determine your financial security in the years to come. By investing 15% of your income, you’re making a commitment to your future self, giving yourself the freedom to enjoy life without financial worry. It’s one of the smartest and most powerful investments you’ll ever make.

Ready to Take Action?

If you haven’t started saving 15% for retirement, begin today. Even if it’s a gradual increase over time, getting started is the key. The sooner you begin, the more you’ll benefit from the power of compounding, and the closer you’ll get to a secure, comfortable retirement.