I’m 54, retired military and get $1,500 a month after taxes and medical deductions. I also have a 457(b) account for my current government job and I have been putting $300 into it each payday. I was paying $1,000 a month toward my car but it’s about to be paid off. I’m planning to increase my 457(b) contribution to $600 per payday but I was wondering if I should put some of the money in either a high-yield savings account or an IRA?
– John
Congratulations on paying your car off! Also, good on you for deliberately thinking about what you are going to do with the money that is freed up every month.
Your next move depends on a lot of factors, you should mainly be thinking about whether you’ll need the money: in the near term or years in the future? (If you have additional questions about your financial plan, this tool can help match you with potential advisors.)
What Is Your Goal for the Money?
You may already have a financial plan in place. If not, take some time to define your goals and prioritize them. Start by making sure you have a sufficient emergency fund, and then go down the line from there. Goal setting is a critical step because saving money in a high-yield savings account achieves a different purpose than saving money in a 457(b) or IRA.
Short-Term Goals vs. Long-Term Goals
If you’re going to need the money in the near future, placing it in a high-yield savings account is the better option. Right now, those are paying in the neighborhood of 4-5%. While that’s a stable return, it’s only in line with current inflation so not really a good choice for long-term savings.
Placing money in a retirement account provides tax advantages as well as investment options geared to help you save for your golden years. Those would be a better option for your long-term money.
So, hash out your goals and allocate the money accordingly. Be sure to consider your attitude toward investment risk too. High-yield savings are a conservative option. The investment options available in retirement accounts will include more aggressive choices as well. (And if you need help picking investments that are aligned with your short- and long-term financial goals, consider working with a financial advisor.)
457(b) vs. IRA
As it relates to your retirement goals, you’ll need to do some evaluation. Make sure you are on track to hit your savings target. Saving $300 per pay period may be enough to fund your retirement lifestyle, but it may not be. It all depends on your specific situation and goals, including:
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How much you have saved already
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When you plan to stop working
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How much you’ll need to withdraw from your savings when you retire