Where Should You Put Your Money for Retirement?

You just finished graduate school or undergrad. You already have a job lined up and instead of living on that college budget, you are starting to see money flow into your bank account. Most of us aren't taught how to save and how to invest in school. The exception is if you studied economics or finance. 

We surveyed a group of individuals who were just beginning their careers in pharmacy, law, and engineering. The most commonly asked question among them was, "What do I do with this money?" 

They weren't talking about where they should be spending it, but rather where they should be saving it. The terms Roth IRAs, 401ks, stocks, bonds, and real estate all seemed to be overwhelming. They could careless what each of them did, they just wanted to be told where to put their money for the best return for retirement.

Here is the ultimate investment guide cheat sheet. 

Suppose after all your monthly expenses, you have money leftover. Most people would stash this away in their checking account. If you are smart about it, you might actually dump it into a high-yield savings account. Still, the return on that savings account is minimal. What we should do is contribute excess cash in the following fashion:

1) Contribute to your 401k until it is no longer matched by the company
2) Max out your Roth IRA
3) Max Pre-Tax 401k to the limit
4) Other tax advantaged accounts 
5) Tax disadvantageous accounts 

For example, if you have $1,000 remaining to invest or save, you would start by contributing to your 401k until your company no longer matches your contribution. Suppose that amount is $200. For every dollar you contribute up to $200, your company will put in that same amount into your 401k. This is a no-brainer because it is free money. The match amount or percentage is at the discretion of your company.

They could care less what each of them did, they just wanted to be told where to put their money for the best return for retirement.

Now you still have $800 remaining. If you meet the income limits, you'll want to contribute to a Roth IRA. Every year, the IRS will come out with a contribution limit on the Roth IRA. For example, in 2015 the amount set by the IRS was $5,500 for those under the age of 50. That limit does go down if you make above a certain threshold. For a single tax filer in 2015 if you make more than 116,000 you will not be allowed to contribute up to $5,500. If you need the full $800 to max out or will fall short of maxing out, put all of the $800 into your Roth and you are done.

If you still have cash left over then you would take a portion of that amount and put it in your 401k until you meet the IRS limit. The 401k contribution limit set by the IRS in 2015 for those under the age of 50 was $18,000. Then any cash leftover would go towards other tax advantaged accounts. For example, the flexible spending account (FSA) allows you to set aside money for health qualified expenses. All other cash should go into tax disadvantaged account, such as your mutual fund brokerage, stocks, bonds, or CDs. Four and five on the above list can be switched depending on your situation. If you have a lot of medical expenses then a FSA might be the way to go. Otherwise, stick with other investments such as mutual funds, bonds, and stocks.