All right, Matt's question is up next. It says step six of the financial order of operations
says maxing out retirement savings. Does that mean you have to put the full $22,500 into your 401K? Is that what it means for other accounts as well, or should I move on to step seven after 25% if I'm not a high earner? I think this is a question we get a lot, so could you help them parse through how to handle the transition from Step six to seven and eight? I'll answer the first part, and you can address the second part.
The first part of the question is, does 'step six maxing out' mean putting the full $22,500 into my 401k, 403(b), or 457? Yes, it does. That's the ideal, that's what it means, maxing that out. But is that what you're supposed to be doing in your circumstances if you're following the financial order of operations
? The financial order of operations
is dynamic for all people. You can check it out on moneyguy.com/resources because, as Matt pointed out, it varies based on your income. The goal is indeed $22,500 if you're 50 and older, but there are situations where you might not reach that number, especially if you don't make six figures. If you reach 25% savings, especially for those making under $100,000, you can move on to Step seven – hyper-accumulation.
However, it's essential to clarify that even some successful individuals who make $150,000 a year might still be living paycheck to paycheck. I'd say you don't get to graduate to Step seven until you're fully maximizing those accounts. Matt's question is very perceptive, and we recently spoke to an organization about the financial order of operations. If you're interested, feel free to reach out; we'd love to help you make the most of your finances.
We had an engineer at one of our talks who raised her hand and asked if it seemed cruel that she couldn't start helping her kids with college until she saved so much for retirement. The clarification here is that you can start assisting with other financial goals once you exceed 25% of your gross income. Still, the primary goal remains maxing out those tax-favored accounts because of the tax advantages they offer, thanks to the government. If you're saving more than 25% and you're planning to retire before the typical age, you might want to consider after-tax savings. Where you put your dollars after 25% will depend on your unique circumstances and your financial independence goals. Ultimately, it comes down to your "why" and your goals. Are you trying to retire early, or do you want to save for your kids' college education? You need to think about what you really want to achieve.