Both ?

[Guest sadieelvis]

I am 27 years old and invested in a 401k plan at work, do I need an IRA or am I okay with a 401k for retirement needs?

[ElGuapo]

Your first priority would be to put enough into the 401(k) to get the full employer match. From there you may have all kinds of different financial priorities--putting aside an emergency fund, saving for a down payment, wedding, college, paying off credit cards, or any number of other things.

That said, your best option for saving money after that 401(k) will be a Roth IRA, and the IRS only allows you to put $4,000 a year into it. (Your spouse can do another $4,000 a year if you're married.) So if there's room for it in your budget to start building up your Roth, the sooner the better.

[John G]

You did not provide much background, but I will take the plunge.

Your question is like asking two questions: How much money do I need in the future? And, do I have more than I need for spending right now? There are many factors at play - your health, age, career prospects, salary growth, future education plans, marital status, tax brackets, .... etc.

The first question gets at big issues such as how long you expect to live and what your lifestyle might be like when you retire. Unless you have a very very bizarre medical history you are likely to live longer than your grandparents because you have survived childhood and teenage risks and because medical advances will likely extend you life. You probably have no frame of reference for retirement lifestyle, but the trend is for more recent retirees to be much more active than those that retired 30 years ago. Having money and choices is better than not so I would error on the side of more retirement savings..... but that is me, you might have different values. {I want to travel to Machu Pichu, Great Wall of China, Alaska, etc.}

The spending question is also very personal. I think it is great to have money left over each month to invest for the future. I like to live below my income, in part, because it gives you a margin of error if you get some bad breaks. I prefer to have the financial resources to make my own choices (or my kids choices) than to leave it up to someone elses decision (like a scholarship committee). Some folks like to burn money now and solve future problems in the future.

If you have more money than you currently need to spend, then I would recommend these four areas for the extra:

1. Any company sponsored retirement plan if it has a matching component.

2. Roth IRA, if you qualify, up to the $4,000 annual max.

3. Retire quickly any high interest rate debt like credit cards. Do not accelerate any debt retirement related to low interest college loans, mortgages, or car loans. (Car loans normally have interest payments loaded up front and therefore early repayment has minimal value)

4. Buy a home or condo if you lifestyle is compatable and you expect to stay at your current location for 3+ years. One of the advantages of home ownership is the leveraging of your downpayment. While homeownership is not always a great wealth building opportunity, for most folks it is one of the major ways they increase their net worth.

Back to that 401k math. If you start contributing $2,500 each year starting at age 27 and earn 10% on average (representative of slight growth bias to a general stock mutual fund) then you will have about $1 million when you turn 67. Some of the value of that 1M will be eroded away (by inflation) due to the rising cost of goods and services - assuming 3% annual your million would have a buying power of about $300,000 today. If you add 5K each year, all those numbers double.... $2M and the buying power of $600k today. You might want to spend an hour fooling around with a spreadsheet to look at other scenarios.

And old rule of thumb is to attempt to save 10% of your annual salary. That is a very simplistic approach because it does not guarentee you will meet your goals. BUT, anyone saving 10% is way better off than someone who thinks that 1% and social security will take care of them.