Introduction

If you’ve read our blog articles, visited our website, or watched our YouTube channel, you can probably surmise that we are all about the Ramsey Solutions 7 Baby Steps. We are committed to the Baby Steps because they work - I speak from personal experience, having gone through my own Baby Step Journey. One of the steps that I discuss frequently with clients is Baby Step 4: saving 15% of your income for retirement. Sounds simple, but there are better ways to achieve this than others. This article aims to provide a few different Baby Step 4 scenarios and the optimal way to structure retirement savings.

Recap of the Ramsey Solutions Baby Steps

Step 1: Save $1,000 in a beginner emergency fund

Step 2: Pay off all consumer debt using the debt snowball (smallest $ to largest $) (not including a mortgage)

Step 3: Save 3-6 months of expenses in a fully funded emergency fund.

Step 4: Save 15% of your income for retirement.

Step 5: Save for your children’s college.

Step 6: Pay your home off early.

Step 7: Build wealth and give.

Credit: https://tinyurl.com/2f65asxd

Some FAQs When It Comes to Baby Step 4

Should I be saving 15% of my NET income or GROSS income?

When we discuss saving 15% of your income, this refers to 15% of your gross income, not your take-home pay. One way to determine this is to add up your W-2 wages or refer to line 9 of the income section on your Form 1040 tax return.

Does my 401(k) or other employer-sponsored plan match count toward my 15% contribution?

No. Your savings are your savings. If you have access to an employer match, that's essentially free money to add to your 15% savings.

Should I be saving more than 15%?

This will depend on your goals, means, and discipline. Sometimes, people try to save more than 15% for retirement, which can harm their overall plan. You should follow the Baby Steps in order, and if there is money left to save after saving 15% for retirement, consider saving for your children’s college. Alternatively, if you don’t have children but own a home, make an extra payment to your mortgage. If these steps are all satisfied and you still have money to save, then saving in a brokerage account or maxing out your 401(k) or Roth IRA might make sense for your specific situation.

Should I complete Baby Steps 3 and 4 simultaneously?

No. Baby Step 3 (fully funded emergency fund) is crucial to staying debt-free. Trying to tackle steps 3 and 4 more often than not ends in “something coming up,” and it sends you straight back to Baby Step 1.

Why shouldn’t I just save 15% of my income into my employer's 401(k)?

Employer plans are great, but they limit you to the investments within the plan. Having an investment account outside of your plan, like a Roth IRA, opens your investment options to virtually any marketable security.

What is the order of savings for Baby Step 4?

A simple rule of thumb for the order of retirement savings: Match beats Roth, Roth beats Pre-Tax.

Always start by contributing up to the match in an employer-sponsored plan. This is FREE MONEY!

Next, consider a Roth IRA, which is an account outside of your employer-sponsored plan. The funds added come from your checking or savings and have already had tax paid on those funds. The funds can be invested and grow tax-free, then withdrawn tax-free after age 59 ½. For 2025, you can save up to $7,000 ($8,000 for those aged 50 and above) in a Roth IRA per person. If you are married and file jointly, your spouse can also save up to $7,000 ($8,000 for those aged 50 and above) in their own Roth IRA.

If you have satisfied the match and maxed out your Roth IRAs, then you would return to your employer plan and increase your contributions to meet 15% of your gross household income.

I don’t have an employer plan, what now?

Start with a Roth IRA. If you max out the Roth IRA option, consider a Taxable Brokerage Account to save the remaining funds. Taxable Brokerage accounts do not offer the tax-free growth that a Roth IRA does, and you would owe capital gains tax when you sell an investment, as well as potentially some interest and income tax each year, depending on the investments selected.

I make too much to contribute to a Roth IRA; what are my options now?

If you do not have any funds in a Traditional IRA, you can use the backdoor Roth contribution method. Essentially, you make a non-deductible contribution to a Traditional IRA and then convert it to a Roth IRA. This allows high-income earners to contribute to a Roth IRA even if they are not eligible to contribute directly to one. Alternatively, you could also save in a Taxable Brokerage Account.

Hypothetical Examples

Now, let’s examine various Baby Step 4 scenarios and break down a savings plan.

Example 1: Single Professional with/ Employer Plan making $60,000/year

In this hypothetical, let’s say this single professional makes $60,000 gross income per year and has access to a 401(k) with a 100% match up to 5% of salary through their employer.

• $60,000 x 0.15 = $9,000 Savings Goal (15%)

• 5% goes to the 401(k) to get the full match or $3,000

• $9,000-$3,000 = $6,000 left to satisfy 15%

• $6,000 goes into a Roth IRA

Example 2: Single Professional with/ No Employer Plan making $60,000/year

In this hypothetical, let’s say this single professional makes $60,000 gross income but does not have an employer plan available to them.

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• $60,000 x 0.15 = $9,000 Savings Goal (15%)

• $7,000 goes into a Roth IRA

• $9,000-$7,000 = $2,000 left to satisfy 15%

• $2,000 goes into a Taxable Brokerage

Example 3: Single Professional with/ Employer Plan making $120,000/year

In this hypothetical, let’s say this single professional makes $120,000 gross income per year and has access to a 401(k) with a 100% match up to 5% of salary through their employer.

• $120,000 x 0.15 = $18,000 Savings Goal (15%)

• 5% goes to the 401(k) to get the full match or $6,000

• $18,000-$6,000 = $12,000 left to satisfy 15%

• $7,000 goes into a Roth IRA

• $12,000-$7,000 = $5,000 left to satisfy 15%

• $5,000/$120,000 = 4.2% back to the 401(k) (increase 401(k) total savings to 9%)

Example 4: Married Couple filing jointly with/ Employer Plan making $120,000/year

In this hypothetical scenario, let’s say a married couple has a single income of $120,000 gross per year and has access to a 401(k) plan with a 100% employer match up to 5% of their salary.

• $120,000 x 0.15 = $18,000 Savings Goal (15%)

• 5% goes to the 401(k) to get the full match or $6,000

• $18,000-$6,000 = $12,000 left to satisfy 15%

• $7,000 goes into a Roth IRA

• $5,000 remaining goes into a Roth IRA for the spouse

Example 5: Married Couple filing separately with/ Employer Plan making $120,000/year

In this hypothetical scenario, let’s say this married couple has a total annual income of $120,000 ($60,000 each), gross, and both have access to a 401(k) with a 100% match up to 5% of their salary through their employer. However, they file separately.

• $120,000 x 0.15 = $18,000 Savings Goal (15%)

• 5% goes to each of their 401(k) accounts to get the full match or $6,000 total between the two

• $18,000-$6,000 = $12,000 left to satisfy 15%

• Because they file separately, they make too much to contribute to Roth IRAs

• They would increase their 401(k) 10% to make each contribute 15%, or consider a Taxable Brokerage as a bridge account

Example 6: Married Couple filing jointly with/ No Employer Plan making $60,000/year

In this hypothetical, let’s say this married couple files jointly, earns a gross income of $120,000, but does not have an employer-sponsored plan available to them.

• $120,000 x 0.15 = $18,000 Savings Goal (15%)

• $7,000 goes into each Roth IRA, totaling $14,000

• $18,000-$14,000 = $4,000 left to satisfy 15%

• $4,000 goes into a Taxable Brokerage

Conclusion

As you have probably gathered from the above examples, many other scenarios can be created by reworking the math for each scenario. Keeping in mind that “Match beats Roth, Roth beats Pre-Tax” is a good starting point. Still, there are many nuances to finance, and having a professional in your corner can be an asset in avoiding common blunders when it comes to planning and investing. It is always recommended to consult with a financial advisor. If you do not have a financial advisor, please reach out to the team of financial advisors with Whitaker-Myers Wealth Managers. They have the heart of a teacher and are ready to listen to your questions and help get you on a path to fulfill your financial goals. This article is not meant to provide advice.