One thing I’ve noticed when talking with college students about personal finance is how totally overwhelmed they are on exactly where to start.

It’s easy to get a few years down the path of financial literacy and forget how impossible making any progress can seem.

So let’s review a little. Step 1 for planning for retirement is:

Get Today Sorted

If you can’t pay today’s bills, you can’t save for retirement yet. Figure out your budgets and the minimum you need to make each month and check out what’s left over.

If it is $0 left over, don’t waste whatever energy you have to dedicate to personal finance (and good on you for dedicating any) to retirement.

My main goals would be to learn any frugal hacks I can use in the moment (just because you can see some immediate wins there, if you haven’t already been using them) and how to increase my income.

I’d looking into how to negotiate a raise better, what training is needed to move up to the next position on the company ladder, or getting a second job (which could hopefully be temporary until achieving that raise/promotion).

Step 2 is:

Get Tomorrow Sorted

Once I have an extra $1, $10, $100 cleared up, I would dedicate it to an emergency fund.

Credit cards have such insane interest rates, there’s very little point in investing over paying them off. So the goal is to avoid using them. Which requires that emergency fund.

The emergency fund would be my only financial goal until it’s at $1000.

Alright, now that today and tomorrow are sorted and we still have a few dollars left over, I’d move onto Step 3:

Take Advantage of Any Retirement Matches Offered By Your Company

If you work for a company that offers a match on your 401k or 403b, my first retirement related goal would be to contribute up to that match.

If you’re not sure, ask your HR department.

So I think 401ks and 403bs can be a little intimidating because you often have to pick what funds to invest in. Some plans have like 4 you can choose from, other plans have hundreds.

Personally, I still sigh every time I have to sort out a new plan at a new job because I do not enjoy this part of setting up a retirement plan.

Let’s take a little side trip into how to pick funds now, since that will apply to 401ks, 403bs, IRAs… pretty much everything else we’re about to talk about.

Here’s what I look for: target date fund options and total stock market/S&P 500 funds.

This is the laziest way to do this. Almost certainly not the most optimal. There are probably better combinations with lower fees to perfectly optimize your investments, but… I can’t be bothered.

On the rare occasion I get to sit down with an advisor while I set up that account (which has happened all of once), I went with a slightly more diverse setup on his advice – since he was able to just sit there and answer some of my fee questions. I was also super lucky to set one my first one while dating a guy who was top notch at personal finance well before I was and pretty much just gave him the list of funds and went “help” and he picked them for me and they have actually done really well (thanks, Tim).

But we can’t always rely on others, right? So that’s why if I’m overwhelmed, I just look for those target date funds or total index. A target date fund is a little more conservative in that you estimate the date you’ll want to retire and pick that fund (ex: Fidelity 2050). It usually then asks you how aggressive you want your investments (since I still have a long time frame, I always pick most aggressive) and the fund does everything else for you. It will rebalance into more conservative investments as you get closer to retirement. You don’t have to do anything.

I really think target date investments are the bomb for anyone who is so overwhelmed trying to pick that they just want to give up.

My IRA (we’ll talk about that later in the post) is entirely invested in a target date fund and I’ve been really content with its performance. And I can tell you, it was the first account I set up and if I had to anything much more complicated that select that, back then I might have just given up.

Total index or S&P 500 funds invest in the stock market as a whole or the S&P 500 (a collection of 500 very large, established companies). Index funds are cool because they diversify your risk. So if one company goes under, it doesn’t have a huge effect. The American economy as a whole would really need to crash to destroy your investment in the total stock market (and while there are recessions and even that one massive crash 100 years, over any 20 year period, throughout the history of the stock market, so far it has always gone up).

End of side trip into how to pick funds for your retirement accounts.

So now you’ve got your retirement account set up through work. If you can just meet whatever the company match is – go for it. If not, do what you can and try to creep up 1% closer every year or every raise (or hop up to the match when you get the raise).

Let’s say you’ve managed to deal with today, tomorrow and you’re now meeting the company match on your work retirement account. Step 4 for me would be:

See If You Are Eligible for a Health Savings Account

Health Savings Accounts (HSAs) are kind of magic. They are the power of an emergency fund and a retirement account rolled into one. You can read about them in detail here, but just know that for 2021 the requirements are:

• You must be covered under a high deductible health plan.
• You can’t be a dependent on someone’s tax return.**
• You are not enrolled in Medicare, TRICARE, or TRICARE for Life.
• For individual that’s a minimum deductible of $1,400 and max out-of-pocket of $7,000
• For family coverage that’s a minimum deductible of $2,800 and max-out-of-pocket of $14,000
• You don’t have a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA).

**If you a recent college grad or early 20-something, check with your parents that you are not still a dependent.

Ok, so I know that’s a lot of things to check. If you have a traditional job with benefits, you’ll need to check that you don’t have an FSA or HRA, since those are sometime employment benefits. You may also need to use the specific HSA that goes with your health insurance with some employers.

If you’re a freelancer or don’t have job benefits that include FSAs, HRAs or an HSA, but you meet the insurance deductible and out-of-pocket requirements, you can open your own account. I have mine at Old National. Lively and Fidelity also have good Health Savings Account options.

So we’re talking about retirement today- you might wonder why I’m pitching this savings account to you, right?

Well that’s the magic of the HSA.

For 2021, individual HSAs have a $3,600 contribution limit and family plans can contribute $7,200.  This money is tax deductible.

You can also spend this money on any qualified medical expense. So if you have lots of medical expenses, you can just use the account as a savings account, pay your medical bills, and get the tax deduction.

But if you don’t have a lot of medical bills or you can afford to just pay for your medical bills, you can also use this account to invest and save for retirement. You can use any part of this account to pay for the qualified medical bills without paying additional taxes on the investment growth.

So how does this help you in retirement? Well, one of the highest cost items for folks in retirement is medical bills, so you can just consider this your savings for that.

But (so many buts) you can withdraw the money you spent on qualified medical expenses any time in the future. Say I pay for $200 dental cleanings each year out of pocket for 20 years, scan (or somehow save) the receipts, and in my first year of retirement decide to go on a $4,000 vacation, I just submit my 20 years of dental receipts, withdraw $4,000 and go on vacation.

In the same way, you don’t have to wait 20 years to make a withdraw. You can withdraw the amount you spent on any qualified expense (always double check what counts, but generally copays, dental visits, medications, even feminine hygiene) so in that way it can double as emergency savings too.

Alright friends, we’ve dealt with today, tomorrow, contributing up to a company match, and checking to see if you’re eligible for an HSA. Step 5 is:

Open an IRA

An IRA is an Individual Retirement Account.

Even if you don’t have access to an employer retirement plan, you can open an IRA. Also, if you move from employer to employer, you don’t have to worry about rollovers or keeping track of a dozen 401k/403bs.

As long as your gross income is less than $125,000 a year, you can contribute to an IRA. The 2021 limit is $6,000.

There are two types: Traditional and Roth

With a traditional IRA, you get the tax benefits now. So if you contribute $6,000, you get to deduct $6,000 from your income on your taxes this year. Once you get to retirement though, you pay taxes on everything you withdraw.

With a Roth IRA, you get the tax benefits in retirement. So if you contribute $6,000, you don’t get to deduct anything from your taxes for this year. However, once you get to retirement, everything you withdraw – what you contributed and the interest it gained – is deducted tax free.

Essentially if you think you’ll make more money in retirement than you make now, the Roth is probably the best way to go. If you think you’ll make more money now than in retirement, the traditional is probably the best way to go. At least as far as tax benefits.

If you think they’ll probably be about the same, then either choice is probably going to be about the same. Personally, I picked a Roth IRA because I felt my income was likely to stay about the same and I’d rather pay the taxes now and have this free and clear income source once I’m retired.

Like a 401k or 403b, you’ll need to pick a fund to invest in. A key thing to remember about IRAs is that when you deposit money, it just goes into a holding account, so you need to move the money from that “cash” fund into an actual investment like your target date fund or index fund. If it’s just sitting in the initial cash deposit fund, it’s not growing.

Ok, so let’s say you’re killing it with your finances. You’ve got today, tomorrow, your company match, your HSA, and your IRA all rolling along and you still have some more cash to contribute to your retirement plans. Step 6 is:

Contribute the Max to Your 401k or 403b or Open a Self-Employed Retirement Account

If you were previously just contributing to the match on your work retirement accounts, and you’ve maxed out on your HSA and IRA contributions, then start contributing more to your 401k or 403b. You can start increasing it 1-2% a year or just increase your contribution as much as possible. In 2021, the annual contribution limit for a 401k is $19,500. That is the amount you can contribute. If your employer has a match, together you can contribute a total of $58,000. If you’re over 50, the limits are a little higher for “catch up” contributions – an additional $6,500 that you can invest and a total between you and your employer of $64,500.

If you’re self-employed and maxing out all the other accounts, you can look into self-employed retirement plans like SEP 401ks or Keough Plans. These can be pretty complicated but worth it if you need to put away more for retirement. It’s worth talking with a financial planner to set one up.

If you’re absolutely balling and managing to take care of today, tomorrow, your company match, your HSA, your IRA and max out your work retirement or self-employed plan, the last step, Step 7 is:

Open a Brokerage Account for Retirement Saving

You can use a brokerage account for any number of reasons, but you can set up a dedicated one to save for retirement with any extra cash.

Brokerage accounts don’t really have the same tax benefits as specific retirement accounts, that’s why they’re the last piece of the puzzle. And honestly, looking at your timeframe to retirement and desired income during retirement, if you’re maxing out an HSA, IRA and work retirement fund each year, this could really be overkill. You might not even need to save more.

If you find you do though, or you want to save for a dream retirement trip or have an “extras” account you can pull from in retirement, a brokerage account could be the way to.

You’ll need to pick the funds you want to invest in.

The one tax break you do get from a brokerage account, is that if you hold the stocks more than one year (and this is each stock, not just having the account open as a whole), when you sell them, you pay long-term capital gains taxes on the sale rather than your regular tax rate.

As of 2020, for single filers, long-term capital gains were taxed at 0% if you made less than $40,000. 15% if you make less than $441,450, and 20% if you make more than $441,450. This is a lower tax rate than your regular income.

Personally, my brokerage account isn’t 100% earmarked for retirement. It’s sort of a big expense slush fund that I don’t have a strong plan for other than retirement, house or education. Those are the things I think it would be ok to pull from it for.

No matter where you are on the retirement savings spectrum, taking any step is a great next move – whether it’s your first step or 100,000^th. Planning for retirement is absolutely a marathon, not a sprint. Some years more of these steps might be achievable than others, but I think it’s always helpful to know the next step to aim for!