You may notice the main image for today’s post. It is a free-flowing waterfall. Look at how the water completely covers the first set of steps at the top, before it spills over to cover the next step. And the next step. Until finally it reaches the bottom. The correct order to fill up our retirement accounts each year should follow a similar pattern. We should fill up one retirement account until it is full, and then move on to the next. And then the next until we have reached our annual savings goal. This is the order of investing, sometimes referred to as Waterfall Investing.
This post is meant to help you determine the order in which you should fill up your investment accounts. Before we can do that, though, you need to go back and first determine how much money you need to be saving each year. If you do not know your annual savings goal, then click here to read a post on determining how much money to save each year.
Waterfall Investing Basics
The order in which you should fill your retirement accounts until you get to your annual savings number should have a method to it. Typically, I prefer to fill up tax-advantaged space first that is most readily accessible and then move towards the less tax-advantaged space with each step.