Does a Pension Count Towards Dave Ramsey’s 15%?

Dave Ramsey is a financial expert known for his “Baby Steps” program, a sequential guide designed to help individuals build wealth and achieve financial peace. This structured path ensures foundational elements like emergency savings and debt elimination are addressed before significant wealth-building activities. This methodology aims to simplify complex financial concepts into actionable steps for a broad audience.

Dave Ramsey’s Baby Step 4 Explained

Dave Ramsey’s Baby Step 4 focuses on investing 15% of your household income for retirement. This step follows the crucial stages of building an initial emergency fund and eliminating all non-mortgage debt, ensuring a solid financial foundation before significant investing begins. The purpose of this step is to leverage consistent, long-term investing to build substantial wealth for retirement, aiming for financial independence rather than working out of necessity in later years.

Ramsey advocates investing this 15% into tax-advantaged retirement accounts, recommending growth stock mutual funds. He suggests vehicles like 401(k)s, 403(b)s, 457 plans, and IRAs (including Roth IRAs). The 15% is calculated based on your gross household income, before taxes and other deductions. This consistent investment grows significantly over decades through compounding.

Pensions in the Ramsey Framework

Dave Ramsey views pensions as a distinct employer-provided benefit, separate from an individual’s active 15% personal retirement investment. He advises that a pension, while valuable, should not replace the personal 15% investment goal in Baby Step 4. This perspective stems from pension plans, particularly defined benefit plans, where the employer assumes investment risk and commits to a specific payout. This differs from self-directed accounts where the individual contributes and bears investment risk.

Ramsey’s philosophy emphasizes personal responsibility and control over one’s financial future. Since a pension’s growth and payout are managed by the employer, it is not considered a self-directed investment like a 401(k) or IRA. He suggests investing the full 15% of household income into personal retirement accounts, in addition to any pension benefits. While a pension contributes to retirement security, Ramsey frames it as a “bonus” or additional income, not fulfilling the 15% personal savings target. In cases of mandatory employee contributions, some interpretations suggest counting about 50% of the employee’s contribution towards the 15% goal.

Actionable Steps for Pension Holders

For individuals with a pension, Ramsey’s framework centers on actively investing 15% of their gross household income. This personal investment should be directed into growth stock mutual funds within tax-advantaged accounts, even with a pension. This dual approach provides diversification, reducing reliance on a single retirement income source. It also offers individuals more control over savings, crucial if pension plans face unforeseen changes.

A practical order of operations for investing involves first contributing enough to an employer-sponsored plan (e.g., 401(k) or 403(b)) to receive any company match. This “free money” should be prioritized. After securing the match, the next step is to fully fund a Roth IRA, taking advantage of its tax-free growth. If the 15% goal is not met, remaining contributions should be directed back into the employer’s 401(k) or similar plan. The pension then serves as a foundational income layer, complementing self-directed investments for a more robust retirement.