Saving for retirement? Rather than take a scattershot approach, save methodically, using a road map known as the retirement savings waterfall, or the retirement savings hierarchy. It can show you which steps to take, the order to take them, and how you may benefit.

First Step

Start saving through your retirement plans at work. Such plans typically let you save conveniently and automatically through payroll deduction, and they offer certain tax advantages to encourage your participation.

Note that assumptions and conditions apply. Please consult your tax and wealth advisors about your specific circumstances.

Start saving as soon as possible. “The first dollars you save for retirement are the most productive,” says Black Square Capital’s Mark Fischer, a wealth management advisor based in California. This is because you have the maximum time for those dollars to grow and compound through investment.

An added bonus: Your employer may encourage you to save by offering to match your contributions. “That’s free money,” Fischer says, so take advantage if such a program exists.

“If your employer offers a traditional and a non-traditional option to save, you need not choose between them,” he says. “You can save in both.”

This move helps investors diversify retirement savings from a tax perspective, winding up at retirement with two pots of money to draw, one containing pre-tax dollars and the other after-tax money. Fischer says the approach you take may also depend on where you stand in the savings cycle.

Next Step

Save in a taxable account. For example, put money directly into a mutual fund or brokerage account. You won’t get a tax deduction, but if you invest for growth alone, your account can grow tax efficiently. Taxes are typically due only when you cash out.

Weigh whether to pay down any high-interest debt and then your home mortgage. “The [stock] market can go up, the market can go down, but you know what the rate is on your mortgage,” Fischer says, so you know what your rate of return will be in paying it down or paying it off.

While a retirement-savings plan at work is “a great way to save for the long-term goal of retirement,” it can be “a terrible way to save” for other long-term goals, such as college savings, Fischer says.

A key issue involves liquidity. In exchange for the many tax advantages of a governmental plan, you typically have limited access to your funds (until retirement or certain other life changes).

If you do make withdrawals prior to retirement, you’ll not only face income taxes, but also an early withdrawal penalty (depending on your circumstances), he says.

While it can be hard to figure out where to put the money you save for retirement when there are multiple types of accounts you can open, the savings hierarchy can help retirement savers prioritize. By understanding where your money should go first, and then where any extra money should be funneled, you’re making a smart decision for your future.

Keep in mind that everyone’s situation is unique. While very few people ever regret saving too much for retirement, it is always a good idea to talk to your wealth advisor about a personalized strategy for your retirement savings priorities.

Hargreaves Financial Pty is a provider of investment advice and dealing services to corporate, sophisticated, professional and private clients.