How to Save for Retirement

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Americans of all ages often dream about retirement, but most struggle to actually save for it. 

Let’s face it, in the shuffle of immediate priorities, saving and planning for retirement isn’t a walk in the park. We all know we need to save for the future, but more than half of Americans don’t know how much they’ll need to comfortably retire. And 15% of Americans are without retirement savings at all, according to Northwestern Mutual’s 2019 Planning and Progress Study.  

“Unfortunately, if you don’t save and don’t do what you need to do for retirement, then you’re going to be forced into a position where retirement may not be in your future, and you may have to work for the better part of your life,” says Larry Sprung, CFP, president and founder of Mitlin Financial in Hauppauge, New York.

When life happens, it can sabotage your retirement savings. But planning for retirement doesn’t have to be daunting; there are plenty of things you can start doing right now to end up with the retirement you envision. 

How Much Money Will You Need to Retire?

The U.S. Department of Labor estimates you’ll need about 70-90% of your pre-retirement income during retirement to maintain your standard of living. Fidelity recommends aiming to put away 15% of your income toward retirement each year, including any matching contributions from your employer. That’s a solid benchmark to measure your progress against, but your retirement goal will depend on your income, how long you hope to work, and other factors.

How to Start Saving for Retirement

There are plenty of things you can do now to set yourself up for retirement success, no matter your age or financial situation. Here are three simple steps you can take to increase your savings and odds of retiring on your own terms.

1. Start Early 

You’ve likely already heard this advice, but experts seem to agree on one thing: start saving early for retirement. The sooner you start saving and investing, the better off you’ll be. Thanks to compound interest, your money can grow over time in a retirement investment account, and you can make money on your money. 

It’s easy to procrastinate and push back your retirement savings, but it can have a more significant impact than you think. Use the compound interest calculator from the U.S. Securities and Exchange Commission to estimate how much you’d need to save for retirement; it’ll show you a little can go a long way. While saving early for retirement will give you a leg up, it’s never too late to begin.

2. Make It a Habit 

Saving is a habit, and saving for retirement is no different. While saving may not feel as rewarding in the beginning, you’ll reap the benefits later on. Integrate saving into your budget now. Even if it’s just a little bit, save as much and as often as possible. And if you’re already saving, keep going. One of the hardest parts of saving for retirement is staying consistent. 

3. Set a Retirement Savings Goal

Make retirement a priority by devising a plan, setting goals, and sticking to those goals. Determining how much annual income you’ll need to maintain your lifestyle is key in the planning stages. You’ll likely have fewer expenses, but don’t forget about inflation. You’ll need to account for it in your budget to protect yourself from rising prices in retirement.

The U.S. Department of Labor estimates you’ll need about 70-90% of your pre-retirement income during retirement to maintain your standard of living. Fidelity recommends aiming to put away 15% of your income toward retirement each year, including any matching contributions from your employer. That’s a solid benchmark to measure your progress against, but your retirement goal will depend on your income, how long you hope to work, and other factors. 

Pro Tip:

Inflation and rising prices can eat away at retirement funds. When calculating how much money you need to comfortably retire, take inflation into account.

How to Maximize Savings on a Budget

Saving for retirement is already a daunting task under normal circumstances. So in times where your budget is tight, it’s easy to deprioritize retirement and other long-term money goals. 

To start, try not to focus on the near term at the expense of long-term planning unless you absolutely have to. If you lost your job during the pandemic, resist the temptation to cash out your retirement savings unless it’s your last resort. Instead, roll it over into an IRA or a new employer’s retirement savings plan, so your money can continue to grow. 

Additionally, fight the urge to make dramatic changes to your retirement plan in response to the market, says Brandon Renfro, a fee-only financial advisor and assistant professor of finance at East Texas Baptist University in Marshall, Texas. Saving for retirement is a long-term game, and what matters is how on-target you are to reach your long-term goals, not your daily, monthly, or even annual returns. It’s also a good time to check your asset allocation, which is essentially a big-picture view of your retirement portfolio, especially if you’re near retirement. 

“It’s common knowledge to be a little more conservative with your investments as you near retirement, but I think it’s especially important now to be aware of how you’re investing and make sure you’re not investing too aggressively,” Renfro says.

Retirement Accounts: Roth IRA vs. Traditional IRA vs. 401(k)

Once you’ve committed to saving for retirement, you can stash your money in several types of retirement accounts.  Many retirement plans are designed to give you the incentive to save for the long term. Some shield your savings from taxes, while others have lower fees and costs. 

401(k) Plan

If your job offers any type of company-sponsored retirement account, it’s probably a 401(k). The 401(k) plan is one of the most popular types of savings vehicles in America and lets workers automatically save and invest a portion of their paychecks before taxes. You aren’t required to pay taxes on your 401(k) savings until you withdraw it. 

With a 401(k), your company usually hires an administrator like Fidelity Investments, but you still decide how to invest your money. Many plans offer a variety of investment options – such as mutual funds or exchange-traded funds ––  ranging from conservative to more aggressive. If you don’t choose an investment plan, your contributions will likely sit in a money market account

Some employers will match the employee’s contribution, although each company sets restrictions and caveats. For example, if you put in 3% of your $50,000 salary, or $1,500, your company may match your 3% contribution. Instead of saving only $1,500, your company’s match would bring your total contributions to 6% or $3,000.

Individual Retirement Account (IRA)

An individual retirement account isn’t the same thing as a 401(k) plan. Both let you save for retirement, but an individual must open an IRA. An IRA is a tax-free savings account and can be set up at a financial institution. There are many types of IRAs with different advantages. 

With a traditional IRA, you make contributions with money you may be able to deduct on your tax return. Any interest you earn in a traditional IRA can potentially grow tax-free until it’s withdrawn in retirement. However, your contributions are limited to $6,000 per year or $7,000 if you’re 50 or older. 

Roth IRA

A Roth IRA is similar to a traditional IRA, but it has a few differences.  With a Roth IRA, you make contributions with taxed money.  Meaning,  your money will grow tax-free, with tax-free withdrawals in retirement, as long as you follow the standard withdrawal rules. Roth IRA contribution limits are $6,000 per year in 2019-2020, up from $5,500 in 2018. 

Alternative Retirement Accounts

If none of the options above work for you, other retirement plans are usually easy to set up and relatively inexpensive. For example, there are solo 401(k) plans for the self-employed who can make both employer and employee contributions in amounts significantly higher than those for other retirement vehicles. If you work for the government or a nonprofit, you can opt-in for a 457 plan or 403(b). The latter of the two is very similar to a 401(k) plan, but a 403(b) tends to have more limited investment options and prominently features annuities, instead of mutual funds. 

There are also Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. A SEP IRA is a retirement plan with high contribution limits an employer or self-employed individual can open. However, contributions are tax-deductible, and withdrawals after age 59½ are taxable. SIMPLE IRAs are ideal for small businesses with fewer than 100 people looking to offer employees a retirement savings option. 

Retirement Goals for Every Decade of Your Life

Making smart money decisions in your 20s, 30s, 40s, and 50s is imperative if you want to retire comfortably. But don’t be discouraged if you got a late start – there are ways to get back on track and stay there. Each decade has its own set of obstacles and challenges to overcome, so it’s important to know what to expect. As you save for retirement, checking your progress against benchmarks can help you see where you stand.  

How to Save in Your 20s: Start Saving 

When you’re in your 20s, you’re likely just starting your career, and retirement may be the furthest thing on your mind. While your salary may not allow you to save too much, you have time on your side. Build an emergency fund first, then start putting money away into either a 401(k) or an IRA. Don’t put too much pressure on yourself since you’re just getting started, but don’t push it off. Sprung recommends putting at least 10% of your income toward retirement in your 20s. In terms of an investment strategy, you can generally afford to be aggressive with your investments since your time horizon is longer. But, pick investments you’re comfortable with. 

How to Save in Your 30s: Be More Strategic About How You Save

This is the decade of your life when you typically start to settle down, and life’s growing expenses start to demand more of your earnings. The plus side? Your income usually rises when you’re in your 30s. And as a 30-something-year-old, you still have the advantage of time. This is when you can start ramping up your retirement savings and becoming more strategic with them. It’s a good time to take advantage of automatic increases in your retirement savings and start stashing any pay raises into savings rather than spending them.

How to Save in Your 40s: Maximize Opportunities to Save More

Retirement starts to become a reality in your 40s, rather than an abstract concept. You’re roughly 20 to 25 years away from retirement, so it’s time to seriously think about saving. You still have some time for compound interest to work in your favor, but not as much. And for many, the cost of living continues to rise, especially if you have a family or a mortgage. You’re likely making more money than you did in your 20s and 30s, so maximize any opportunities to save more. 

If you’re just getting started now, figure out where you’re overspending and begin cutting those costs. Know you’ll have to play catch up and need to set aside more money to reach the same total as a younger person with less income.

How to Save in Your 50s: Quantify Your Savings and Trim Debt

You’re on the home stretch to your retirement, but you’re not there just yet. It’s time to get out the calculator, spreadsheet, and crunch some numbers. Sprung recommends talking to a financial advisor and turning your rough draft into a more detailed plan. Details to consider is  where you will live, how much your living costs will be, source of retirement income, and when you will retire. 

You have a significant advantage in your 50s that you don’t have in previous decades. Once you turn 50, the government allows you to put more money into your 401(k) plan or IRA, known as catch-up contributions, and it’s tax-free. The 2020 contribution limit allows people who are 50 or older to save up to $26,000 in a 401(k) and up to $7,000 in an IRA. Since you’re nearing retirement age, this is the decade to eliminate as much debt as possible and contribute the max amount you can in your retirement plan at work and into an IRA. Time is running out, so you’ll simply have to save more and be vigilant if you’ve fallen behind. 

How to Save in Your 60s: Prepare to Enter Retirement

You’re closer to retirement than you’ve ever been before, so you’ll want to start shifting your savings into more conservative investments. Some will continue working for the stimulation it provides, while others will work because they need the income, or because they want to delay tapping their retirement savings. 

But there are still ways to save and make the most of your lifetime earnings. Social Security benefits, for example, can be a major factor in your retirement fund. As soon as you turn 62, you can start getting Social Security benefits, but you won’t be eligible for full benefits until you reach your normal retirement age. If you’re wondering when you’ll reach full retirement age, it depends on the year you were born. You can find out what it is by using this retirement age calculator.

Sprung says you’ll want to plan your transition into retirement at least two to three years ahead and determine the best time to access the funds in each account or plan. Any savings in an IRA or 401(k) is only taxable once it’s withdrawn, so it’s more beneficial to take out your funds when your income tax rate is lower. You’ll owe less in taxes as a result. 

But if your savings are in a Roth IRA or Roth 401(k), which has already been taxed, it’s better to dip into those when your income rises because of its income limits