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How to save for retirement

Try these strategies to build your personal retirement plan and boost your retirement savings.

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Matt Miczulski
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When do you want to retire and how much money do you need to retire comfortably? While there’s no way to definitively predict your retirement needs, you can make an educated guess with proper planning.

If you’re new to the workforce and want to maximize your retirement savings or are older and looking to get your financial house in order before you retire, these strategies are meant to help you improve your ability to save and hit your retirement goals.

3 steps to save for retirement

Retirement looks different for everyone, but the path there is generally the same. Once you figure out what retirement looks like to you, here’s how to get an idea of how much savings you need to get there.

Step 1: Set your retirement goal

Retirement ages and the amount of income you’ll need in retirement are unique to everyone. But having something to aim for will help keep you on track.

At what age do you want to retire?

George Foreman once said, “The question isn’t at what age I want to retire, it’s at what income.” But these factors don’t have to be mutually exclusive. The age you plan to retire has a big impact on how much you need to save. For instance, those who can postpone retirement for longer might get by with less savings.

Though you can’t always choose when you retire, having a time frame of how long you want retirement to last can help you figure out how much money you need to save.

How do you want to live in retirement?

Take some time and think about what you want your retirement to look like. Will you plant yourself on a beach or travel the world? Do you want to volunteer or start a business? Will you dine out more often?

In short, do you expect your expenses to be more or less than they are now? Determine how much annual income you’ll need to live the life you want in retirement.

Step 2: Invest 15% of your income in a 401(k) or IRA

When saving for retirement, a general principle is to put away at least 15% of your pretax income toward retirement over your working career.

Why 15%? Research shows that saving 15% each year for 30 years starting at 25 years old should be enough to allow you to replace 80% of your pre-retirement income to maintain your current lifestyle in retirement. If you wait until later in life to start saving, you may need to save more or push back your retirement age.

It may be difficult to save this much right off the bat, and that’s OK. Save as much as you reasonably can and aim to hit the 15% goal eventually. Make an educated guess as to how much you’ll need by creating a ballpark annual estimate based on what you live on now and what might change in retirement. One guideline is that you’ll need 10 times your income in retirement. Another is to save between 70% and 80% of your pre-retirement income.

Saving in tax-favored accounts can help you make the most of your money. If your employer offers a 401(k) plan, boost your 401(k) contributions by taking advantage of any employer match. Individual retirement accounts (IRAs) let you save for retirement in a tax-advantaged way outside the workplace.

  • Take advantage of free money: According to a 2021 survey report from human resources firm XpertHR, 82% of employers that offer traditional 401(k) plans say they match a portion of their employees’ retirement contributions. If your employer offers a 401(k) and contributes to the account on your behalf, save enough to get the match. It’s free money that you shouldn’t leave on the table.
  • Contribute to an IRA: Even if you have a workplace retirement plan and get a company match, consider opening and contributing to an IRA. If you have a workplace retirement plan and get matching contributions, save enough to get the match and then focus on maxing out your IRA. There are two main types of IRAs, and we’ll dig into them shortly to help you figure out the best IRA for you.

Step 3: Max out your retirement accounts

There are two reasons why you might want to max out your retirement accounts if your situation allows you to do so:

  1. The more you contribute, the bigger your retirement savings might be.
  2. 401(k) contributions reduce your taxable income and, if you contribute to a traditional IRA, you may be able to claim a deduction come tax season.

Maxing out your retirement accounts is a great savings strategy, but it’s not feasible for everyone. If you’re making $45,000 a year, contributing $19,500 toward retirement would leave you with $25,500 to live on.

If you aren’t in a position to max out your 401(k), at least save enough to get the company match. Then work toward maxing out an IRA. If you can max out your contributions to your IRA and haven’t hit your 15% savings goal or have extra money to save, go back to your 401(k).

2022 contribution limits

For 2022, 401(k) contributions are capped at $20,500, or $27,000 if you’re age 50 or older. These limits apply only to your individual contributions.

If your employer offers a matching contribution, different limits determine how much your employer can contribute on your behalf. For 2022, the combined contribution limit is $61,000, or $67,500 when you include catch-up contributions.

IRA contribution limits are lower. For 2021, the most you can contribute is $6,000, or your taxable income for the year. If you’re 50 or older, you can contribute a total of $7,000. These limits apply to all IRA accounts in your name. So while you can contribute to both a traditional and Roth IRA, your contributions are limited to $6,000 total for the year.

Take advantage of your 401(k)

Workplace retirement plans offer numerous perks:

  • Automate your savings by having money taken directly from your paycheck
  • Many employers match a portion of employee contributions
  • Traditional 401(k) contributions lower your taxable income
  • Earnings grow tax-deferred or tax-free depending on the account type
  • Roth 401(k) earnings can be withdrawn tax-free in retirement

Your employer may give you a choice between a traditional 401(k) and a Roth 401(k). The contribution limits and investment options are the same, but Roth 401(k) contributions are made with after-tax dollars, like a Roth IRA. Since you make contributions to a Roth 401(k) with money that has already been taxed, earnings grow tax-free and you pay no taxes on the money you withdraw in retirement.

Either 401(k) option can play an important role in saving for retirement. And if your employer offers a matching contribution, it’s free money you absolutely should take advantage of.

How it works

Suppose you earn $50,000 a year and your employer matches 100% of your contributions up to 3% of your annual income. To get the full 3% match, you would need to contribute $125 each month. The first $125 you contribute would be matched 100%, giving you a combined contribution of $250 each month.

Now, say your employer matches 50% of your contributions up to 6% of your annual income. In this case, you would need to contribute $250 each month to get the full employer match, which would be a maximum of $125. Your total combined contribution in this scenario would be $375 each month.

While a 401(k) and other workplace retirement plans offer several benefits, some 401(k)s have high fees and crummy investment options. The variety of investments in your 401(k) depends on your plan provider, but many 401(k)s are limited to mutual funds. If you want more investment options than what’s available in your 401(k) plan, an IRA is a strong option.

Open and contribute to an IRA

An IRA is a retirement account you open yourself that lets you make tax-advantaged investments for retirement.

IRAs usually offer a wider variety of investment options compared to 401(k)s. Whereas a 401(k) may only offer mutual funds, IRAs let you invest in individual securities, such as:

Take it a step further with a self-directed IRA — it lets you hold alternative investments, such as real estate, cryptocurrency and privately held companies.

While there are several types of IRAs, the two main types are the traditional and Roth IRA.

Traditional IRA

The money you use to fund a traditional IRA is considered pretax dollars, and you can generally take a tax deduction the year you make a contribution. Your contributions and the gains you make on your investments are tax-deferred, meaning you don’t pay taxes on this money until you begin taking distributions in retirement. If you expect your income and tax rate to be lower in retirement, a traditional IRA may be the better option.

Roth IRA

Roth IRA contributions, on the other hand, are not tax-deductible. Contributions are made with after-tax dollars. As a result, earnings grow tax-free and you won’t pay any taxes on the money you withdraw in retirement. For this reason, if you expect your income and tax rate to be higher in retirement, a Roth IRA is likely the better option.

Having a 401(k) doesn’t stop you from contributing to an IRA, and you can have both a traditional and Roth IRA at the same time. But you may not be able to deduct all your traditional IRA contributions if you have a retirement plan at work and your income exceeds specific levels.

Traditional IRA vs. Roth IRA

2021 contribution limits2021 income limitsTax creditTax treatmentEarly withdrawal rulesRequired minimum withdrawals
Traditional IRA$6,000 ($7,000 if you’re age 50 or older)None to contribute, but there are income limits for tax-deductible contributionsContributions may be tax-deductibleTax-deferred growthWithdrawals before age 59 and one half are taxed and subject to a 10% penalty unless you meet an exceptionWhen you reach 70 and one half, or 72 if you reach the age of 70 and one half after December 31, 2019
Roth IRA$6,000 ($7,000 if you’re age 50 or older)Single, head of household or married filing separately and you did not live with your spouse at any time during the year:

  • Full contributions if modified adjusted gross income (MAGI) is less than $125,000
  • Partial contribution if your MAGI is more than $125,000 but less than $140,000
  • Can’t contribute if your MAGI is above $140,000

Married filing separately and you and your spouse lived together at any time during the year:

  • Partial contribution if your MAGI is than $10,000
  • Can’t contribute if your MAGI is $10,000 or more

Married filing jointly or qualifying widow(er):

  • Full contribution if your MAGI is less than $198,000
  • Partial contribution if your MAGI is $198,000 or more but less than $208,000
  • Can’t contribute if your MAGI is more than $208,000
NoneTax-free growth and withdrawals
  • Withdraw contributions at any time, tax- and penalty-free
  • Withdrawals of earnings before age 59 and one half are taxed and subject to a 10% penalty unless you meet an exception
None until after the account owner’s death

Automate your savings

Some people have a hard time setting aside money for savings each month. According to the latest US Government Accountability Office (GAO) estimates, nearly half of households age 55 and older have no retirement savings.

To reach your retirement goals, and any other savings goals for that matter, it’s important to pay yourself first. And you can do this by automating your savings.

How it works

  1. Enroll in your employer’s tax-advantaged retirement plan. Some employers automatically enroll new employees in a workplace retirement plan with a default annual contribution rate unless the employee elects otherwise. If your employer requires a waiting period before new employees can participate, set a reminder for that date and contact your HR department to enroll.
  2. Set up recurring deposits into an IRA or taxable brokerage account. If your company doesn’t offer a workplace retirement plan or you want to supplement with an IRA or a taxable brokerage account, you can still automate your savings. Most brokers let you set up recurring deposits from a linked bank account. Simply choose the deposit amount and the frequency.
  3. Use a retirement investing app. A variety of investing apps have emerged in recent years that offer innovative ways to save and invest automatically. Roboadvisors like Wealthfront and Betterment allow you to set up recurring deposits to automatically invest in index funds and ETFs, whereas apps such as Stash and SoFi Invest allow you to automatically invest in stocks.

Reexamine your budget

Maximize your retirement savings by examining your spending habits and existing bills. A comprehensive budget will allow you to make the most of your money.

Debt

Should you pay off your debt before you start investing? Some experts recommend paying off all debt before saving for retirement, while others say that not all debt is created equal. The latter argues that if you invest the money and earn a greater return than what you’re charged in interest on your debt, saving for retirement first might make sense.

For instance, the stock market has historically provided around 7% annual returns when you account for inflation. Would it make more sense to pay down a student loan with an interest rate of 3.15% or invest that money and benefit from the potential for years of compounding growth?

The answer depends on your unique financial situation and your relationship with money. If you have high-interest credit card debt, you’re probably better off eliminating that debt first. If you have a 401(k) and receive matching contributions, it’s still probably a good idea to contribute at least enough to get that free money.

If you want to pay down debt that’s eating into any potential savings, consider the following debt repayment strategies:

  • The Snowball Method: The snowball method focuses on paying off the smallest debts first. Throw as much as you can at your smallest debt and make only minimum payments on the rest. After the first debt is paid off, you roll that entire payment into the second smallest debt and continue making minimum payments on the rest. As you progress, your payments grow larger and larger until you’ve paid off your debt. If you have trouble staying motivated during debt repayment, the snowball method provides more frequent “wins,” which can help you stay on track.
  • The Avalanche Method: The debt avalanche method, on the other hand, focuses on paying your most expensive debts first. These are the debts costing you the most money each month — think high balances and high interest rates. Calculate which debts are costing you the most and order them from most to least expensive. Throw every extra cent at your largest debt while making minimum payments on the rest. After you’ve paid it off, roll that entire payment into the next and continue until you’ve paid off your debt. The avalanche method will help you save more money in the end, as you’re eliminating your costliest debts first.

Savings

While you might have your eye set on the distant future, evaluating your short-term savings goals is also an important part of a healthy budget. You want to set aside enough money to hit your short-term savings goals, whether that’s a vacation, new car or down payment for a house.

Importantly, you don’t want an unexpected expense to derail your retirement savings. Everyone’s savings goals will be different, but they’re important to analyze as a part of your budget.

How much should I save?

The exact dollar amount depends on your specific savings goals. But like saving for retirement, work backward from your end goal.

Take the dollar amount you need to save and when you’d like to have the money saved by and calculate how much you need to save each month to get there.

To protect yourself from financial uncertainties, experts suggest building an emergency fund and a rainy day fund. Aim to build an emergency fund to cover at least three to six months of expenses, should you lose your primary source of income. Prioritize necessary expenses like mortgage or rent payments, utilities, food, phone and Internet.

Rainy day funds are similar to emergency funds but are for unexpected expenses like car repairs, home repairs or medical bills. It doesn’t matter what you call them — the idea is to give yourself a financial safety net in case the unexpected happens.

Bills

You might not be able to rid bills entirely from your life, but there are some ways you can potentially cut costs and free up extra money to pay down debt or put into savings.

For starters, cancel any services you no longer use but continue to get billed for. Platforms such as Trim and Truebill analyze your spending to find unwanted bills and help you cancel them. They’ll also negotiate cable, Internet and phone bills on your behalf to help you save money.

Reevaluate all your bills and monthly expenses and see if you can find any potential savings.

Delay Social Security

Social Security payments can start as early as when you turn 62, but you aren’t entitled to full benefits until you reach your full retirement age. If you start taking your benefits early, your payments will be reduced for each month before you reach your full retirement age. Depending on your age and how early you take your benefits, your payments could be reduced by as much as 30%.

While your situation will dictate at what point you need to begin taking your Social Security benefits, postponing receiving your benefits until you reach your full retirement age can lead to extra income in retirement.

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Bottom line

Saving for retirement is a unique journey, but these strategies can help you make the most of your efforts. Figure out what retirement looks like for you, build a plan and stick with it. Your plan may not be perfect, and you may need to make some adjustments along the way, but arming yourself with the best knowledge out there will help.

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