A Comprehensive Guide to Saving for Retirement

A Comprehensive Guide to Saving for Retirement

Updated October 9, 2020
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A Comprehensive Guide to Saving for Retirement

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Have you started saving for retirement? Don't worry. You're not alone. More than 25% of Americans have nothing saved for retirement. Fortunately, it's never too late to start.

Did you know that when you retire, you'll likely need at least three-quarters of your pre-retirement annual income each year? That's just to cover basic necessities such as housing, medical needs, food, and other living expenses. If you have big dreams of a new lifestyle during retirement, you'll need even more savings.

Saving for retirement requires some sacrifice, but it's for your own good. You'll enjoy the fruits of your labor in the years to come.

How Much Should You Save?

Your retirement savings needs will likely be different from your friends, next door neighbors, and siblings. You need to factor in your current income, debts you may have upon retirement, and your intended lifestyle. In general, you should have the following saved:

  • Annual income saved by age 30
  • 3 times your annual income saved by age 40
  • 6 times your annual income saved by age 50
  • 7 times your annual income saved by age 55
  • 8 times your annual income saved by age 60

This may sound impossible, but it's not. With a few simple steps, you can be well on your way to hitting these benchmarks no matter your age or how much you've saved so far.

The Golden Rule - Save 10-15 Percent of Your Paycheck

Your goal should be to save 10 – 15 percent of each paycheck for retirement. Sound impossible? Then start small. Start by taking 5 percent of your paycheck each pay period and transferring it to a savings account, investment account or retirement account. Make sure it's an automatic deposit directly into your account. We'll discuss where you should invest your money below.

As you get comfortable with the 5 percent paycheck reduction, consider increasing the amount slightly. Whether you go straight for the 10 – 15 percent or you work in small increments, the goal is to gradually increase and work your way up to saving 15 percent of your income for retirement.

Where Should you Invest Your Money?

Saving for retirement sounds complicated, but it's not. You have a few options to get you started:

  • Employer-sponsored 401(k), 403(b) or 457(b)
  • Traditional IRA
  • Roth IRA
  • Taxable investment accounts

401(k), 403(b) or 457(b)

Always start with your employer-sponsored 401(k), 403(b) or 457(b). In 2020, the maximum contribution for all three sponsored account types is $19,500.

If your employer matches any portion of your contributions, it's like getting free money. At a minimum, you should contribute whatever is necessary in order to get the full employer match. Also, your 401K contributions are deducted from your paycheck before taxes. Therefore, you'll pay less tax on each paycheck. Not only will you be saving for future retirement, you'll be lowering your current tax liability too.

Find out if you have any say in your 401K investments. Some companies allow you to choose. Even if you have limited options, take advantage. For example, if you are in your 20s or 30s, you may want aggressive investments to actively grow your account. If you are nearing retirement age, though, you'll want a less aggressive investment strategy to protect your balance and ensure you have a nest egg for retirement.

Traditional IRA

If you don't have an employer-sponsored 401K or you maxed out your contributions and have more to save, open a Traditional IRA. An Individual Retirement Account sets money aside for retirement and invests the money in stocks, bonds, and mutual funds, based on your preferences.

The maximum IRA contributions you can make in 2020 are $6,000. If you are over the age of 50 and behind on your savings, you can contribute up to $7,000 to catch up. Any money you save in an IRA is tax-deductible and your earnings grow tax-free. You pay taxes when you withdraw the funds, which you are eligible to do starting at age 59 ½.

Roth IRA

Another individual retirement account option is the Roth IRA. You contribute after-tax dollars to your Roth IRA. While you don't get tax benefits when you fund your Roth IRA, you can withdraw your funds tax-free during retirement. Keep in mind that you can't withdraw your Roth IRA funds until you are at least 59 ½ AND you have had the account for at least five years.

Taxable Investment Accounts

If you have more money to invest and have maxed out your other retirement options, don't discount the value of investing in standard stocks, bonds, ETFs, mutual funds and index funds. You get the freedom to choose what you want to invest in, how aggressive you want to be, and when you want to withdraw it. While there aren't tax benefits, it's another valuable way to save for retirement.

Tips by Age

Still wondering where you should start? Consider these options:

In your 20s

If you started a career, contribute what you can to your 401K. If not, open an IRA or Roth IRA and invest. Even if it's just a little bit, the earnings will compound.

In your 30s

If you have accumulated debt, pay it off. You'll want to increase your retirement savings now. Paying interest on your debt only takes away from what you can contribute to your retirement account(s).

In your 40s

Now it's really time to get serious. You may even have retirement plans. Figure out how much you need to save each year to achieve that goal. Next, put the steps in place that will get you there. It's time to get aggressive.

In your 50s

This is your time to catch up. The IRS allows extra contributions to your IRA and 401K at this age, take advantage.

The Time To Start is Now

The key is to start now. It doesn't matter how old you are, start saving. Open a retirement account and take advantage of the tax benefits. Maximize your 401K first, then invest in other places, such as an IRA or Roth IRA. Always exhaust all tax-advantaged options first. If you still have funds left to invest, then open your own taxable investment accounts.

It all starts with the first dollar that you save. With consistency and continual increases in your savings, you'll reach your retirement goals and make saving for retirement much less overwhelming than you thought. Are you ready to start today?