Discover the Best Way of Saving for Retirement: a Helpful Guide

Planning for retirement can feel overwhelming, but it doesn't have to be. We're here to help make building a financial future something you're excited about—whether you're just starting out or figuring out how to maximize what you've already saved.

In this guide, we'll walk you through all the critical steps of making a plan for retirement that fits your life right now (even if things change down the road). That includes understanding different kinds of accounts for retirement savings and intelligent ways to invest so your money grows.

Think of us as your trustworthy friend guiding you toward a happy, stress-free retirement—without using words like "fiduciary" or "inflation" that complicate things.

What Is a Retirement Account?

Retirement accounts are savings accounts explicitly created for future needs. It's like a personal nest egg. You put money in during your working years so you can afford to live well after you stop working.

What makes these accounts extra special are the tax benefits and perks that come with them. For example, you might get a fat tax break on contributions today or enjoy tax-deferred growth, meaning investments grow without being taxed until withdrawn.

Consider it financial forward thinking aided by government incentives—kind of like airbags for your wealth while alive (though hopefully less dramatic). Whether you have a 401(k), IRA, or one of their cousins, they all serve this purpose: providing financial security once work becomes optional.

Types of Retirement Accounts

If you want to plan for retirement, it's important to know about the different kinds of retirement accounts. Each type comes with its own advantages and rules, so you can pick what suits your goals and situation. Here are some popular types:

401(k) Plans

If you work for a company, chances are good you have access to a 401(k)—one of the most popular types of retirement accounts. With this employer-sponsored plan, you can set aside part of your paycheck pre-tax (meaning no income tax is withheld) directly into your account.

You won't pay taxes on the money until you withdraw it in retirement—hopefully at a lower tax rate than while you're working.

There are several advantages to saving via a 401(k). One is a high contribution limit—$23,000 for most savers in 2024 ($30,500 if you're 50 or older)—which allows diligent savers to turbocharge their efforts.

Another perk: many companies offer matching contributions (up to certain limits) that provide an immediate return on your investment, much like a windfall.

Individual Retirement Accounts (IRAs)

When you want more control over your retirement investments, an Individual Retirement Account (IRA) could be for you. It's a self-directed retirement plan that provides significant tax benefits. Unlike a 401(k), it's not tied to your job, so you have more options for where and how to invest your money.

The two main types are Traditional IRAs and Roth IRAs. Traditional IRA contributions have the potential to be tax-deductible, and it's possible for you to grow your investments tax-deferred.

Roth IRAs don't offer tax-deductible contributions, but you can take retirement withdrawals tax-free – with potentially no taxes or penalties due. That's why lots of people who want extra say over their retirement investments choose IRAs.

Other Retirement Accounts

In addition to 401(k)s and IRAs, there are other retirement accounts that can be beneficial in certain circumstances. If you work for a nonprofit, you might have access to a 403(b), which functions much like a 401(k).

Self-employed people have SEP IRAs available to them, which allow for higher contribution limits than many other retirement savings vehicles.

Small-business owners may consider a SIMPLE IRA. It's easier to administer than a 401(k) and comes with fewer regulations. However, it allows participants to set aside more money for retirement than they can with traditional and Roth IRAs.

Retirement Age: When Can You Start Withdrawing?

Retirement age can vary depending on personal circumstances and the type of retirement account held. In most cases, individuals can begin making penalty-free withdrawals from 401(k)s, traditional IRAs, and similar accounts at age 59 1/2. This is when the IRS gives most savers the nod by saying, "OK, enjoy your money."

Roth IRAs are different. Because you contribute after-tax dollars to these accounts (meaning you've already paid Uncle Sam before putting money in), you can generally withdraw that cash at any time without owing taxes or a penalty.

There may be taxes or penalties on earnings within a Roth IRA if you take them out early - before age 59 1/2 - and before the account is five years old.

If you meet certain conditions—such as holding your Roth account for at least five years—your withdrawals in retirementare completely tax and penalty-free. Understanding when this money can be taken out helps with financial planning. It also means understanding all aspects of how retirement nest eggs work for maximum benefit.

Retirement Savings Strategies By Life Stage

Saving for retirement is not a set-it-and-forget-it endeavor. Instead, it's a lifelong journey that evolves as you move through different life stages.

Your financial priorities and opportunities change as each decade passes — and so should your savings strategies. Here are tips on how to maximize retirement savings in your 20s, 30s, 40s and 50s-plus:

How to Save in Your 20s: Building Your Emergency Fund and Starting to Save

Your 20s are the best time to build a solid financial future—though retirement may seem light years away, starting to save early gives your money more time to grow (thanks, compound interest!).

This is when you earn interest on your savings. Then, in the future, interest can grow not just on what you save but also on the interest itself.

Begin Saving Early

Even if it's only a little bit that you can put by right now, start as soon as possible. One option is to funnel some of your earnings into a retirement account such as an individual retirement account (IRA) or Roth IRA.

For young savers specifically, Roth IRAs often make good sense. You contribute money you've already paid taxes on. It means qualified withdrawals in retirement come out tax-free. And there aren't any required minimum distributions (RMDs) at age 70½ or later as there are with a traditional IRA or a workplace retirement plan.

Build an Emergency Fund

Before you start saving for retirement, it's essential to have an emergency fund in place. Try to save sufficient cash to pay for living costs over a three-to-six-month period.

An emergency fund is like a financial buffer, meaning you don't have to dip into your retirement savings if unforeseen expenses arise.

How to Save in Your 30s: Ramping Up Your Emergency Fund and Retirement Savings

It's common to become more financially stable in your thirties, which means you can save more money. By now, you probably have financial commitments like a mortgage or dependents – but higher earnings, too.

Boost Retirement Savings

If you're earning more than before, step up how much you put into your pension pot(s) – for example, by increasing payments into your Roth or Traditional IRA and maxing out any matched contributions from your employer.

You should set aside 15% of your income from this decade onwards (including any employer input). But even small increases could make a noticeable difference down the line.

Consider Opening a 401(k)

If your boss gives you the option, sign up for a 401(k) retirement plan at work. If you do it and they match what you put in, that's free money! And trust us: you want to have as much money as possible when you're older.

Alternatively, look into other retirement accounts such as a SEP IRA or SIMPLE IRA. These types of plans may be available through your own business if you're self-employed.

Take Advantage of Tax Benefits

Chances are good that by the time you reach your 30s, you're making more money (and thus paying taxes at a higher rate) than you did in your 20s. That makes now an excellent time to tap into Uncle Sam's tax break for saving in retirement accounts.

Contributions to Traditional IRAs.) and workplace plans like 401(k)s are made with pre-tax dollars. So, they can reduce the amount of income tax paid on every dollar put into them—at least up front.

How to Save in Your 40s and 50s: Paying Off Debt and Planning for Retirement

In your 40s and 50s, planning becomes more important. These are typically high-earning years. So concentrate on saving as much as possible for retirement while still managing any debt you may have.

Think About Getting Rid of Debt with High Interest Rates

If you're really focusing on increasing the amount you save for retirement each month, one option is to pay off any debt you have that comes with a particularly high interest rate first.

By doing this, there's more money left over from your salary every month that can go towards retirement savings (hooray!). Plus, it means less worry about finances when you eventually retire (double hooray!). An example might be credit card balances or personal loans.

Make Use of Catch-Up Contributions

If you're aged 50 or over, you are entitled to make additional catch-up contributions to your retirement savings under IRS rules.

For example, you can put an extra $7,500 into your 401(k) plan each year, along with an additional $1,000 in an IRA. These catch-up contributions can be a great way to build up more for retirement – especially if you're getting started late.

Consider Speaking with a Financial Advisor

In your 40s and 50s, it may be worth seeking professional help from a financial advisor. They offer tailored recommendations depending on your situation. An expert can help assess how you're doing financially.

They'll also take into account any employer matches on retirement savings that were suspended during the pandemic. Advisors additionally might recommend different strategies for people of various ordinary income levels or ages.

Tips to Save for Retirement

Retirement saving may appear challenging, but there are strategies to help make it easier and more effective. Whether you are starting out or want to increase your savings, these tips can assist in building a solid financial future:

Automate Saving

One of the easiest ways –– yet most potent–– methods for saving toward retirement is automating contributions. By establishing automatic transfers from either your paycheck or bank account directly into a retirement savings account, you ensure money is regularly being saved without having to think about it.

This "set it and forget it" approach takes the guesswork out of saving on your own and helps circumvent any temptation to spend the cash elsewhere. Over time, those regular contributions have the potential to grow quite a bit, thanks to compound interest at work.

Prioritize High-Interest Debt

Prioritize eliminating high-interest debt, such as credit card balances or personal loans, before concentrating on saving for retirement. This type of debt can undermine your financial well-being and make it challenging to save money successfully.

By clearing your slate of these obligations in advance, you'll have more income available each month to put toward retirement savings.

Methods such as the "debt snowball" (paying off the lowest balances first) or the "debt avalanche" (targeting accounts with the highest interest rates) could be helpful strategies for becoming debt-free sooner.

Take Advantage of Employer Matching

If your employer has a retirement plan where they match what you put in, like a 401(k), make sure to contribute enough to get the entire match. Consider it free money that can make a big difference in how much you'll have when you stop working.

Let's say your employer matches half of what you contribute – up to 5% of your salary. Putting in at least 5% means you aren't leaving any of this extra cash behind.

Diversify Your Investments

While you save money for retirement, make sure to invest in various types of assets like stocks, bonds, and property – this is called diversification. Spreading your investments in this way helps lower risk and could mean higher returns over time.

If the market changes, a mix of investments does not hit your savings as hard as having all your eggs in one basket. This provides reassurance for long-term savers. To develop an investment plan that suits how much risk you can cope with along with what you want to achieve for retirement, think about consulting with financial advisors.

Revisit Your Savings Plan Regularly

As your life changes, so too should your retirement savings strategy. It's essential to review it periodically—especially after significant events such as switching jobs, getting married, or having a baby.

Check that you're contributing enough, confirm your investment choices still make sense, and see whether you're on target with your goals. By doing this housekeeping regularly, you can make any needed course corrections and help ensure that your hard-earned nest egg is growing as intended.

Conclusion

Don't worry if planning for retirement seems daunting. You can secure your financial future by starting early, selecting the correct accounts, and using savings techniques suited to each life stage.

Remember to automate saving as much as possible, benefit from any employer contributions that are going, and review your plan and investment strategy regularly to ensure you're still on course.

With careful thought and regular input, it's possible to look forward to a comfortable retirement fund without fretting about money. So why not get started now? Your older self will be grateful.

Frequently Asked Questions

What Is an Individual Retirement Account?

IRAs are accounts that provide tax benefits for individuals who want to save money for retirement, and they also offer a range of investment options.

What Type of Account Is Best to Save for Retirement?

Determining the ideal retirement account hinges on what you want to accomplish. A 401(k) with an employer match is onerous to beat, but individuals who anticipate paying more taxes in retirement might gravitate toward a Roth IRA, where growth can be tax-free.

What Are Social Security Benefits?

Social Security benefits refer to payments made by the government to support people who are retired, disabled, or survivors. These payments are made based on how much money you earn while working.

How Much Money Do You Need to Start Saving to Retire?

You can start putting money aside for your golden years with just $25 or $50 retirement contributions per month. But it's essential to ramp up your savings as you earn more.