How to save for retirement: a beginner’s guide

It’s easy to dream about all the things you’ll do in retirement. But figuring out how to save enough to make those dreams a reality can feel daunting. There’s a lot to consider. Which type of retirement savings account should you have? How do you know how much you need to save? And where do you start? 

If you feel overwhelmed, you’re not alone. Many people have a hard time saving for retirement. But learning a little more about different kinds of accounts, tips on saving and how to create a savings goal can help you get started. And talking to a qualified financial professional is always a good idea, too. 

Key takeaways 

• Experts recommend saving 70% to 90% of your pre-retirement income to maintain your current lifestyle after you stop working.
• There are multiple retirement accounts a person might use, including 401(k) plans, 403(b) plans, individual retirement accounts (IRAs) and more.
• Contributing to your retirement savings early can help you enjoy financial security post-retirement.

According to the Department of Labor, experts say most people need around 70% to 90% of their pre-retirement income to maintain the same standard of living after they stop working full time.

But ultimately, the amount you’ll need to have saved depends on a variety of factors, including what your annual contributions to retirement savings plans are, what other sources of savings and income you have, and the lifestyle you want after you stop working.

There are many different types of retirement accounts, and each one has rules and regulations for things like contributions and withdrawals.

Here are some basics about four common types of retirement savings plans. 

401(k) plans

A 401(k) is an employer-sponsored retirement plan. With a traditional 401(k), you can automatically contribute a percentage of your paycheck before it’s taxed. And you won’t have to pay taxes on contributions or earnings until you withdraw funds from the account. 

A Roth 401(k), on the other hand, is funded with money that’s already been taxed. So qualified withdrawals are tax-free.

In some cases, your employer may match your 401(k) contributions up to a certain limit. That can help you increase your savings potential. But there might be a vesting period before you can access the employer-matched funds.

You also get to choose how your 401(k) is invested. Depending on the provider, you may have a menu of investment options to pick from. And you may even have access to free financial guidance through your provider. But all plans and providers are different. 

401(k) plans also have some requirements and limitations that you should be aware of, including: 

• Income requirements. To contribute to a 401(k), you must be earning income through the employer that sponsors your plan.
• Contribution limits. There are limits to how much you can contribute to a 401(k) per year that might depend on your age. For 2022, the limit is $20,500 for people under 50 and $27,000 for people 50 and over. If you leave your job and need to transfer money out of your 401(k), you can likely roll it over into an individual retirement account (IRA). But it’s important to do your research when changing jobs. 
• Withdrawal penalties. There’s typically a 10% penalty if you withdraw money from your 401(k) before age 59½. But there are certain situations in which you don’t have to pay the penalty. 
• Minimum distributions. You’re generally required to receive mandatory minimum distributions in the calendar year you turn 72.

403(b) plans

403(b) plans are a lot like 401(k) plans. For one, they’re also employer-sponsored. But they’re offered by public schools and certain tax-exempt organizations. You may have heard 403(b) plans referred to as tax-sheltered annuity plans or tax-deferred annuity plans. 

Contributions to traditional 403(b) plans are tax-deferred—just like they are with traditional 401(k) plans. That means you don’t have to pay taxes on the contributions or earnings until you withdraw funds from the account.

Under normal circumstances, 403(b) plans also carry the same 10% penalty on withdrawals made before age 59½, unless otherwise specified. And they have other rules and regulations to be aware of. 

Traditional IRAs

IRAs are self-directed retirement plans—meaning they’re not sponsored by an employer. And there are two different types of IRAs: traditional IRAs and Roth IRAs.

The requirements and limitations of traditional IRAs include:

• Income and tax deductions. You need to be earning income to contribute to an IRA. Contributions to a traditional IRA may be tax-deductible, but it depends on your income. In 2022, if your adjusted gross income is $68,000 or higher, your tax deduction amount might be affected. 
• Contribution limits. Contributions to a traditional IRA are tax-deferred. And like employer-sponsored plans, there are limits to how much you can contribute to an IRA per year and regulations about withdrawals. For 2022, the limit is $6,000 for people under 50. For people 50 and older, the limit is $7,000.
• Withdrawal penalties. You can withdraw from your traditional IRA at any age. But if you’re under 59½, withdrawals may be subject to a 10% tax penalty. And the withdrawal amount may be included in your taxable income, too.
• Minimum distributions. You’re generally required to make mandatory minimum distribution withdrawals after the age of 72.

Roth IRAs

Roth IRAs are similar to traditional IRAs in many ways. A major difference is when you pay taxes. 

Unlike traditional IRAs, Roth IRAs are funded with money that has already been taxed. That means contributions aren’t tax deductible, but qualified withdrawals are tax-free. 

Some requirements and limitations of Roth IRAs include:

• Income. Like traditional IRAs, you need to be earning income to contribute to a Roth IRA. 
• Contribution limits. For 2022, the contribution limit for Roth IRAs is $6,000 for people under 50. For people 50 and older, the limit is $7,000. And your adjusted gross income might affect how much you can contribute, too. 
• Withdrawal penalties. You can withdraw from your Roth IRA account at 59½ without paying a penalty, as long as the account has been open for at least five years. But like traditional IRAs, early withdrawals from a Roth IRA may be subject to a 10% tax penalty. 
• Minimum distributions. Unlike traditional IRAs, there are no minimum distribution requirements for Roth IRAs as long as you’re the original owner of the account. 

How to choose between a traditional IRA and Roth IRA

Choosing between the two might involve a consideration of your current tax rates, expected growth of the assets in the account and your expected future tax rates. If you feel your taxes will be lower in the future, you might opt for a traditional IRA. If you feel your income taxes may be higher in retirement, a Roth IRA may be more advantageous.

There are also many other kinds of retirement savings plans. And different plans work for different people. If you’re not sure what type of plan fits your needs, you can learn more about them or talk to an expert for advice.

Everyone’s retirement savings plan will look a little different. But there are a few tips that might be able to help you—whether you’re just starting to think about how to save for retirement or you’ve been saving for years.

1. Take inventory of expenses and spending habits

One way to start is to record everything you spend in a month. You can use a spreadsheet, an automated online tool or an old-fashioned pen and paper. Just make sure to include occasional expenses—like vacations—that might only pop up a couple of times a year. 

2. Create a savings goal

Saving 70% to 90% of your pre-retirement income can be a good rule of thumb for some people. Keep in mind that according to the Employee Benefit Research Institute, household spending tends to decrease as retirees age. But that’s not the case for everyone.

Social Security might contribute to your retirement income, but remember to also account for inflation. And other factors like health, income, where you live, your education and property values can affect your spending habits and how much money you’ll need in retirement, too. 

If you need some help creating a goal, there are online tools that can help you estimate how much you’ll need to save. And if you want more personal guidance, talking to a qualified financial professional can help. 

3. Maximize your savings

There are several ways that you can maximize your retirement savings potential.

1. Take advantage of employer 401(k) matching. If your employer offers to match your 401(k) contributions up to a certain limit, it’s a great way to get the most out of every dollar you contribute to your 401(k). But remember, there might be a vesting period before you can access your employer’s matching contributions. 
2. Max out your IRA and 401(k) accounts. If you can afford to do so, consider maxing out your IRA and 401(k) contributions. This will help you maximize your investments. 
3. Consider taxable accounts. If you still have money that you’re able to set aside but have already contributed the maximum amount, you can put this money into a savings or brokerage account, which may grow over time. 

4. Start small and increase over time

If the thought of putting away too much of your paycheck gives you financial anxiety, you can always start small and increase your retirement savings as you get more comfortable.

You may also want to consider contributing a portion of any bonuses, raises or tax refunds you get. And if you pay off existing debts, you could redirect the amount of your debt payments to your retirement accounts.

And over time, your savings may benefit from compound interest, which is basically interest that’s earned on top of interest. 

If you have a compound interest savings account, you earn interest on the principal amount plus the interest you earn over time. This compounding effect can help you earn more money and reach your financial goals faster. So even small contributions might make a difference in the long run.

5. Be consistent

Habits and automation can make a huge difference when it comes to retirement savings. Being as consistent as possible about saving for retirement can go a long way. And if possible, why not consider making your contributions automatic? That way, your retirement savings will grow without you having to think about it on a day-to-day basis. 

6. Start now

It’s never too early or too late to start saving for retirement. And the earlier you start, the easier it might be to meet your retirement goals. Starting early could also help you prepare for the possibility of forced early retirement. 

The earlier you start saving, the more opportunity your money has to grow. How your retirement savings account changes depends on the economy and how your money is invested. 

If you’re nervous that you may not have started saving early enough, you still have options. For example, once you reach age 50, you may be eligible to make annual catch-up contributions.

Whether you’re just starting to save for retirement or you’re ready to kick it into high gear, there’s no better time to begin than today. Remember, you can start small and increase your savings as you get more comfortable. 

If you need help, talk to a qualified financial professional. And remember, every dollar saved is a gift to your future self. Curious to know more? Explore ways to use passive income during retirement.