Discover the best ways to start saving for retirement.

12 minute read

Retirement usually enters your life the first time you get a job. Each paycheck you get has money deducted from it that goes toward Social Security. That’s a government program that provides retirement benefits, as well as disability and survivor’s benefits to Americans. This may be automatic, but you still need to learn how to save for retirement on your own.

Amanda Williams: I think you have to do a mix of both, definitely getting out debt, getting on a budget, fixing your past debt mistakes so that you really free up that income to be able to save more for the future. But you also need to have an emergency fund in place. In case anything goes wrong, so you’re not running back to your credit cards.

Leslie H. Tayne: So, I really think you need to consider a combination of the two because past financial mistakes will impact your future, so you definitely want to take a look at what you’ve done in the past. Perhaps, there’s a pattern that you want to change, that ended you up in the situation that you’re in. And Perhaps part of that pattern wasn’t saving properly for the future. So, you definitely want to take a look at the past as a lesson to learn what not to do but also look at some of the things that you did do, that were successful and implement them going forward.

Lance Davis: Preparing for retirement is a necessity and you definitely don’t want to be 80 years old and broke so, a balancing between the two.

Vee Weir: Because interest rates are stealing from you what you could in retirement.

Brian Bandow: I think for people currently in debt, in there you know, 30s or 40s. There’s a lot of variables so it really depends on their current situation and how much debt they have. I’d like to think if you focus on paying off debt, you can get that done hopefully quickly.

Chelsea Brennan: BMake sure that your high interest debt is paid off because you’re never going to make that up in the market.

Paul Curley: I think it’s important to first, have an emergency fund. Make sure that you have that buffer so that you’re not constantly getting hit and put into debt.

The idea of purposely saving for retirement likely won’t enter your life until you get a full-time job. It happens when your company offers something called a 401(k) plan. These are employer-sponsored retirement plans. Your employer takes money out of your paycheck and invests it for you via an outside company. Companies can also provide a financial incentive in the form of a match, which is when your employer matches your contribution and helps you save even more for retirement. A 401(k) is often the first time that people start actively saving for retirement.

Table of Contents

Why do you need to save for retirement?

It's time to learn how to save for retirement

Individuals are living longer than ever, but the retirement age hasn’t changed much. The average retirement age for Americans is 62. However, many of us are living until almost 80, and a chunk of us make it to over 100, which means we will need some form of income for at least 15 years after our last paycheck.

Years ago, it was the protocol for companies to “provide” for your retirement through pensions, or defined benefit plans. But according to a recent Willis Towers Watson study, only 16 percent of “Fortune 500” companies offered a defined benefit plan, whether it was traditional or hybrid (with a 401(k)), to new hires. This is a drop from 20 years ago when 59 percent of the same employers offered jobs with pensions.

While Social Security can provide some financial help, individuals can no longer solely depend on the system to take care of all their financial needs. For those of us who aren’t living like Scrooge McDuck, we need some kind of backup plan. This is where saving for retirement comes in.

Retirement planning can help you figure out how much money you will need when you are no longer working. Recent research from the TransAmerica Center for Retirement Studies shows the average income for a retiree is $32,000. The number is higher for married retirees ($48,000) and much lower for those who are unmarried ($19,000). The majority of this comes from Social Security retirement benefits, but many say they still struggle with everyday expenses. Proper planning can help you avoid that struggle and allow you to live your retired life to the fullest.

When should I start saving for retirement?

The earlier you start saving for retirement, the better. Investing early gives your money time to grow, meaning someone who starts putting small amounts of money away at age 25 will have a much larger retirement account than someone who started saving large amounts of money at age 45. Not sure which goals to set for which times? The general timeline below will help you plan out the coming years.

Retirement Savings Timeline:

  • By the end of your 20s, you should have:
    • A retirement savings account the size of your annual income.
  • By the end of your 30s, you should have:
    • Around 3 times your salary in your retirement fund.
  • By the end of your 40s, you should have:
    • A retirement savings account about 6 times your salary.
  • By the end of your 50s, you should have:
    • Approximately 8 times your annual pay in your retirement account.

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How much should I save for retirement?

Assessing the health of your 401K nest egg

Again, this all depends on the kind of lifestyle you would like to live in retirement. If you plan on living modestly in a house that will be paid off, you likely will not need as much in retirement savings as someone who wants to travel the world and spend money on their grandchildren. Certified Financial Planners can help you plot out your savings and investing plan so that when you are retiring, you won’t need to worry about potentially running out of money due to illness or unexpected expenses.

How can I save more for retirement?

The best way to save extra money for retirement is to limit your current spending. If you don’t already, come up with a monthly budget and stick to it. This allows you to put away whatever is leftover every month into your retirement account. For some everyday saving tips, check out our Money Tips section.

How do I start saving for retirement?

Before you use any of the methods below, you need to make sure you are prepared to save for retirement. The most important first step is to pay off all your debt. If you are in debt, it can be very difficult to save for retirement (or for anything at all). Read our guide to getting rid of debt here.

Next, you need to consider the kind of budget you want during your retirement years. Will you downsize or do you think you may end up spending more than before? How much do you think you will need per month to have the lifestyle you want? Planning out a potential budget gives you a better idea of how much you really need to save.

After getting rid of your debt and doing a little bit of budget planning, you’re ready to start one (or a combination) of the methods below.

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Method 1: 401(k)

The easiest way for many of us is to use a 401(k) through our company.

It will automatically deduct money from your paycheck and put it into an account. Then you invest the money in a mix of stocks, bonds, and cash. How the money gets invested depends on the company you are with. Some companies let you choose how you want to invest while others give you a suggestion based on your risk profile. Others will put your money in their own selection of investments based on the year you will likely retire. The older you get, the less risky your investments tend to become as you will be needing more of that money sooner.


Even if you leave the company, the money in this 401(k) will continue to be invested until you decide what to do with it. You can roll it over into another account (where it will still be invested), you reach retirement age and start getting disbursements, or you cash it in.

Method 2: Traditional IRA

You can open an IRA by visiting a local financial services firm, or even finding one online, and creating an account.

Individual retirement accounts are like 401(k)s, except they are not provided by your employer. It is similar to a 401(k) in that your investments will be based on your risk profile and other retirement needs. Some companies provide you with an adviser to understand your needs and help you create a retirement plan. These retirement planners will look at all aspects of your life and ask you questions about how you anticipate your lifestyle to be once you’ve retired. From there they will formulate an amount you need to invest in order to achieve those goals when you reach full retirement age.

Unlike a 401(k), where the money is taken out of your paycheck, you will need to have money transferred from your checking or savings account on a regular basis to mimic a 401(k).


With a traditional 401(k) or IRA, taxes will not be deducted until you start taking disbursements on the money. This means that the money you invest is actually tax deductible each year when you file your taxes. When you start taking disbursements, you will pay taxes on the amount then, whatever your tax rate might be.

Method 3: Roth IRA

A Roth IRA is a type of IRA that takes out taxes before you invest the money. This means that when you retire, you’ll get whatever money you are being disbursed, tax-free. However, there are certain limits to who can invest in a Roth and how much you can put in.

The main rule is that how much you can contribute depends on your adjusted gross income. As you make more, the amount you can contribute decreases. At a certain income level, you are no longer able to contribute — at least in the traditional way.

Can contribute the maximum of $5,500 (or $6,500 if over 50)

Single/Head-of-household: $120,000 or less

Married Filing Jointly: $189,000 or less

Can contribute a reduced amount

Single/Head-of-household: $120,000 to $134,999

Married filing jointly: $189,000 to $198,999

Not eligible to contribute

Single/Head-of-household: $135,000 or more

Married filing jointly: $199,000 or more

There’s more to Roth IRAs, but these basics can help you decide if it’s a good choice for you.


This can be really useful if you expect to be in a higher tax br

acket when you retire. You cannot deduct Roth contributions from your yearly taxes.

Method 4: HSA/FSA

An HSA can be a secret retirement fund.

Health Savings Accounts are frequently a topic of conversation when starting a new job or getting a new insurance provider at work. Most people think of them as an alternative to a PPO or HMO.

An HSA is an alternative to a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO), where you have a high-deductible health plan and no other health insurance. You can contribute money via your paycheck. This helps offset your taxable income, or via additional funds, which are tax deductible. Most people who have this account carry a small balance for use as its intended purpose, taking care of medical expenses, such as doctor and specialist visits.

But for many affluent Americans, they max out the contribution

Health Savings Account

amounts, which currently are $3,350 for individual health plans and $6,750 for a family plan. But they pay out of pocket for medical expenses, allowing their HSA money to grow throughout the years.

Many of you might be wondering what the difference between an HSA and an FSA. Well, an HSA can be used to pay for medical expenses but can also be used as a retirement investment. A health savings account can be used to pay for doctor’s visits, procedures and the like. But you can also let it sit, untouched, earning money for as long as you don’t use it. Your HSA carries over with you from job to job as well.

Once you put money into an HSA, it grows tax-free. You can use that money without penalty at any time on qualified medical expenses without facing any tax penalty. If you do decide to use it on something other than a medical expense before retirement age (65), you will face a 20% penalty. Once you reach 65, you are allowed to take as much as you want and use it for what you want, there are no required minimum distributions.

An FSA is a Flexible Spending Account. It’s also used for health care, including eye doctor’s visits. However, you can only contribute a maximum of $2,650 to it. Use these funds by the end of the year. Otherwise, you will lose them.


The HSA is definitely a health plan, but it is often used as a third investment account next to 401(k)s and IRAs. While it is still best to use this for medical expenses, which have a tendency to jump as you age, it can be a nice addition to your retirement savings if you plan correctly. When planning your retirement, make sure to think about how this money could be used for long-term care facilities, hospital stays, and more.

Bonus Tips

  • 401(k) contributions can be withheld from your paycheck, so take advantage of that automatic savings option.
  • Don’t forget to contribute to an emergency savings account in addition to your retirement account.
  • Avoid early withdrawals from any retirement account. You will be charged.
  • If you are low- to middle-income, you could qualify for a saver’s credit.
  • Besides a regular IRA and a Roth IRA, there is also a less common option called a myRA that can help you save.
  • When you get to retirement age, use Social Security to your advantage.
  • After you retire, take steps to reduce the amount of taxes you owe.

Retirement FAQ

Q:What is the SECURE Act and how will it affect your retirement savings strategy?

A: The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in late 2019. The goal of the law is to expand retirement plan access and flexibility for consumers, as well as to encourage small business owners to adopt sponsored retirement plans, specifically those with automatic enrollment. While many of the changes affect employers who sponsor 401(k) plans, there are some changes that will affect workers that you should know:

  • If your employer offers a sponsored plan with automatic enrollment, you will be automatically enrolled with contributions set at 15% of your annual salary. Previously, the contribution would be set at 10% of your income. You can opt-out or change the contribution limit at any time.
  • Students can now treat stipends and non-tuition fellowship pay as taxable income in order to make IRA contributions. This allows students to start saving earlier for retirement and build retirement savings while they attend school.
  • The age cap on contributing to IRA and 4019(k) plans has been removed, so you can continue contributing even after age 71.
  • If you take out a loan from your retirement account, you can’t withdraw the funds to a credit card or similar type of credit. This is meant to curb consumers from using retirement funds to cover things like everyday expenses.
  • You can now make penalty-free withdrawals of up to $5,000 from your retirement accounts for qualified birth and adoption distributions.
  • Long-term part-time employees are now eligible for employer-sponsored plans, such as a 401(k). If you work at least 500 hours per year for three consecutive years, you would be eligible for a 401(k) if your company offers one.
  • Volunteer firefighters and first responders may now qualify for benefits.
  • If you have a retirement plan, you can make disaster-related plan withdrawals if you live in an area when a declared disaster occurred.
  • Annuities may now be offered as an investment option for employer-sponsored plans and the employer must provide a disclosure of the lifetime income disclosure to you at least once every 12 months.
  • If your retirement assets pass to a beneficiary after you pass away, all of the funds must be distributed within 10 years of your death. There are exceptions to this rule for spouses, disabled or chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the decedent. There are also partial exemption rules for minor children.

Q:Who qualifies to invest in a 401(k) retirement account?

A: Laura Adams from the Money Girl podcast answers a question from a reader in New York…

Vinny from New York asks, “I have a pension and an annuity through my work union. Should I also start a 401(k) on my own?”

Thanks, Vinny, I like that you’re thinking about saving more for retirement. However, because a 401(k) is an employer-sponsored plan, to participate, you must have an employer that offers one. These accounts were designed to encourage workers to save money with the help of their employers.

The good news is that even if you don’t have a 401(k) at work, you can use other types of tax-advantaged retirement accounts. Just about everyone with some amount of earned income is eligible for an IRA (Individual Retirement Account).

An IRA gives you many of the same benefits as a 401(k), but it comes with lower annual contribution limits. For 2019 and 2020, you can contribute up to $6,000, or up to $7,000 if you’re over age 50. But if your earned income for the year is less than the IRA limit, you can only contribute an amount up to your income.

With a traditional IRA, you make contributions on a pre-tax basis, and then pay tax on those amounts and investment growth when you take withdrawals in retirement. With a Roth IRA, you pay tax upfront on your contributions, but make tax-free withdrawals in retirement.

You might contribute to a traditional IRA, a Roth IRA, or both in the same year. As long as your combined contribution to both accounts doesn’t exceed the annual limit, you can split contributions in any proportion you like.

Additionally, if you have full- or part-time self-employment income, you can use different types of retirement plans, such as a solo 401(k) or a SEP-IRA. These are an option even if self-employment isn’t your only source of income. Retirement plans for the self-employed offer benefits similar to employer-sponsored plans, and they come with annual contribution limits that are higher than an IRA.

There are many online investing firms—such as Betterment, Fidelity, and Vanguard—where you can learn more and get started with an IRA or a self-employed retirement plan. Most brokerages have representatives who can answer questions about your eligibility for a new retirement account and even offer guidance about investment choices that may be suitable for your retirement horizon and goals.

Adding an extra savings vehicle to your portfolio can be a wise way to cut taxes and make sure you have plenty of money put away to enjoy a comfortable retirement.

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