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How to save for retirement in 4 steps

Set yourself up for a comfortable retirement

Key takeaways:

  • Know your target, adjust as needed, take full advantage of employer matching funds, and supplement with an IRA.
  • If you find you’ll be short of your target, there are still things you can do.
  • Get help from a financial professional.


Everyone knows that the sooner you start saving for retirement, the better off you’ll be. But beyond that, what else should you be doing?

Even if your retirement is decades away, it’s never too early to plan. Here are simple things you can start doing now. It’s also a smart move to get advice from a financial professional who will help guide you towards your specific goals.


How to save for retirement in 4 steps

Here are four things you can do to set yourself up for a comfortable retirement.


1. Determine how much you need to save for retirement

It’s important to have a savings goal, or at least a rough idea of how much you’ll need for retirement. 

To calculate your savings goal, use a couple rules of thumb.

  • Use the 80% rule to determine how much income you’ll need each year during retirement.
  • Then, use the 4% rule to know how much you need to save between now and when you retire to provide that income throughout retirement.

For example, if you want your future lifestyle to look like what you have currently, you’ll want to have about the same annual income during retirement that you have now. Take your current income, adjust it for inflation (try this Forward Flat Rate Inflation Calculator), and then multiply that number by 80%; this assumes that you won’t need quite as much income because you’ll have lower expenses when you retire. 

The 4% rule can tell you the total amount of savings you may need saved by the time you want to retire. In this case, take the retirement income amount you calculated using the 80% rule above and divide it by 4%.

For example…

  • Current: 50 years old, income $85,000, want to retire at age 65
  • $85,000 adjusted 15 years at 3.5% inflation = $142,400
  • $142,400 x 80% = $113,920 targeted annual retirement income
  • $113,920 ÷ .04 = $2,848,000 needed to retire at age 65

Don’t forget to subtract the money you could get each month from a pension and/or Social Security, which will count towards your desired $113,920 annual income.

Learn more about these calculations and other factors that affect how much you need saved for retirement.


2. Adjust your income, budget, and lifestyle as needed

If you’ve run the numbers and found that you’re not going to have what you need by the time you want to retire, it’s time to make some changes. Your next steps depend on how much time you have available until retirement. You may need to work a few years longer and retire at age 68 instead of 65 for example. Or you could look for ways to earn extra income in the coming years—by switching jobs, taking on a side hustle, or renting out a portion of your home. 

You may also need to cut back on your expenses. Sticking to a budget is a proven way to get yourself back on track. And when you implement a ‘pay yourself first’ approach—where you set aside money for retirement before you pay for anything else—you’ll put yourself on a direct path to meeting your goals.


3. Meet any employer-sponsored retirement plan match

One of the easiest ways to save for retirement is by using money contributed by someone other than you. If your employer offers matching funds in your retirement plan, take full advantage—it’s basically free money. 

Many employers will match your contributions to a certain percentage. And while most people think of this as a feature of just a 401(k), there are many other plans that include this perk, including 403(b), 457(b), Thrift Savings Plans, SIMPLE plans, and others. Learn more about these and other types of employer-sponsored retirement plans


4. Contribute to an individual retirement account (IRA)

Looking for additional ways to save? Or do you want more control over how your retirement money is invested? 

Even if you are contributing the maximum amount to your employer-sponsored retirement plan, you may still be able to contribute to a traditional or a Roth IRA, up to a certain limit. There are several reasons this can be a good idea for you.

First, managed IRAs usually have more investment options than employer-sponsored retirement plans. IRAs allow you to invest in mutual funds, index funds, exchange-traded funds, and more, giving you many ways to invest and balance your investment portfolio. You may also find that some IRA investments charge lower fees than 401(k) funds. A financial professional can walk you through your options and help you decide which are best for you.

Second, IRAs give you the ability to diversify your retirement tax obligations. For example, distributions from a traditional IRA are taxed, but those from a Roth IRA are not. It’s smart to have both types of IRAs so you’ll have tax flexibility during retirement.

It’s easy to contribute to an IRA; set it up so your money automatically comes out of your paycheck each pay period.


Need more than the contribution limit?

While contributing the full amount allowed to your 401(k) or IRA is a great goal, sometimes you need to do even more to save what you need, as determined in Step 1 above.

Employer-sponsored plans like 401(k)s have annual contribution limits set by the Internal Revenue Service. For example, in 2023, the IRS limits your pre-tax contributions to $22,500, and the total contributions (from you and your employer) are capped at $66,000. If you are age 50 or older, your maximum is $30,000 ($73,500 total) due to extra allowable catch-up contributions.

Anyone can contribute to a traditional IRA, but your eligibility for a Roth is dependent on income. 2023 IRS limits apply here as well. You can contribute $6,500 a year if you’re under age 50, or $7,500 if you’re 50 years or older.

Don’t forget about regular investment and savings accounts, such as a high-yield savings account, a money market account, or a certificate account. While these do not come with the tax advantages of a 401(k) or an IRA, they still provide great ways to save for retirement, and can help you diversify your tax obligations. 


Start today

Whatever you do, start saving early and put away as much as you can, then do your best to increase your savings rate over the years. The sooner you begin saving, the more time your money will have to grow. And take advantage of the expertise of a financial professional, who can help put and keep you on track. 

Retirement may be closer than you think.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Get help from a financial professional

Even when you take steps to save early and maximize your contributions, there’s no doubt that retirement planning can be complicated. You need a comprehensive retirement savings strategy that covers more than just investing. Regardless of where you are in life, or how much you have saved, you’ll benefit from the advice of a financial professional.

Retirement Savings Strategies for Every Age

Here’s how your approach to retirement savings should change over time.

How Much Money Do I Need to Retire?

Are your retirement savings on track? Here are some quick ways to find out.

Comparing Types of Retirement Plans

When it comes to retirement plans, there’s something for everyone.

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Man checking email on his smartphone.

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