How to save for retirement: A step-by-step guide

Saving for retirement is one of the most important financial goals you can set for yourself. Sometimes a small change, like having access to a retirement account, can be just the push you need to get you on the path to financial security.

Whether you're just starting to save for retirement or you haven't saved enough, the following retirement strategies can give you the confidence and knowledge you need to achieve your goals. From choosing an account to maximizing your savings at any age, here's how to plan for retirement in six steps.

1Start with a goal in mind

Your plan may be to retire in 10 years or 40 years. Either way, your first step should be to set a retirement savings goal. This helps determine how much you need to contribute each year, while also helping to ensure you're on track to reach your goal.

How much should I save for retirement?

The total amount you should save for retirement each month will depend on a few factors, including your current salary and future lifestyle expectations. One rule of thumb is to save at least 15% of your pretax income each year. However, if you're starting to save later in life, you may need to set aside more to catch up.

You can calculate how much to save for retirement based on your unique situation, including your current age, expected retirement age, annual income, current savings and how much money you'll likely need after you retire.

How much do I need to retire?

Conventional wisdom says you'll need roughly 80% of your current income to maintain your lifestyle in retirement. While your actual retirement income needs may vary, this can serve as a general guide as you start to save for the future. If you're close to retirement age, it's a good idea to work with a financial advisor to get more clarity on how much income you'll need in retirement.

2Choose a retirement account

Tax-advantaged retirement plans offer a smart way to save for your future, allowing your money to grow faster. By leveraging the power of these accounts, you can accelerate your savings growth and potentially reduce your tax burden either now or in retirement.

Types of retirement accounts

There are a variety of defined contribution plans for retirement savings, which are designed to meet the needs of different individuals and employment situations. These plans can be broken up into three general categories: employer-sponsored plans, individual retirement accounts, or IRAs, and plans for small business owners and those who are self-employed. Learning more about how each of these types of accounts work can help you choose the best retirement plan for your goals.

Employer-sponsored retirement plans

Employer-sponsored retirement plans are a popular benefit offered by companies. These accounts typically offer automated savings, and many employers will also contribute by matching employee contributions up to a certain percentage.

There are a few main types of employer-sponsored retirement plans available.

• 401(k)s: Offered by many employers, traditional 401(k) plans allow you to contribute pretax dollars from your paycheck, often with an employer match. These funds grow tax-deferred until withdrawal in retirement. Some employers also offer Roth versions of these accounts, which have different tax impacts.
• 403(b) and 457 plans: While similar to 401(k)s, these plans are offered by nonprofit organizations, schools and government entities. Some rules may differ from 401(k)s.

Because these plans are employer-sponsored, you'll lose your ability to make contributions if you leave your job. However, the money you've contributed will remain yours, and you'll have the option to transfer or move your funds into a new plan. Exploring the options for what to do with an old 401(k) can help you make the most of your existing savings.

IRAs

Unlike employer-sponsored retirement plans, IRAs are available to anyone who's earned taxable income during the year. There are a few types available.

Traditional IRAs: These accounts allow you to contribute pretax dollars, which grow tax-deferred until you withdraw the funds. Note that if you or your spouse has access to a workplace retirement plan, your ability to deduct your contributions on your taxes may be limited based on your income.

Roth IRAs: With Roth IRAs, you contribute after-tax dollars, but qualified withdrawals in retirement are tax-free. Eligibility to contribute to a Roth IRA is restricted for higher-income earners.

Thanks to robust tax benefits and a wide range of investment options, IRAs can be a powerful financial tool. Learning more about how IRAs work can help you determine whether they're the right fit for your retirement savings goals.

Self-employed retirement accounts

IRAs are the most popular type of retirement savings account among self-employed individuals. However, they may be less than ideal as a primary retirement savings account due to their modest contribution limits. Whether you're saving for retirement as a freelancer or you're a small business owner, there are several other retirement accounts that may be a better fit.

• Solo 401(k)s: Designed for self-employed people or business owners with no employees other than a spouse, solo 401(k)s offer much higher contribution limits than employer-sponsored 401(k)s.
• SEP IRAs: Simplified Employee Pension, or SEP, IRAs are a popular retirement plan for self-employed individuals and small business owners. They offer high contribution limits and flexible annual funding requirements.
• SIMPLE IRAs: Savings Incentive Match Plan for Employees, or SIMPLE, IRAs are designed for small businesses with 100 or fewer employees. Both employers and employees can contribute to these accounts.

Here are some eligibility and income requirements, as well as annual contribution limits, for the types of accounts covered so far.

Comparing traditional and Roth accounts

One of the most important decisions when saving for retirement is whether to choose a traditional or Roth account. This is the case for IRAs but also increasingly for 401(k)s because more employers are offering Roth options alongside traditional 401(k)s. According to the Plan Sponsor Council of America, about 88% of employers that offer retirement plans now offer Roth 401(k)s—nearly double the percentage from a decade ago.

While there are many differences between traditional and Roth accounts, one of the most significant depends on when you pay taxes.

• Traditional accounts: Contributions to a traditional IRA or 401(k) are made with pretax dollars, reducing your current taxable income. Your money grows tax-deferred, and you'll pay taxes when you withdraw the funds. This may be helpful if you expect your income tax bracket to be lower in retirement than it is today.
• Roth accounts: Contributions to a Roth 401(k) or Roth IRA are made with after-tax dollars, so there's no immediate tax benefit. However, your money will grow tax-free, and qualified withdrawals in retirement will also be tax-free.

It's helpful to consider your current and future tax brackets when deciding between Roth and traditional accounts. If you expect to be in a lower tax bracket in retirement, a traditional IRA or 401(k) may be a good option. However, if you think you may be in a higher tax bracket in retirement, Roth contributions may be more advantageous. If you're uncertain what your future situation may be, consider using a combination of account types to cover your bases.

Keep in mind that there are rules and penalties that can impact your decision. Taking the time to learn more about the withdrawal rules for an IRA or 401(k) can help you choose the best retirement plans for your needs.

3Consider your risk tolerance

When developing a retirement savings strategy, it's a good idea to consider your risk tolerance and how it may change over time. For example, younger individuals with more years until retirement often opt for a higher allocation to riskier assets—such as stocks—in their investment portfolios. This is because they have a longer time horizon to ride out market fluctuations and potentially benefit from higher long-term growth.

As you get closer to retirement, it's generally advisable to gradually shift your asset allocation toward more conservative investments—such as bonds—to protect your savings from market volatility. This approach may help reduce the risk of significant losses in the years leading up to retirement, when you'll have less time to recover from market downturns.

Be sure to regularly review and rebalance your retirement portfolio to ensure your asset allocation remains aligned with your risk tolerance and investment goals. As market conditions change and your personal circumstances evolve, you may need to adjust your retirement savings strategy accordingly.

Diversifying your retirement investments across different asset classes, sectors and geographies is one way to help manage risk and smooth out returns over time. By spreading your money across various investments, you reduce the impact of any single investment's performance on your overall portfolio.

4Maximize retirement savings

To maximize your retirement savings and ensure you're on track to reach your goals, consider implementing these strategies.

• Start saving early. The sooner you begin saving, the more time your money has to grow through the power of compounded earnings.
• Automate your savings. Set up automatic contributions from your paycheck to fund your retirement account. This way, you're consistently saving without having to think about it.
• Increase retirement contributions over time. As your income grows, make a habit of increasing your retirement contributions. For example, commit to raising your 401(k) contribution each time you receive a raise, or plan out how to take advantage of catch-up contributions after you've turned 50.
• Consider a Roth conversion. If you expect to be in a higher tax bracket in retirement, converting some of your traditional IRA or 401(k) funds to a Roth account might make sense. This can help you minimize your tax burden in retirement, although you'll face an immediate tax bill on the amount you convert.
• Take full advantage of employer matching if it's available. Employer matching is essentially free money that can significantly boost your retirement savings over time, so it's important to contribute enough to capture the full match. What's more, these matches don't count toward the annual limit for employee contributions. Use a 401(k) calculator to see the full impact of employer matching in your situation.

The power of matched contributions

Here's an example of how an employer match would work to your advantage.

Let's say you earn $60,000 per year, and your employer matches 50% of your contributions up to 6% of your salary. If you contribute at least $3,600—or 6% of your annual salary—your employer will kick in an additional $1,800 each year. Over a 30-year career—assuming a 7% annual return on your investments and salary increases of 2% per year—those matching contributions could add more than $217,000 to your retirement savings on top of what you're able to save.

Should I save for retirement or pay off debt?

There may be circumstances where maximizing your retirement savings isn't feasible. If you're facing current income demands, such as high-interest debt or unexpected medical expenses, it may be more beneficial to allocate your financial resources toward addressing these immediate concerns before focusing on maximizing your retirement contributions.

In these cases, try to find a balance between meeting your current obligations and saving for your future. Contribute as much as you can comfortably afford to your retirement savings, and you can gradually increase the amount you're saving as your financial situation improves. Also check with your plan administrator because some employers offer matching contributions against amounts you've paid off in student loan debt instead of outright contributions to the plan.

5Adjust your strategy over time

As you move through different stages of your career and life, it's important to periodically review and adjust your retirement savings strategy by age. This is because your risk tolerance may shift the closer you get to retirement.

In your 20s and 30s

In your early years, focus on establishing good saving habits and taking advantage of the power of compounded earnings. During this time, you also might also consider riskier investments like stocks that have higher growth potential.

In your 40s

As you enter your prime earning years, prioritize catching up on savings if needed and consider increasing your contributions as your income grows. Depending on your goals, you may want to shift to a more balanced risk orientation. During peak bonus-earning years, consider adding life insurance with a cash-value account to your portfolio. This is another tax-advantaged tool that will allow you to build savings either tax-deferred or tax-free for retirement.

In your 50s

Start taking advantage of catch-up contributions. Now is also a great time to start working with a financial advisor if you don't already have one. An advisor can help you map out your retirement income needs and create a strategy to catch up on your retirement savings if necessary.

As you near retirement

Reassess your risk tolerance as you continue catching up on retirement savings, and consider moving your investments to more conservative options to protect your savings and generate income. Be careful about starting your retirement and distributions in a down market because it can have serious effects on the longevity of your nest egg. Be flexible about your retirement date as well. A few years of working through a market correction can allow your account to avoid distributions when earnings are down and you won't have the ability to recover. Continue to work with a financial planner to create a thorough retirement roadmap.

6Catch up on retirement savings

If you've mapped out your retirement strategy and realized that you're behind on your retirement savings—or if you haven't yet started saving—don't panic. There are several strategies you can use.

• Max out your catch-up contributions. If you're 50 or older, take full advantage of the additional catch-up contributions allowed for 401(k)s and IRAs. People age 60 to 63 receive a further boost on their ability to make large catch-up contributions.
• Consider a side hustle. Earning extra income through a side job or consulting work can take the edge off the size of distributions needed during your retirement.
• Reduce expenses and redirect savings. Look for ways to cut back on your current expenses, and redirect these funds into your retirement account.
• Delay retirement. Consider working a few extra years to give your savings more time to grow. This will also help reduce the number of years you'll need to rely on your retirement funds and can maximize the amount you'd receive from Social Security benefits.

Key takeaways

• Saving for retirement is a critical part of ensuring a secure financial future. Start early, save consistently and adjust your approach as needed over time.
• Leverage the power of tax-advantaged retirement plans, maximize employer matching and implement other smart savings strategies to help achieve your retirement goals.
• While the prospect of saving enough for retirement can be daunting, you can look forward to a comfortable and fulfilling retirement with consistent saving and a thoughtful plan.