How to Save Money for Retirement

Senior couple relaxing on porch, holding hand, laughing

When you're in the early years of your career and retirement is a long way off, the thought of setting aside a chunk of income you won't use for decades may feel unnecessary—especially if you're scraping by right now.

But starting to save money for retirement sooner rather than later can pay off big in the future—even if you start small. Before you begin, however, it helps to get a sense of how much you'll need to have saved for a comfortable retirement, so you have a goal to shoot for. The amount you'll need to save for retirement is an individual decision that comes down to the age at which you'd like to retire and what type of lifestyle you hope to be able to afford. Regardless of what your retirement dreams look like, following these steps now can help make your goals a reality.

Start Saving as Early as Possible

It's easy to put off saving for retirement, especially if your budget is tight. You're far from alone if you struggle to find money to set aside for the future; a 2019 Federal Reserve report found that a 1 in 4 non-retired American adults had no retirement savings at all.

While retirement may still feel abstract when you're in your 20s or 30s, the truth is that the best time to start saving for retirement is as soon as you're able. Given how retirement funds grow in value over time, a few years' difference in when you get started can have a big impact on what you'll ultimately earn.

You can ensure your short- and long-term financial security if you create a plan and gradually increase your contributions as you earn more and get closer to retirement. Even if you can't afford to contribute a portion of every paycheck, one-off deposits made into a retirement account when you can afford it can make a difference over time.

Time is on your side when you start early since you give your money more time to grow. For example, Fidelity found that someone who is 35 and earns $60,000 a year can retire with an extra $85,000 by upping their retirement contribution just by 1%. It's never too late to start saving for retirement, but those who start early benefit from the magic combination of time and compounding.

Contribute to a 401(k) or Open an IRA

One of the easiest ways to save for retirement is to contribute to a 401(k) or IRA, which are tax-advantaged retirement savings accounts. The downsides: There are maximum annual contributions, plus potential penalties if you withdraw money before retirement age.

A 401(k) account is a benefit some employers offer. Employees who opt in select what percentage of their salary they want to contribute and how they want it invested (mutual funds and exchange-traded funds are the most common choices). Each paycheck, that amount is automatically deducted and funneled into the 401(k) account. Some employers will match an employee's 401(k) contributions up to a certain percentage each year. If your employer does 401(k) matching, taking advantage of that perk will help you boost your retirement savings. Not doing so will be leaving money on the table.

An IRA, or individual retirement account, is a type of retirement savings account you open yourself. IRAs come in several forms, the most common of which are the Roth IRA and the traditional IRA. Types of IRA accounts can differ in terms of contributions limits and tax rules, and in other ways. You may want to open an IRA if you're self-employed, if your employer doesn't offer a 401(k) or if you've maxed out your workplace 401(k) plan and want another tax-advantaged way to save for retirement.

So how much should you contribute to retirement accounts? If you're in your 20s or 30s, a general rule of thumb is to set aside 15% of your income. If you're 40 or above, consider contributing 20% if possible since you have less time until retirement (and less time for the money to grow).

Create a Budget and Stick With It

If setting aside money for retirement seems impossible, creating or reviewing your budget can help. While it may sound like a drag, creating a budget—and sticking to it—can actually be a path to freedom since it ensures you have enough money for the things you want (like a comfortable retirement).

When you take the time to map out how much money is coming in and going out each month, you may find some expenses that are unnecessary, or money that could be diverted elsewhere. A budget is a plan on how to use your money, and having one can make it easier to live within your means, avoid taking on debt and save for retirement. In addition to helping you save for retirement, the process of creating a budget can also help you reach other savings goals, like building an emergency fund or taking a dream vacation.

Tackle Any Existing Debt

Debt is a drag on your finances since it requires you to spend some of your income paying it off (plus interest) rather than saving for the future. After making debt and bill payments, you may not have much left to save.

For that reason, it's crucial to assess all of your financial obligations and make a plan to get out of debt if you haven't already. If credit card debt is the main burden holding you back, there are numerous strategies to tackle credit card debt. Two approaches to paying off your debt are the debt snowball and debt avalanche methods.

  • Debt snowball: This payment method has you focus on your account with the smallest balance first, and make the biggest possible payment on it. For all your other accounts, make the minimum payment due. Once your smallest account is paid off, roll what you were paying into your next smallest account (adding it on top of that account's minimum payment). As you pay off your accounts, your "snowball" will grow and it'll become easier to pay down your larger accounts more quickly.
  • Debt avalanche: This method is similar in practice to the snowball method, but instead of focusing on the account with the lowest balance, you'll concentrate your efforts on the accounts with the highest interest rates. This method can save you more money over the snowball method, but it can be hard to stay motivated with it if your highest interest account also has a high balance.

Once your debt is reduced or paid off, you can redirect those payments to your retirement savings. Making strides to address debt now may help you avoid delaying retirement or having to take on more debt during retirement.

Invest Outside of Your Retirement Accounts

A 401(k) or IRA aren't the only ways to invest your money for the future. These accounts have tax advantages but also limit how much you can contribute and may penalize you if you need to take out any money early.

Because of that, it could make sense to diversify your portfolio with other investment options with more flexibility, such as individual stocks, bonds, mutual funds, exchange-traded funds (ETFs) and real estate investment trusts (REITs). Your strategy should be based on your personal goals, age, risk tolerance and budget. It will also depend on whether it's better to pay off debt or invest in your situation.

If you're unsure where to start with investing, it could be worth hiring a financial planner or investment advisor to help you map out a strategy and potentially manage your investments for you.

There's also the option of robo-advisors, which are digital platforms that collect your basic information and goals, and then automatically invest and manage your portfolio. Robo-advisors have appeal since their fees and investment minimums are typically lower than with traditional human advisors, and their online platforms are easy to use. But you also lose the ability to work directly with a person who can offer advice and customize your portfolio, so think about which factors are most important to you.

Consider Buying a Home

Buying a home is one of the biggest decisions—and largest purchases—most people will ever make. Purchasing offers more permanence and stability than you'd have as a renter, but it can also serve as a retirement nest egg.

When you buy a home with a down payment, you become the owner of an asset with equity invested in it. As you pay down your mortgage, you continue to build your equity in the home, so if you sell, you can make some of that money back. If you've paid off your mortgage, or if you live in an area with significant appreciation, you might even make a profit long term by selling and downsizing upon retirement. Or, you may choose to stay in your home and pay off your mortgage completely, which would give you a place to live rent- and mortgage-free in your retirement years (though you may still have to pay for things like upkeep and property taxes).

If homeownership appeals to you, it's important you only take out a mortgage that works for your budget. It may be smart to work with a financial advisor to ensure you can afford to buy a home and how it might fit into your long-term financial plan. According to the most recent Census data from late 2020, 65.8% of Americans own a home, so while it's a common financial move to make, it's not the right choice for everyone.

Don't Forget About Your Credit

Just as investing for retirement is a crucial long-term strategy, so is monitoring your credit, which you can do for free through Experian. Financial missteps that lower your score can result in higher interest rates when you borrow money, or denial of loans like mortgages altogether. As you work to keep your debt repayment and investing goals on track, it's also wise to also keep tabs on your credit and ensure your decisions help—not hurt—your credit score.