How to Save Money for Retirement

Quick Answer

If saving for retirement is on your list of financial goals, the following steps can help you get there:

  1. Start saving early
  2. Contribute to a 401(k) if it’s available
  3. Consider an IRA
  4. Use other investment accounts
  5. Prioritize retirement saving
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Being strategic about saving for retirement can help you build a stronger nest egg. That's important at every age, whether you're just starting your career or have been working for years. What matters most is making it a priority, sticking with it and saving money in the most tax-efficient way possible. Here are five steps to help you save for retirement.

1. Start Saving Early

The sooner you begin saving for retirement, the more time you'll have to benefit from compound interest. By compounding, your money will grow faster as you earn interest on your principal balance andthe interest that's already accrued in your account.

Example of Compound Interest

Let's say you saved $5,000 a year for retirement beginning at age 25. After 40 years, you would have put in $200,000—but compound interest would have ballooned those savings to over $1.1 million (assuming interest compounded monthly and you earned a 7% annual return). Someone who began saving at age 35 would have less than half that amount. If you're getting a late start, don't stress. The most important thing is to begin saving for retirement sooner rather than later.

2. Contribute to a 401(k) if It's Available

A 401(k) is an employer-sponsored investment account that's designed specifically for retirement. It's a common employee benefit that can help supercharge your savings.

  • How do contributions work? Contributions are made through automatic payroll deductions, and the money you put in is tax-deductible. Your employer might also contribute to your 401(k). In 2023, you can put in up to $22,500. Employees who are 50 and older can contribute an extra $7,500.
  • How is 401(k) money taxed? You won't owe taxes on your money until you make withdrawals in retirement.
  • What happens if I leave my job? You can either roll your money into a new 401(k) with your new employer or transfer it to an individual retirement account (IRA).

Contributing to a 401(k) is a simple and tax-effective way to save for your future. Just keep in mind that you'll likely be hit with a 10% early withdrawal penalty if you dip into your 401(k) before age 59½. You must also start taking required minimum distributions (RMDs) beginning at age 73.

3. Consider an IRA

You can open and fund an IRA on your own through a number of banks, investment companies and brokers. That can be good news for folks who don't have a 401(k) through their employer. You can also have a 401(k) and an IRA. There are two main types of IRAs, and each one offers its own tax advantages:

  • Traditional IRA: Contributions to a traditional IRA reduce your taxable income, which could help you pay less come tax time. Like a 401(k), you'll be taxed on distributions when you retire. Early withdrawal penalties and RMDs also apply.
  • Roth IRA: You won't get a tax deduction on the money you put into a Roth IRA, but you'll enjoy tax-free distributions in retirement. You can withdraw your contributions whenever you like, as long as you've had the account for at least five years. However, you may be taxed on investment gains if you're under 59½.

In 2023, you can contribute up to $6,500 across all your IRAs. Those who are 50 and older can contribute an extra $1,000.

4. Use Other Investment Accounts

Retirement accounts are designed for long-term saving. Beyond that, you can also save in a brokerage account or health savings account (HSA).

  • Brokerage account: You can manage a brokerage account yourself or have a robo-advisor or broker make trades on your behalf. You won't get the tax benefits of a 401(k) or IRA, but brokerage accounts are very flexible. There are no RMDs or early withdrawal penalties. However, you'll likely be taxed on earnings during the year they're realized.
  • HSA: An HSA is funded with pretax dollars that can be used for qualified medical expenses. You can also invest your balance and enjoy tax-free gains. Once you turn 65, you can use HSA funds for non-medical expenses (though you'll be taxed on these withdrawals). You must be enrolled in a high-deductible health plan to contribute to an HSA.

5. Prioritize Retirement Saving

Saving 15% of your income for retirement is often recommended in your 20s and 30s. Once you turn 40, that number goes up to 20%. If that feels unrealistic, set a target that fits into your budget and still allows you to save for other things. That may include paying down debt, saving for a home down payment or building your emergency fund. You can gradually increase your retirement contributions as you go. In the meantime, aim to contribute at least enough to secure an employer match. Automating your contributions can help you stay consistent.

The Bottom Line

Saving for retirement is a worthy financial goal. It's important to make it a priority and begin saving as early as possible. Using tax-advantaged retirement accounts, like 401(k)s and IRAs, can help you build a nest egg that goes the distance.

While saving for retirement, be sure to keep your credit health as strong as it can be. Free credit monitoring with Experian will notify you whenever something new appears on your credit report.