Updated: March 29, 2024
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Saving for retirement is a challenging task. You’re funding your future while paying for your present. Throw in inflation and possibly unexpected expenses, such as caring for ailing parents or losing a job, and retirement planning can be stressful.
But that’s why you should start planning for your retirement as early as possible because you’ll need time — and information. In other words, what you need is our guide to retirement planning.
Retirement Savings Fast Facts
A strategic and focused approach to saving money can help you secure financial independence during retirement. Here are some key takeaways to consider:
The Federal Reserve estimates that the conditional median value of American retirement accounts was $65,000 in 2019, up 2% from 2016.
The Center for Retirement Research at Boston College calculates that 50% of households are at risk of being unable to maintain their pre-retirement income through retirement. In 1989, analysts estimated that 30% of households needed to catch up.
In 2021 the median household income in America was $70,784.
Suppose you were on the verge of retiring and wanted to continue with the same annual income level for 20 years after Social Security benefits. In that case, you need $390,000 in retirement savings. This figure is likely higher if you live longer, as half of 65-year-olds live past 85 years.
If you are worried that you don’t have enough saved for retirement, you are probably right. For instance, the investment management company T. Rowe Price suggests that by age 35, you have one to one and a half of a year’s salary saved for retirement. By age 50, it should be three to six times.
Don’t get discouraged if you are uncertain whether your retirement financial planning measures up. Giving up is a surefire way to not save enough for retirement. It is never too late to start saving and investing, and taking proactive steps toward your financial goals can make a significant difference in the long run.
Everybody’s lives and financial situations are different — there’s no universal set amount that everybody needs for retirement. But the guiding rule is to save as much as possible for retirement.
Consider following these steps if you’re trying to land on some retirement savings goals.
It can start with your current expenses, including housing, transportation, food, entertainment and other costs. Then adjust your budgets up and down as you expect them to change (i.e., lower housing costs or higher travel costs).
To estimate your expected income during retirement, consider sources like Social Security, pensions or other plans that pay an income.
Once you have estimated your expenses and retirement income, calculate the additional income needed to fill the gap. If your budget is $60,000 per year and your Social Security only gives you $28,000, your gap is $32,000 annually.
Use a retirement savings calculator to help you estimate the amount you need to have saved on the day of your retirement to ensure you can fill the gap amount and that your nest egg will last the rest of your life.
MoneyGeek’s compound interest calculator can help you calculate how much you need to save per month or year, considering your savings.
If you cannot reasonably expect to save your target amount, you’ll need to make some decisions, such as postponing retirement or adjusting to a lower budget.
John is 45 years old and plans to retire at age 65. He estimates his current annual expenses to be $55,000 and expects to receive $25,000 per year in retirement income from Social Security and his employer's pension plan. After adjusting for changing expenses in retirement, he estimates his annual retirement expenses will be around $50,000 inclusive of taxes. He needs an additional $25,000 per year in retirement income to fill the gap.
Using a retirement calculator, he finds his target savings amount would be approximately $690,000. Using the compound interest calculator, he finds that with his existing $100,000 of retirement savings, he’ll need to save $13,000 per year for the next 20 years to reach his target savings.
At this point, John can assess whether he can save this much or make a different plan. He might adjust his retirement plan by working a few extra years or reducing his retirement expenses to reach his savings target to make it easier.
There are several tried-and-true strategies financial planners recommend following to save for retirement, such as the 50/15/5 rule, in which 50% of your income goes to regular bills and living expenses, 15% goes to your retirement and 5% goes to saving for short-term expenses (and 30% goes to everything else). But the important thing is having a plan after you have a retirement savings goal. Without a plan to follow, the goal is almost worthless.
The best time to start saving for retirement is right now. More precisely, it’s when you have income and can spare to put some of it away for the future. If you can start when you’re young, such as in your 20s, you’ll have more time to save money and take advantage of your savings compounding than those who wait. However, plenty of people have started saving for retirement later in life; that’s nothing to be ashamed of. What can be the real pitfall is when you decide to defer your retirement savings over and over or give up entirely. So don’t kick the can down the road or decide that since you can’t save much, it’s not worth saving.
Compound interest means you’re earning interest on your interest. For instance, if you put aside $1,000 a year when you’re 20 and earning 6% interest, when you’re 21, you would have $1,060. And at age 22, you’ll earn 6% on $1,060. That adds up. Look at the table below, and let’s assume each person saves $200 a month toward retirement. You can see the advantage of starting earlier.
Compound interest calculators are invaluable for determining how much you can save toward retirement. If you invest a certain amount of money every month, the interest compounds over time. You'll see what we mean if you check out MoneyGeek’s free compound interest calculator below and plug in some of your numbers, such as how many years you’ll be saving for retirement.
| Year | Starting Balance | Annual Contributions | Cumulative Contributions | Interest Earned | Cumulative Interest | Total Balance |
|---|---|---|---|---|---|---|
| 1 | $5,000 | $1,800 | $1,800 | $359 | $359 | $7,159 |
| 2 | $7,159 | $1,800 | $3,600 | $492 | $851 | $9,451 |
| 3 | $9,451 | $1,800 | $5,400 | $633 | $1,484 | $11,884 |
| 4 | $11,884 | $1,800 | $7,200 | $783 | $2,267 | $14,467 |
| 5 | $14,467 | $1,800 | $9,000 | $943 | $3,210 | $17,210 |
| 6 | $17,210 | $1,800 | $10,800 | $1,112 | $4,322 | $20,122 |
| 7 | $20,122 | $1,800 | $12,600 | $1,291 | $5,613 | $23,213 |
| 8 | $23,213 | $1,800 | $14,400 | $1,482 | $7,095 | $26,495 |
| 9 | $26,495 | $1,800 | $16,200 | $1,685 | $8,780 | $29,980 |
| 10 | $29,980 | $1,800 | $18,000 | $1,899 | $10,679 | $33,679 |
| 11 | $33,679 | $1,800 | $19,800 | $2,128 | $12,807 | $37,607 |
| 12 | $37,607 | $1,800 | $21,600 | $2,370 | $15,176 | $41,776 |
| 13 | $41,776 | $1,800 | $23,400 | $2,627 | $17,803 | $46,203 |
| 14 | $46,203 | $1,800 | $25,200 | $2,900 | $20,703 | $50,903 |
| 15 | $50,903 | $1,800 | $27,000 | $3,190 | $23,893 | $55,893 |
| 16 | $55,893 | $1,800 | $28,800 | $3,498 | $27,391 | $61,191 |
| 17 | $61,191 | $1,800 | $30,600 | $3,824 | $31,216 | $66,816 |
| 18 | $66,816 | $1,800 | $32,400 | $4,171 | $35,387 | $72,787 |
| 19 | $72,787 | $1,800 | $34,200 | $4,540 | $39,927 | $79,127 |
| 20 | $79,127 | $1,800 | $36,000 | $4,931 | $44,857 | $85,857 |
| 21 | $85,857 | $1,800 | $37,800 | $5,346 | $50,203 | $93,003 |
| 22 | $93,003 | $1,800 | $39,600 | $5,787 | $55,990 | $100,590 |
| 23 | $100,590 | $1,800 | $41,400 | $6,254 | $62,244 | $108,644 |
| 24 | $108,644 | $1,800 | $43,200 | $6,751 | $68,995 | $117,195 |
| 25 | $117,195 | $1,800 | $45,000 | $7,279 | $76,274 | $126,274 |
| 26 | $126,274 | $1,800 | $46,800 | $7,839 | $84,113 | $135,913 |
| 27 | $135,913 | $1,800 | $48,600 | $8,433 | $92,546 | $146,146 |
| 28 | $146,146 | $1,800 | $50,400 | $9,064 | $101,610 | $157,010 |
| 29 | $157,010 | $1,800 | $52,200 | $9,734 | $111,345 | $168,545 |
| 30 | $168,545 | $1,800 | $54,000 | $10,446 | $121,790 | $180,790 |
| 31 | $180,790 | $1,800 | $55,800 | $11,201 | $132,992 | $193,792 |
| 32 | $193,792 | $1,800 | $57,600 | $12,003 | $144,995 | $207,595 |
| 33 | $207,595 | $1,800 | $59,400 | $12,854 | $157,849 | $222,249 |
| 34 | $222,249 | $1,800 | $61,200 | $13,758 | $171,607 | $237,807 |
| 35 | $237,807 | $1,800 | $63,000 | $14,718 | $186,325 | $254,325 |
| 36 | $254,325 | $1,800 | $64,800 | $15,737 | $202,061 | $271,861 |
| 37 | $271,861 | $1,800 | $66,600 | $16,818 | $218,879 | $290,479 |
| 38 | $290,479 | $1,800 | $68,400 | $17,966 | $236,846 | $310,246 |
| 39 | $310,246 | $1,800 | $70,200 | $19,186 | $256,031 | $331,231 |
| 40 | $331,231 | $1,800 | $72,000 | $20,480 | $276,511 | $353,511 |
Once you’ve realized the power of compound interest in helping you reach your retirement goals, it’s time to discuss how qualified retirement accounts can help increase your savings. A qualified retirement account allows your investments and saving to grow tax-free. Paying taxes on your investment returns is a drag on how quickly your investments compound. As you might expect with compound interest, it adds up over time.
If you saved $100 monthly for 20 years at 5%, you’d have $41,103. But paying taxes on your investment returns of 20% would lower your return to $36,677. So by using a qualified retirement plan to enable tax-free growth, you’d get 12% more in this scenario. Unfortunately, retirement plans are all different and use some confusing acronyms (IRA), references to the tax code (401(k)), and the name of a former U.S. Senator (Roth IRA). Learn the pros and cons of each and what might best apply to your situation.
Many employers offer retirement accounts as benefits for working for them — sometimes, matching contributions. For investment-minded people, a matching contribution from your employer is a 100% return on investment with no risk. If you’re considering investing in an employer-sponsored retirement plan, your options are typically determined by the employer. While the most common one is the 401(k), even if you have a 402(b) or 457(b), they all work similarly.
You may be offered a 401(k)
A 401(k) is a retirement savings plan that allows you to contribute a portion of your pre-tax income to an investment account. The funds you contribute to a 401(k) plan are entirely yours, and you can transfer them to another account if you leave your employer. You may receive a matching contribution from your employer for your 401(k) account, which is free money. Therefore, verifying if you qualify for the employer match is crucial and taking advantage of it if possible, is crucial.
You may have access to a specialized retirement account
Depending on your employer, you may be offered retirement vehicles such as a SIMPLE IRA, a 402(b) plan, a 457(b) plan or a Thrift Savings Plan. Only some plans will be available to some. For instance, a 402(b) plan is a tax-advantaged retirement savings plan for teachers, nurses, and those working for nonprofits and government agencies. Thrift Savings Plans are only available to federal government employees. A 457(b) plan is for certain state and local government employees. You’ll want to learn the details with human resources or a financial advisor, but an employer-sponsored retirement plan is almost always a good deal.
There’s no retirement plan offered
Yes, it happens — often for smaller businesses or if you are a part-time employee. Businesses that provide 401(k) plans can receive tax breaks, the founders can fund their retirement accounts, and it’s a benefit that can help keep the business competitive in hiring situations. So it doesn’t hurt to ask for one if it’s not there yet. You still have ways to contribute to a retirement account, just not at work. These would be your traditional IRA and Roth IRA, which can be available to almost anyone.
So you’re on your own. Nobody will help you set up a retirement account unless you hire a professional. That’s okay. You have options:
Invest in a SEP IRA
These accounts are fairly common for self-employed individuals. They can allow you to contribute more to them than a traditional or Roth IRA and don’t take more effort to administer.
Contribute to your own IRA
Contributing to an IRA allows you to take control of your retirement savings and plan for your financial future. It can help you avoid relying solely on Social Security benefits in retirement, which may need to be more to meet your needs.
Utilize your spouse’s employer
This is less common, but If you’re married and your spouse has an employer-sponsored retirement account, you may be able to get a Spousal IRA set up, which has the same rules as any IRA does (you will need to file your taxes jointly to have a Spousal IRA). You may find it less of a hassle to have your account with your spouse’s employer.
If you're an employer, you can choose whether or not you offer your full-time employees retirement benefits. If you own a small business and are willing, offering a rich retirement plan can be very beneficial. You can have some options aside from a 401(k) plan:
Set up a Solo 401(k)
This type of retirement account allows you to make contributions both as the employer and the employee, which means you can contribute more than you would be able to with a traditional 401(k). Additionally, if you have employees, you can still set up a solo 401(k) but will need to follow certain rules to ensure you are not discriminating against your employees.
Set up a SIMPLE IRA
It’s simple to set up. But you don’t want to do this unless you know you can give something to your employees’ retirement. Contributions are mandatory.
Set up a SEP IRA
A SEP IRA is another excellent benefit for employees. The employer contributes to the employee’s retirement accounts and their own. You don’t have to contribute every year, but you do have to give yourself and your employees the same percentage of contribution (the exact number of what you contribute changes annually). There are tax-related benefits for you and your employees when offering a SEP IRA.
Except in extreme cases, you can’t go wrong by putting anything away towards retirement, but you can fall short of your goals. Maximizing your savings is important to ensure you’ve got enough for your golden years. Here are several you may want to try:
Tax-deferred growth is crucial for maximizing retirement savings, allowing money to grow without taxes until withdrawal. This provides a significant advantage, resulting in faster growth than taxable accounts. Tax-deferred growth can accumulate over time, making a substantial difference in retirement savings. For instance, a $10,000 investment in a retirement account with a 7% average annual return for 30 years would yield $76,123 if taxed annually. However, if the earnings were tax-deferred, the investment would be worth $196,715. That's a difference of over $120,000.
MoneyGeek advises you to set up automatic contributions to your retirement account(s). If you manually put money in a retirement account every month, you choose whether to pay for your future or the bills now. So take psychology, or behavioral finance, out of the equation and automate your actions. If you take the choice away from you and make it automatic with banking technology, your odds of saving every month, every year, become that much more significant.
Yes, we just told you to forget about your retirement accounts; you should do a routine financial check and look at how your investments are doing. Sometimes the investment offerings change, which may prompt you to adjust or change your portfolio. It might motivate you to spend more money on your retirement as well.
The fastest way to double your retirement savings, especially early on, isn’t by investing smartly. It’s saving more. While it's important to prioritize saving for retirement, it's also essential to strike a balance and not go overboard. Always pay your current expenses first. You can still enjoy your life and save for other goals, such as a vacation or buying a home. Ultimately, balancing enjoying the present and saving for the future is important.
For instance, if you have a 401(k) with an employer, you probably have to work there for a certain amount of years before your money is considered “vested.” In other words, the matching benefits that an employer gives you may not be yours if you don’t stay on the job long. Granted, if you hate a job, life is short, and if you’re going to be happy elsewhere, maybe you should quit. But you’d first want to know if you were close to having your investments fully vested, right? Bottom line: the more you know about your retirement accounts, the more you can avoid making costly mistakes.
When you start saving for retirement in your life matters a lot. Each decade of your life will have financial challenges regarding financial planning. If you start early, you’ll be able to capitalize on compound interest in a way that you simply can’t when you’re 10 or fewer years away from retirement. If you start young, you might also be able to put the brakes on saving for retirement. For example, when an emergency happens, like you lose your job and you can’t afford to put anything away. If you keep waiting, however, not saving for retirement becomes an emergency.
We’ll examine the various life stages and discuss what you may want to consider about retirement.
This is the time in your life to start developing good financial habits. If you don’t, bad financial habits will set in. You’re only human.
Pay your current expenses and debt. It can help you avoid costly interest charges and late fees, which can eat into your savings.
Create an emergency fund. If you’re always paying for unplanned expenses, it’s hard to budget for retirement or anything.
Start saving for retirement. Often you may have other pressing financial goals, so saving for retirement, even a small amount, is a great step to build the habit and take advantage of compounding interest for 30+ years.
For many, this is the decade of buying a house or having kids. If you haven’t developed good financial habits, like saving for retirement, this is the time to start getting serious about it.
Start a retirement account if you haven’t already. Again, it’s important to save as soon as you can. And the more that you can. Financial advisors may recommend upwards of 10% of your pre-tax income, which is a great goal to strive for.
Strengthening your emergency fund. You'll be better prepared to handle unforeseen expenses or events that could destabilize your finances.
Put your raise into your 401k. You often start getting raises and earning more as you get into your 30s. If you can funnel a part of your raise into your retirement, it’s a pain-free way to increase your savings.
If you haven’t started saving for retirement, it’s not too late. But the midnight hour is at hand. If you have been saving, keep building on what you’ve been doing.
Talk to a financial advisor. If you have $100,000 in retirement savings, this is often a time when people start working with a financial advisor.
Consider other insurance. If you have a spouse or children, life insurance can be important for this stage and ensuring there’s enough for your loved ones even if you don’t retire.
Keep saving to your retirement accounts. It can be challenging if you have kids you’re trying to feed, clothe, and provide college savings for. What’s important is to continue regular contributions.
With luck, you’ve been saving for retirement and envision a soft landing when you retire. If you can’t picture that, it’s worth putting away whatever you can.
Set the date. This is a good time to consider a retirement date for retirement planning purposes, even if it’s theoretical.
Check your Social Security savings. You could set up your online Social Security account and check your earnings (you can do that at age 18!).
Consider maxing your tax-free retirement contributions. Put that money into your retirement accounts if you’ve paid off your home or some other big ongoing expense.
If you’re like most retirees, saving doesn’t end once you are retired. Although at this point, it may be more of a process of managing money and keeping costs low.
You can still invest. If you have a financial advisor, they can steer you toward safe, profitable investments.
Downsize and save. This could be a good time to downsize into a smaller home and pocket the savings from selling your bigger one.
Maintain financial well-being. Hopefully, you’re continuing good financial habits you developed in your 20s, such as keeping a budget.
MoneyGeek spoke with some academics to provide expert insight on what we should all consider regarding retirement. Here’s what we asked them.
If you’re still looking for inspiration or insight into saving for retirement, here’s the good news. There is no shortage of resources available for you to contact which can provide support. Here are some:
About Geoff Williams
Geoff Williams has been a professional writer for over three decades and a personal finance journalist for over 15 years. He contributes financial content to MoneyGeek, with expertise in personal finance, real estate, entrepreneurship, credit cards and loans. He has been writing for various publications, including The Wall Street Journal, The Washington Post and CNNMoney. He also authored several books, including “Living Well with Bad Credit.”
Williams earned his creative writing degree from Indiana University Bloomington.
