Wondering what the best ways to save for retirement are?
If you’re over 30, you have probably thought about retirement.
You’ve likely wondered if social security will be enough or been concerned you don’t make enough money to save for retirement.tri
If you’re like most folks, you probably haven’t started retirement saving yet. Or at best you have a little saved in a 401k but nowhere near what you’ll need to live on at age 65.
Saving for retirement doesn’t have to be out of reach and it is crucial for your future. So in this post, we’re walking through all the steps you need to know. We’ll review how to get started, what to do if you’re starting late, how to save when you’re broke and all the other top questions.
Specifically, we’re reviewing all the best ways to save for retirement so you can get started.
And getting started, however small, is the key!
The most important reasons you need to start saving for retirement
- So you and your spouse can live in dignity after you retire
- That your spouse can live comfortably in the event of your passing (and good term life insurance is a must for that too)
- So that you don’t have to work your fingers to the bone until you’re 80
- Helping you and your spouse keys to financial success!
— Chris Hogan (@ChrisHogan360) November 10, 2016
As I point out in one of my earlier posts about how to Stop Living Paycheck to Paycheck, The average person has less than $1,000 in the bank, a lot of debt and haven’t started saving for retirement yet.
So you don’t want to hit 65 with no money saved and be wondering when your “golden years” will actually start.
How Much Money Should You Save for Retirement?
We need to answer a few questions before we start to review the best ways to save for retirement.
We need to know a few things like:
- At what age do you and your spouse want to retire? (and if you’re different ages like my wife and I we need to factor that in)
- How much do you have saved now?
- Do you know how much is in your social security fund (hint: we don’t want to count on that)
- What do you want to do in retirement? (travel, relax, hit Vegas every other weekend?)
- Do you have any hobbies or small business ideas that will contribute to income after retiring from your main job(s)?
As Chris Hogan, famed Former All-American football player, best selling author, and retirement expert is fond of saying “Retirement isn’t an age; it’s a financial number.”
In other words, you get to retire not when you cross 65, but when you have enough saved to live off of and that could be 25, 45 or 95; it all depends on you!
What percentage of your income should you save for retirement?
Most experts agree that one of the best ways to save for retirement is to set aside 15% of your gross income. So if you make $20/hr and work 40 hours a week, you make about $41,600/year.
Let’s also assume you get paid every other week.
Thus you should contribute $240 per paycheck to your retirement plan. However, if you’re starting way early (like under 25) you could get away with less than that.
On the flip-side, if you are starting late (over 40) you may need to contribute more than that.
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Here are the best ways to save for retirement
We also need to explain the options when you Save for Retirement.
There are number of different financial options available, all a little different with pros and cons, so while you don’t need to be a stockbroker or CPA to get going, it helps to know a little bit. Believe it or not, it’s not rocket science!
401k – a retirement plan sponsored by your employer
- It may or may not include an employer match (where they match the amount you put in up to a certain amount)
- It gives you the opportunity to select from a wide variety of mutual funds usually with one main company such as Fidelity or Vanguard
- When you change employers, you can either move your 401k to a 401k with the new employer or, if they don’t offer one, you can roll it over into an IRA (explained below)
- In either case, when you move it, it’s vitally important to do a direct transfer rollover where the money never actually passes through your hands as this can result in the whole thing not only being taxed at your tax rate but also paying a 10% penalty. Trust me; you don’t want to pay 35% of your hard earned cash for the privilege of simply changing jobs!
- You typically have the option to borrow from your 401k with no penalty unless you don’t repay on time. This loan would have interest but you essentially pay yourself the interest
- This is certainly the most common and best ways to save for retirement
403b – public service employer plans
The same as the 401k but for employees of public schools and some types of non-profit companies
IRA – Individual Retirement Account
- An account you open on your own with a stockbroker, financial advisor or online trading company such as E-Trade.
- You put money in before you have already paid income tax on it or if it’s after the fact, the amount you contribute would typically be tax deductible
- The money grows but when you withdraw money from the account, no matter what age, the amount IS taxable
- You and your spouse can each contribute a max of $5,500 per year or if you are older than 50, that goes up to $6,500 per year
- The IRS says you must wait until age 59 1/2 to withdraw money to avoid paying a 10% penalty
- You can only contribute up until age 70 1/2
- Typically the best place to roll an old 401k to unless you have cash on hand to pay income tax which would be required if you rolled it to a Roth IRA
Roth IRA – Same as the above with one huge key difference
- In this case, you put in money after you paid taxes (and the amount of contribution is NOT tax deductible) but the money grows tax-free as long as you wait until age 59 1/2 to withdraw it
- You cannot open a Roth IRA if your household income exceeds $184,000 (this amount could change from year to year so it’s always best to double check)
- A Roth is almost always your best option if you qualify, as the money grows tax-free. When possible do a Roth first, an employer-matched 401k second and then a traditional IRA as a last option
- Outside of a 401k, this would be the next best ways to save for retirement
Want more detail on these? Check out the IRS page on all plans. I can almost guarantee it won’t flag you for an audit!
Unsure of how much is in your Social Security Account? Normally they mail you statements, but you can also check online by going to the Social Security Page (create an account if you don’t already have one. But think of your social security as icing on the cake; depending on it for 100% of your retirement is risky business!
Mutual Funds, Stocks & Bonds – What’s the difference?
If you’re new to this, you may not know the differences between stocks, bonds or mutual funds. These are the most common investment options within the above programs, so let’s look at those quickly so it will make more sense.
Need to dive in deeper to better understand investing options? Check out my post called Learning to Invest.
Stock is like buying a small percentage of a specific business.
For instance, you could go to your stock broker or one of the above mentioned online companies and buy stock in Apple. As Apple does well financially, your stock will likely increase in value. If they fall on hard times and lose profit, your stock value will likely go down.
Technically buying stock in Apple is like becoming an owner of the company, albeit unless you are buying millions in shares (the term used for 1 small piece of stock) your percentage of ownership is minuscule. The biggest downside of stock is like the old adage; you’re putting all your eggs in one basket.
If your retirement were all in one company’s stock and that company tanks or goes out of business, your entire future may well go down the drain with it.
But ultimately, stocks are not one of the best ways to save for retirement due to the risk and lack of diversification.
This is still stock, but in this case, it’s a group of different stocks all managed by one group.
When you buy into a mutual fund, your money is spread across all the stocks in that fund. Essentially you are minimizing risk by doing what they call diversifying.
There are many types of mutual funds; aggressive growth (meaning riskier but potentially making you more money), conservative (meaning less risky but with lower returns) and some that fall in between.
There are also different classes which usually refer to whether or not you pay a commission (selling fee) when you buy, when you sell or not at all.
The best strategy for an IRA or 401k is to have your money in at least 4 different mutual funds so you have even more diversification.
I personally look for mutual funds that have been around at least 10 years and over those 10 years have averaged at least 10% growth (ie: profit for you).
For me personally, mutual funds are definitely one of the best ways to save for retirement, ideally inside of a 401k or Roth IRA.
A bond is essentially you lending a corporate entity (like the government) money for a set period of time for a set interest rate and at the end of the term, you get paid back your money plus interest.
These tend to be safer, but don’t usually give you much in return. And in most cases, in my opinion, you would be much better off with mutual funds. Thus it does not make my list of best ways to save for retirement.
But don’t take my word for it, take it from world-renowned financial and retirement expert Dave Ramsey:
How much money do you need to save for retirement?
So let’s say you and your spouse are 38 and have $20,000 saved in retirement accounts.
Let’s say you both want to retire at age 65 and let’s say that right now your household income totals $52,000, which is the current average household income according to the U.S. Census Bureau.
Let’s do some math. We know the following:
- They have 27 more years to save what they need
- The average rate of inflation over the past 27 years means that by the time of retirement they’ll need approximately 51% more income to maintain the same income they make now (roughly $101k/year). Factored using the government’s Inflation Calculator
- We also can assume that if they follow good financial principals, their home would be paid off before retirement (reducing the income needed to maintain their lifestyle). Paid off cars and no credit card debt makes their flexibility even greater
- The average home price being about $189,000. Thus a paid off home saves about $900/month or almost $11,000/year (remember they will still have to pay insurance and taxes on the home)
- We know that according to the Social Security office, they will likely live approximately 20 years after retiring
Thus if we do some simple math, making the assumptions of inflation and factoring out the need for a mortgage payment, we need approximately about $1.9 million if they plan to have no income and live about 20 years once they retire.
But let’s not forget about the $20,000 they already have.
If they invest that in mutual funds, seeking out funds with a 10 or more year track record of at least 10% growth, that $20k will automatically grow to $262,000 by the time they retire (math courtesy of BankRate’s compound interest calculator)
So that leaves us needing to somehow save an additional $1.6 million. That’s where the best ways to save for retirement come in!
How can we save an additional 1.6 million dollars?
If both spouses put in the max in a Roth IRA of $5,500/year (each) that alone (again invested in mutual funds or other best ways to save for retirement earning an average of 10%) will give us almost $1.4 million.
Yes, you could be a millionaire all for a monthly allocation of about $900.
That still leaves us $238,000 short though. But let’s assume at least 1 spouse has a 401k or 403b through their employer, as that’s pretty common. And let’s also assume that comes with an annual match from your employer of $500.
For just an additional $104/month invested into that 401k, they will meet their retirement goal!
Even if neither of the spouses has an employer-sponsored option, we know the likelihood is that both spouses will see annual wage increases to keep pace with inflation. Those will allow them to open a regular IRA and once they turn 50.
Then they can collectively put in an additional $2,000/year into their Roth IRA for an additional 15 years. And none of this is taking social security into account which could provide up to an additional $62,000/year (both combined and if they are eligible for the maximum payout).
In other words, they will truly be golden once they reach their Golden Age, thanks to utilizing the best ways to save for retirement!
So hopefully you now see that saving for retirement; saving millions of dollars, is not as impossible as you may have once thought.
The key though is getting started: Taking Action
Trust me, it’s easy to put it off or think to yourself “that’s such a long way away” or “I can’t afford to set that money aside”.
It’s also easy to convince yourself that you need that new Lexus more than you need to be setting aside $1,000/month for retirement.
Life is long on excuses, but you have to ask yourself what’s really important?
Do you want to keep up with the Jones’ only to end up in poverty with them when you retire? Or do you want to make a plan, get fired up, dream big and get on the path to financial freedom?
If you don’t already own it, I highly recommend Chris Hogan’s book “Retire Inspired“.
Chris also has a great podcast on this subject called Retire Inspired, and is a frequent guest and sub on the Dave Ramsey Show.
Too Broke to Save for Retirement?
We need to get our monthly household finances before we consider any of the best ways to save for retirement. If you find you don’t have any money left to invest then let’s start there.
For starters to maximize the income you do have, you need to be on a written budget each month. If you’re trying to budget on a low income, you’ll want to put a hold on all extra expenses (including retirement) while you get your financial house in order.
But maybe you’re not broke, but you just don’t know How to Make a Budget?
In that case, we need to go back to basics and just walk through the steps to create your very first budget. You’ll put your known income for next month at the top. Then you’ll subtract your known expenses.
Once you’re out of debt and living on less than you make, THEN you can start to look at the best ways to save for retirement.
Another great tool in your financial arsenal are your bank accounts. Many folks have just a basic savings and checking. But in fact, to really get ahead you need Multiple Bank Accounts for Budgeting. Check out my post to see what they are and why you need them.
OK, so you’re ready to budget but have no idea where to start or what tool to use?
I have a copy of my Budgeting Spreadsheet available at no charge – a key step in ensuring you have enough money each month to save for retirement!
It’s a simple, highly customizable, Excel spreadsheet and you can download it quickly and easily FOR FREE!
9 Best Ways to Save for Retirement & Make Your Dreams Come True!
1. You don’t want to count on the Government
- The max benefit anyone can possibly earn from Social Security is a little over $2,600/month.
- That amount could change and if you and you and your spouse are both eligible for the max you might be OK, but what if you aren’t?
- According to last year’s annual report from the Social Security Board of Trustees, Social Security, if left unchecked on its current path, will be out of money by 2034. Where will that leave you? Read more on that at BankRate.
2. You don’t want to just subsist or scrape by
You’ve worked hard all these years and you and your spouse deserve to ENJOY your retirement. I don’t know about you, but my “golden years” won’t consist of ramen noodles and living in a run-down shack.
Thus, it’s crucial to learn about all the best ways to save for retirement.
3. You don’t want to be a burden on your kids
According to AARP, over 4 million adult retirees live with their kids, and that amount has steadily gone up by over 13%!
I LOVE my kids but I want them to enjoy adulthood and start families of their own. Mostly I want them to see me as something that enriches their life; not something that detracts from it.
4. You don’t want to have to keep working
If you want to keep working that’s different from having to work.
And let’s face it; job options & pay diminish when workers hit their mid-60’s. So unless you own the company, you’ll want to have figured out the best ways to save for retirement long before you get there.
5. Invest 15% of your income in mutual funds!
Start early, save often and look for mutual funds with a 10+ year track record of delivering 10% (or more) in returns.
The younger you start the more compound interest works for you! Starting late, save even more (but anything is better than nothing!)
And don’t forget to check out Personal Capital‘s amazing free retirement planning tool; your road-map to financial success!
6. You don’t want to fall into poverty!
The University of Michigan conducted a recent study of retirees between the ages of 65 and 74 and found that almost 10% were living below the poverty line; an almost 2% increase over just a 4 year period.
You can read more on that in this US News Story.
7. You can be more generous!
People who aren’t worried about the light bill can give more; to church, to charity, to your kids or all of the above!
8. You can travel!
There’s a whole lotta world out there and most of us have only seen a small fraction.
With the best ways to save for retirement and some planning, there’s no reason your retirement can’t include seeing a lot of the world and sharing some amazing memories and stories.
9. You get to see your kids more
In my grandparent’s day, kids often tended to live to close to home.
The reality these days is that many of our families are spread across the country or even the globe.
If you can barely afford rice and beans, that trip to Costa Rica twice a year to see your kids probably isn’t in the cards.
What if your retirement is a little different?
Now bear in mind, there are some other variables to retirement.
For instance one of you may retire later than the other as is the case with my wife and I who share a 17 year age gap. Or maybe one or both of you have an employer with a pension.
In those cases, simply do the math as best you can, make sure the older spouse has good term life insurance, and when in doubt, save more rather than less.
You can always spend more, but you can’t spend what you don’t have.
Maybe you plan to delve further into a hobby that generates a small income. Or perhaps you have a small business idea or online business idea that could generate income.
All of those things will affect the amount you need to save or allow you to up the lifestyle when you do retire; all good things!
And while I do want you to take risks and stretch your comfort zone, the less certain that income is, the more planning now ensures your future.
Did I cover all the best ways to save for retirement you were looking for?
In this post, we looked at some of the many ways to save for retirement.
We not only covered the how, but we also explored the why. We did the math to show you what your actual results could look like.
Specifically, though, we explored all the best ways to save for retirement, no matter what age, if you’re starting late, deep in debt or think you’re too broke to save.
The one thing I know is getting started is the key.
The app Trim automatically looks at your monthly bills & spending and then cross-checks that with savings programs almost all vendors have. It’s a GREAT way to get a few extra bucks each month to put towards retirement.
When they match up, you save. They’ll even handle the hassle of canceling memberships you no longer want or renegotiate bills for you like insurance and cable bills.
Just sign up and spend on your Visa card and earn automatic savings back on your statement!
What is preventing you from saving for retirement?
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Photo credits (that aren’t mine):
Ankor Wat Lake View Panorama and Us by Neville Wootton is licensed by Creative Commons 2.0
Laurence and Kimbra by Johnny Silvercloud is licensed by Creative Commons 2.0
While I have years of successful financial & insurance experience and run several million dollar businesses and handled the accounting, P&L and been responsible for the financial assets of them, I am not an accountant or CPA. Like all my posts, my posts are opinions based on experience, observations, research, and mistakes. While I believe all my personal finance posts to be thorough, accurate and well-researched, if you need financial advice, you should seek out a qualified professional in your area.