Wondering how to save for retirement? Here’s everything you should know

Retirement may feel like a long ways away, but the sooner you start saving, the greater the reward will be. CBS reported that 1 in 5 Americans aren’t saving, and half feel as though they are falling behind in setting money aside. Meanwhile, in August 2023, the average savings amount Americans reported necessary for retirement was $1.8 million.

How much should I save for retirement?

CEO of Passport Wealth Management Dan Tobias said the first thing to ask yourself when planning how much to save for retirement is assessing what lifestyle you intend on living, per Bank Rate.

Creator of Whiteboard Finance Marko Zlatic explained how to assess if what you currently have saved is enough. He suggested the 4% rule. The stock market typically does 6%-10% in returns yearly, so if you take 4%-5% of your savings out of the stock market, it should be replenished by the returns in the market. Ideally, you should be able to live for a year off of 4% of your retirement savings.

How much should I have saved for retirement by now?

Fidelity laid out some guidelines for how much to have saved by specific ages.

• By 30, save 1x your annual salary.

• By 40, save 3x your annual salary.

• By 50, save 6x your annual salary.

• By 60, save 8x your annual salary.

• By 67, save 10x your annual salary.

These rates may vary depending on your desired standard of living during retirement or the age you want to retire at.

What are retirement savings accounts?

Retirement savings accounts are financial accounts that offer tax advantages and investment options that help people stay financially afloat after they retire. IRA, Roth IRA, SEP IRA, 401(k), Roth 401(k), 403(b), 457(b) and GIA are all kinds of retirement savings accounts.

Many employers offer retirement plans and will match what you save to a certain percent, according to Vanguard.

What is a 401(k) employer match?

Some employers offer to match your contributions to your 401(k) to a certain percentage in order to incentivize and attract employees. Alternative retirement plans like 403(b)s work the same. Over 85% of 401(k) plans serviced by Fidelity include some form of employer contribution, per Fidelity.

What is a 401(k)?

Traditional 401(k):

401(k)s are typically sponsored by employers and are savings accounts designed to help people prepare for retirement. Most employers offer 401(k)s to their employees. Earnings to a 401(k) grow tax deferred, meaning you only pay tax on earnings when you withdraw. However, if withdrawn before the age of 60, there is a 10% penalty.

Do I have to pay taxes on money in a 401(k)?

Traditional 401(k)s lower taxable income. For example, if you earn $80,000 yearly and contribute 15K to your 401K, you only need to pay taxes on $65,000. Although you don’t have to pay taxes while your money is in a 401(k), you must pay taxes upon withdrawal. It is taxed at your income tax rate when withdrawn, per the IRS.

How much can I put into a 401(k)?

The yearly contribution limit in 2023 for ages 49 and younger is $22,500, and $30,000 for ages 50 or older, according to Forbes. The Roth 401(k) contribution limit is the same, according to the IRS.

What age do I have to withdraw money from my 401(k) by?

As of March 2023, you must begin withdrawing from your 401(k) annually by the age 72, according to the IRS. Withdrawal at this age is required for Roth 401(k)s as well. However, starting in 2024, there will be no withdrawal requirement for either Roth 401(k)s or Roth IRA accounts, per the IRS.

What does ‘Roth’ mean regarding IRAs and 401(k)s?

“Roth” refers to up-front tax payments when contributing money to your savings account. Essentially, you pay taxes now so you don’t have to later.

Ramsey Solutions compares a traditional 401(k) account to a Roth 401(k) account.

• “The traditional 401(k) involves tax-deferred contributions — meaning you’ll pay taxes every time you withdraw money, including on your growth and employer contributions.”

• “The Roth 401(k) comes with financial and emotional advantages. Tax-free withdrawals mean your savings stay relatively unaffected by future tax bracket adjustments (since it’s already been taxed), and you’ll feel like you have access to more of your hard-earned dollars.”

The term “Roth” comes from Sen. William Roth, who proposed the legislation for individual retirement accounts in 1999, according to the Senate.

What is an IRA?

An individual retirement account can be opened by anyone, while a 401(k) is usually accessed through an employer. Both traditional and Roth IRAs allow earnings to grow tax-free through compounding. However, they offer tax benefits at different stages: traditional IRAs (and 401(k)s) give tax breaks at the time of the contribution, while Roth IRAs provide tax-free withdrawals in retirement. In contrast, taxable investment accounts require payment of annual taxes on profits, according to TD Ameritrade.

As of 2023, the total contribution to your traditional IRAs and Roth IRAs cannot exceed $6,500 (under age 50) or $7,500 (50 or older) per year, per the IRS.

IRAs offer more choices in what you invest in, while 401(k)s are limited to what your company offers.

Traditional IRAs vs Roth IRAs

Bank Rate specified the difference between Roth IRAs and traditional IRAs as “taxes and timing.”

Traditional IRAs delay taxing until withdrawal, while Roth IRAs require taxing upon contribution. If your tax bracket is significantly higher upon withdrawal than it was when you contributed the money, a Roth IRA account will save you the most money.

Bank Rate says Roth IRAs’ “annual contribution limits are the same as a traditional IRA. However, there is no timestamp for when you must make those withdrawals. You can wait longer to access the cash, and if you wanted, you could leave the money in the Roth IRA forever and pass the money on in your estate plans.”