Retirement Savings: Strategies by Age

What we'll cover:

• In your 20s: Aim to save 10-15% of your income, pay down debt, budget and live within your means.
  
• In your 30s: Keep up those good habits, avoid lifestyle creep and think about other expenses.
• In your 40s: Prioritize saving for yourself, picture what retirement looks like.
• In your 50s+: Nail down the details and think about how you’ll turn your savings into income.

Saving for retirement. We all know we should make it a priority and that the earlier we start the better.

The challenge is that saving for the future can feel so distant – life gets in the way, so saving takes a back seat. But no matter your age, life stage, or the many things you’re juggling, saving for your future should always be a top priority. And just because it’s important doesn’t mean it needs to be difficult. A lot of the fundamentals covered in this article are simple and more importantly, achievable.

With a little math and a lot of discipline, you can set yourself up for a comfortable future – one that eventually won’t feel so distant.

Here are some retirement savings strategies for different age groups broken down by things to do, things to know about and some bonus points if you’re up for the challenge.

A quick note: This is a fairly comprehensive list and there may be times where you feel like you’re behind or aren’t doing enough. That’s okay. The main thing is to do what you can given your circumstances. Another note: This is general guidance. When it comes to your money and investing, it’s always a good idea to do your own research and consult a financial advisor if you have one.

Start here: Determine how much you’ll need for retirement

This is probably the hardest and most daunting part because there are so many unknowns. You don’t know how long you’ll live. You don’t necessarily know when you’ll retire – even if you have a target age, it may come sooner or later than you think.

You don’t know what sort of healthcare costs you or your loved ones might incur. Your location and lifestyle will impact this number. Point is: you just don’t know, and not knowing is scary.

So what do you do? There are several retirement planning calculators out there that will try and factor in some of the variables (retirement location, lifestyle, wage inflation, etc.). There’s also a basic rule of thumb that you’ll need 80 – 100% of your pre-retirement income each year once you retire. In other words, once you retire, you’ll need to have access to 80-100% of what you made immediately prior to retiring.

Going with this rule, let’s say you retire at 65 with a $150,000 annual income. For this example, let’s use 90% as the percentage of your income you’ll need in retirement. Take that $150,000, multiply it by 0.90, and $135,000 is the annual income you’ll need in retirement. That’s well over $3 million if you live to 90.

So not only is calculating this number scary, but once you get to a number, that number makes your stomach churn. But keep reading, because you don’t want to just ignore the big, scary costs of retirement.

Do some research, crunch your own numbers and figure out a ballpark goal. Even a range is fine, but having some real, actual numbers is a critical first step. Whatever you do, don’t just wing it and hope that you’re saving enough.

• Traditional IRA – This is an individual retirement account (hence, IRA) that offers tax advantages. Your contributions may be tax-deductible (depending on certain criteria), and your money grows tax-deferred until you withdraw it in retirement. The maximum annual contribution limit for IRAs is $6,000 in 2022 and $6,500 in 2023.
• Roth IRA – This is also an IRA (with the same $6,000 contribution limit), but you pay taxes on your contributions now and your withdrawals in retirement are tax-free.
• If you’re a business owner or work for yourself, you may want to look into a SEP IRA. The contribution limits for these are usually higher.

Things to do:

• Revisit your budget with big life changes – marriage, mortgage, kids – and adjust accordingly.
• Avoid lifestyle inflation and getting into debt.
• Make sure you’ve built a solid emergency fund, and keep adding to it.
• Ramp up your 401(k) contributions, ideally to the maximum allowed. The maximum is $20,500 for 2022 and $22,500 for 2023.
• If you can’t contribute the maximum, gradually start to increase your contributions over time (look into auto increases). Even small increases can make a big difference.
• If you’re already contributing the maximum your 401(k), consider an IRA (more on those above).
• If you change jobs, don’t cash out of your 401(k) – you’ll pay hefty fees. Consider rolling a 401(k) over to an IRA instead.

Things to know about: 

• 529 plans. These can be a good option for saving for your kids’ college education. 529s are college savings plans that typically come with tax-advantages. The money you put in grows tax-free and can potentially help soften the blow of an expensive education. Do some research on the plan details and contribution limits, which vary by state.
• IRAs. These can be an additional way to add to your retirement savings if you’re already maxing out your 401(k).

Bonus point:

• Explore other ways to make your money work for you. If you’re maxing out your 401(k) and IRA, consider putting additional funds into savings accounts – such as a high-yield savings account or a certificate of deposit – or into a traditional brokerage account. Both options could help your money grow, but make sure you pick the right option based on what you want that money to do (that is, financial goals).

Things to do:

• Continue to do all the things you did in your 30s – especially staying out of debt.
• Don’t let new costs, like paying for your kids’ college education, be an excuse for borrowing from your 401(k).
• Take a broad view of your overall financial picture. Look beyond your current 401(k) to other investments or retirement savings from previous employers.
• Start to think about what your retirement looks like – consider things like your health, where you want to live, what type of support you plan on providing for your family, and how you want to spend your time. If working longer is part of your plan, think about how that impacts your finances.

Things to know about: 

• IRS rules. These are inherently complicated, but it helps to know some of the basic rules and tax implications that apply to your retirement plans.
• Life and disability insurance. Both can help financially protect your family in the event that something happens to you and you are no longer able to provide for them. Make sure you understand the details of your plan and that you’re appropriately covered.
• Beneficiaries. You can have beneficiaries for the multiple plans you have in place – your 401(k), IRA, life insurance, etc. Know the rules for each, and make sure you have your beneficiaries listed.

Bonus points:

• Consider opening a Health Savings Account (HSA). HSAs are tax-advantage savings accounts that can help cover qualified medical costs.
• If you’re already maxing out your own retirement contributions, think about setting up an IRA for your kids. As long as your child has earned income (be it babysitting or lifeguarding), either you or your child can contribute to that IRA. Compound interest can do wonders here.