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How to Save for Retirement

By Pam O’Brien · August 22, 2023 · 15 minute read

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How to Save for Retirement

Between paying for your regular expenses including groceries, rent or mortgage, student loans, and bills, it can seem nearly impossible to find a few dollars left over for saving for retirement — especially when that might be decades away. However, building up a nest egg isn’t just important, it’s urgent. The sooner you start, the more financially secure you should be by the time retirement rolls around.

So, how to save for retirement? Finding a solid retirement plan to suit your needs may be easier than you think. Here are 10 ways to save for retirement to help make those golden years feel, well, golden.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.


money management guide for beginners

Assess Your Retirement Goals and Needs

When it comes to saving for retirement, first do an inventory of your current financial situation. This includes your income, savings, and investments, as well as your expenses and debts. That way you’ll know how much you have now.

Next, figure out what you want your retirement to look like. Are you wondering how to retire early? Do you plan to travel? Move to a different location? Pursue hobbies like tennis, golf, or biking? Go back to school? Start a business?

You may not be able to answer these questions quickly or easily, but it’s important to think about them to determine your retirement goals. Deciding what you want your lifestyle to look like is key because it will affect how much money you’ll need for retirement saving.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

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Determine How Much You’ll Need to Retire

Now the big question: How much money will it take for you to retire comfortably? You may also be wondering, when can I retire? There are several retirement savings formulas that can help you estimate the amount of your nest egg. And there are various calculators that can help generate an estimate as well.

While using a ballpark figure may not sound scientific, it’s a good exercise that can help lay the foundation for the amount you want to save. And it may inspire you to save more, or rethink your investment strategy thus far.

As an example, you can use the following basic formula to gauge the amount you might need to save, assuming your retirement expenses are similar to your present ones. Start with your current annual income, subtract your estimated annual Social Security benefits, and divide by 0.04.

Example

Let’s say your income today is $100,000, and you went on the Social Security website using your MySSA account (the digital dashboard for benefits) to find out what your monthly benefits are likely to be when you retire: $2,000 per month, or $24,000 per year.

$100,000 – $24,000 = $76,000 / 0.04 = $1.9 million

That’s the target amount of retirement savings you would need, theoretically, to cover your expenses based on current levels. Bear in mind, however, that you may not need to replace 100% of your current income, as your expenses in retirement could be lower. And you may even be contemplating working after retirement. But this is one way to start doing the math.

10 Ways to Save For Retirement

So, how to save money for retirement? Consider the following 10 options part of your retirement savings toolkit.

1. Leverage the Power of Time

Giving your money as much time to grow as you possibly can is one of the most important ways to boost retirement savings. The reason: Growth compounds over time.

You may have heard of compound interest, sometimes called the Eighth Wonder of the World; and while investment returns are different (they’re more volatile for one thing), the underlying concept is the same.

Let’s say you invest $500 in a mutual fund in your retirement account, and in a year the fund gained 5%. Now you would have $525 (minus any investment or account fees). While there are no guarantees that the money would continue to gain 5% every year — investments can also lose money — historically, the market has returned about 9% per year on average.

That might mean 0% one year, 10% another year, 3% the year after, and so on. But over time your principal would likely continue to grow, and the earnings on that principal would also grow. That’s compound growth.

2. Create and Stick to a Budget

Another important step in saving for retirement is to create a budget and stick to it, forever. Calculating your own monthly budget can be simple — just follow these steps.

•   Gather your documents. Gather up all your bills including credit cards, loans, mortgage or rent, so that you can document every penny coming out of your pocket each month.

•   List all of your income. Find your pay stubs and add up any extra cash you make on the side using your after-tax take-home pay.

•   List all of your current savings. From here, you can see how far you have to go until you reach your retirement goals.

•   Calculate your retirement spending. Decide how much money you need to live comfortably in retirement so that you can establish a retirement budget. If you’re unsure of what your ideal retirement number is, plug your numbers into the formula mentioned above, or use a retirement calculator to get a better idea of what your retirement budget will be.

•   Adjust accordingly. Every few months take a look at your budget and make sure you’re staying on track. If a new bill comes up, an expensive life event occurs, or if you gain new income, adjust your budgets and keep saving what you can.

3. Take Advantage of Employer-Sponsored Retirement Plans

Preparing for retirement should begin the moment you start your first job — or any job that offers a company retirement plan. There are many advantages to contributing to a 401(k) program (if you work at a for-profit company) or a 403(b) plan (if you work for a nonprofit), or a 457(b) plan (if you work for the government).

In many cases, your employer can automatically deduct your contributions from your paycheck, so you don’t have to think about it. This can help you save more, effortlessly. And in some cases your employer may offer you a matching contribution: e.g. up to 3% of the amount you save.

Starting a 401(k) savings program early in life can really add up in the future thanks to compound growth over time. In addition, starting earlier can help your portfolio weather changes in the market.

On the other hand, if you happen to start your retirement savings plan later in life, you can always take advantage of catch-up contributions that go beyond the 2024 annual contribution limit of $23,000 and 2023 annual contribution limit of $22,500. Individuals over the age of 50 are allowed to contribute an additional $7,500 a year to a 401(k), to help them save just a bit more before hitting retirement age.

If you have a 403(b) retirement plan, it’s similar to a 401(k) in terms of the contribution limit and automatic deductions from your paycheck. Your employer may or may not match your contributions. However, the range of investment options you have to choose from may be more limited than those offered in a 401(k).

With a 457(b) plan, the contribution limit is similar to that of a 403(b). But employers don’t have to provide matching contributions for a 457(b) plan, and again, the investment options may be narrower than the options in a 401(k).

4. Add an Individual Retirement Account (IRA) to the Mix

Another strategy for how to save for retirement, especially if you’re one of the many freelancers or contract workers in the American workforce, is to open an IRA.

Like a 401(k), an IRA allows you to put away money for your retirement. However, for 2024 the maximum contribution you can put into your IRA caps at $7,000 ($8,000 for those over 50). For 2023 the maximum contribution you can put into your IRA caps at $6,500 ($7,500 for those over 50).

Both the traditional IRA and 401(k) offer tax-deductible contributions. Roth IRAs are another option: With a Roth IRA, your contributions are taxed, which means your withdrawals in retirement will be tax free.

You control your IRA, not a larger company, so you can decide which financial institution you want to go with, how much you want to contribute each month, how to invest your money, and if you want to go Roth or traditional.

For those who can afford to invest money in both an IRA and a 401(k), and who meet the necessary criteria, that’s also an option that can boost retirement savings.


💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

5. Deal With Debt

Should you save for retirement or pay off debt? And, more specifically, if you’re dealing with student loans and facing the resumption of federal student loan payments on October 1, 2023, you may be wondering, should I save for retirement or pay off student loans? That is the financial conundrum for modern times. A good solution to this problem is to do both.

Just as it can be helpful to create a budget and stick to it, it can be helpful to create a loan repayment plan as well. Add those payments to your monthly budgeting expenses and if you still have dollars left over after accounting for all your bills, start socking that away for retirement.

If your student loan debt feels out of control, as it does for many Americans, you may want to look into student loan refinancing. By refinancing your student loan, you could significantly lower your interest rate and potentially pay off your debt faster. Once the loan is paid off, you will be able to reallocate that money to save for retirement.

6. Add Income With a Side Hustle

Working a side gig in your spare time can seriously pay off in the future, especially when you consider that the average side hustle can bring in several hundred dollars a month, according to a recent survey by Bankrate.

There are several things to consider when thinking of adding an extra job to your résumé, including evaluating what you’re willing to give up in order to make time for more work. But, if you can put your skills to use — such as copy editing, photography, design, or consulting — you can think about this as less of a side hustle and more of a way to hone your client list.

A side hustle should be one way to save for retirement that you’ll enjoy doing. And it could help if you find yourself dealing with a higher cost of living and retirement at some point.

7. Include Real Estate in Your Portfolio

There’s no one best way to save for retirement — sometimes a multi-pronged approach can work best. If you already have a budget and an emergency savings account, and you’re maxing out your contributions to your 401(k), 403(b), 457, or IRA, then adding real estate could be another way to diversify your portfolio.

In general, it’s good to not think of a primary residence as an investment. (Though someday, you could decide to rent the home for income, live in it as a paid-off asset, or sell it to cash in.) Instead, to dip your toe into real estate investing without taking out a second mortgage, you can consider a real estate investment trust, or REIT.

REITs pool investor assets to purchase or finance a portfolio of properties such as shopping malls, hospitals, or office parks.

A REIT essentially allows investors to own a slice without having to buy the whole pie. There are, of course, risks that come along with REITs — in addition to typical market risks, REITs are also significantly impacted by real estate prices. They can also potentially generate a negative return when interest rates rise.

8. Automate Your Savings

Setting up automated savings accounts takes the thought and effort out of saving your money because it happens automatically. It could also help you hit your financial goals faster, because you don’t have to decide to save (or agonize over giving in to a spending temptation) and then do the manual work of putting the money into an account. It just happens like clockwork.

Enrolling in a 401(k), 403(b), or 457 at work is one way to automate savings for retirement. Another way to do it is to set up direct deposit for your paychecks. You could even choose to have a portion of your pay deposited into a high-interest savings account to help increase your returns.

9. Downsize and Cut Costs

To help save more and spend less, pull out that monthly budget you created. When you look at your current bills vs. income, how much is left over for retirement savings? Are there areas you can be spending less, such as getting rid of an expensive gym membership or streaming service, dialing back your takeout habit, or shopping a bit less?

This is when you need to be very honest with yourself and decide what you’re willing to give up to help you hit that target retirement number. Finding little ways to save for retirement can have a big impact down the road.

10. Take Advantage of Catch-Up Contributions

If you’re getting closer to retirement and you haven’t started saving yet, it’s not too late! In fact, the government allows catch-up contributions for those over the age of 50.

A catch-up contribution is a contribution to a retirement savings account that is made beyond the regular contribution maximum. Catch-up contributions can be made on either a pre-tax or after-tax basis.

In 2023, catch-up contributions of up to $7,500 are permitted on a 401(k), 403(b), or 457(b).

Common Retirement Savings Mistakes to Avoid

These are some of the biggest retirement pitfalls to watch out for.

•   Not having a retirement plan in place. Neglecting to make any kind of plan means you’ll likely be unprepared for retirement and won’t have enough money for your golden years.

•   Failing to take advantage of employer-sponsored plans. If you haven’t enrolled in one of these plans, you’re potentially leaving free money on the table. Sign up for a 401(k), 403(b), or 457(b) to tap into employer-matching contributions, when available.

•   Underestimating how much money you’ll need for retirement. Experts advise having enough savings to last you for 25 to 30 years after you retire.

•   Accumulating too much debt. Try to avoid taking on too much debt as you get closer to retirement. And work on paying down the debt you do have so you won’t be saddled with it when you retire.

•   Taking Social Security too early. It’s possible to file for Social Security at age 62, but the longer you wait (up until age 70), the higher your benefit will be — approximately 32% higher, in fact.

The Takeaway

It’s never too early to start planning for retirement. And there are many ways to start saving, and set up a system so that you’re saving steadily over time. You can contribute to a retirement plan that your employer offers; you can set up your own retirement plan (e.g. an IRA); and you can choose your own investments.

The most important thing to remember is that you have more control than you think. While your retirement vision may change over time, starting to save and invest your nest egg now will give you a head start.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

What is the fastest way to save for retirement?

Take a two-pronged approach: First, invest as much as you can in your employer-sponsored retirement account like a 401(k). You’ll likely get some matching contributions from your employer, as well as tax advantages. You can invest up to $23,000 in a 401(k) in 2024 and $22,500 in a 401(k) in 2023, plus an extra $7,500 if you are 50 or older.

Second, if you qualify you can also set up and invest in a Roth IRA. You can contribute $7,000 in a Roth IRA in 2024 and $6,500 in a Roth IRA in 2023 ($7,500 if you’re 50 or older).

Having these two accounts could really help you start building up your retirement savings.

How much do I need to save for retirement?

To estimate how much you need to save for retirement, use this retirement savings formula: Start with your current income, subtract your estimated Social Security benefits, and divide by 0.04. That’s the approximate amount of total retirement savings you’ll need, based on your current income and expenses. You can try other calculators or formulas that might indicate that you’ll need less in retirement. It all depends.

Experts advise having enough savings for 25 to 30 years’ worth of retirement.

How do I save for retirement without a 401(k)?

If you don’t have a 401(k), you can set up another type of tax-advantaged account for retirement, such as a traditional IRA and/or a Roth IRA. With a traditional IRA, the money grows tax free and is taxed when you withdraw it during retirement.

A Roth IRA, on the other hand, doesn’t provide a tax break upfront, but the funds you withdraw after age 59 ½ are tax free, as long as you’ve had the Roth IRA account for at least five years. You can contribute up to $7,000 to both types of IRAs for 2024 and $6,500 to both types of IRAs for 2023 ($7,500 if you’re 50 or older).

What is the average monthly income for a person who is retired?

The average monthly retirement income for a person who is retired, adjusted for inflation, is $4,381, according to a 2022 U.S. Census report.

How do taxes affect retirement income?

You will need to pay taxes on any withdrawals you make from tax-deferred investments like a 401(k) or traditional IRA. You will also have to pay federal taxes on a pension, if you have one. At the state level, some states tax pensions and some don’t. Additionally, you might have to pay tax on a portion of your Social Security benefits, depending on your overall income.

How can I supplement my income in retirement?

In addition to any retirement plans and pensions you have plus Social Security, you can supplement your retirement income with such strategies as: making investments generally considered to be safe, like investing in CDs (certificate of deposit), getting a part-time job or starting a small business, or renting out any additional property you might own, such as a vacation cabin, to make some extra money.


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