8 MIN READ
How to Save in Your 20s, 30s, 40s and 50s if You Want to Retire Someday
Articles with titles like “How Much You Should Have Saved for Retirement at Every Age” are super clickbaity and mostly end up being depressing.
Sure, it’s easy for someone who doesn’t know me to say I should have double my salary saved, but they don’t know my salary, what I’m spending, or what I want to be spending in retirement.
And frankly, neither do I.
Retirement isn’t one of those set-it-and-forget-it things. Saving for retirement isn’t hard, but you can’t do all the steps at once — which is great, because that would be pretty overwhelming.
Ways to Save for Retirement: 3 Common Retirement Accounts
First off, let’s not get bogged down by the terminology and acronyms associated with retirement.
There are three foundational definitions you’ll want to know to understand your retirement accounts. Everything else is supplementary.
- 401(k): This is a retirement plan offered by an employer. The name “401(k)” actually refers to the section of the tax code that allows your contributions to be deducted from your paycheck before taxes are taken out.
- IRA: This stands for Individual Retirement Account. The most common types are traditional and Roth, and both have great tax benefits. There is a limit to how much you can contribute every year.
- Taxable account: This is a regular ol’ investment account without the tax benefits of the 401(k) and IRA. What it lacks in tax benefits, it makes up for in flexibility. You can open one with any company and withdraw from it at any age for any purpose with no penalties.
If an Employer Does Not Offer a Retirement Plan, What Might Be Another Way to Save For Retirement?
If your employer doesn’t offer a 401(k), bring up the possibility of adding one. If cost is an issue, companies like SaveDay offer 401(k) plans at no cost to employers and low fees for employees.
If you’re self-employed or you don’t have a 401(k) through your employer, you’re not off the hook. There are several types of retirement accounts you can open, depending on your needs.
How to Calculate What You Need to Save
You don’t need to be stressed about not having double your salary saved but how much should you have?
Ask yourself questions like:
- Where do you want to retire?
- Do you want to pay off your house?
- How frequently or far do you want to travel?
All these things and more will impact what you need to have saved for retirement.
Know that your plans will change, and inflation will make the things you want to do 3% to 4% more expensive every year on average. But it’s important to monitor your plan to ensure you’re on track.
How to Save for Retirement at Every Age
You don’t have to have your entire life planned to start saving for retirement.
You actually don’t have to have anything planned or know much at all about the subject. But there is a rule you can use to monitor your savings and to gauge your progress as you figure out where you’re going.
It’s called the 4% rule. The rule states that if you can live off 4% of your current retirement savings in a one-year span, your savings will likely last for at least 30 years. So if at any time you multiply your investment savings by 0.04 and you can live off that amount for the first year of retirement, you’ve arrived!
The 4% rule isn’t set in stone; it doesn’t mean you’ll be living off that savings forever, but it’s considered a safe withdrawal rate by most professionals and is a good way to monitor your progress.
How to Save for Retirement in Your 20s
The most important thing to do in your 20s is to just start.
The math doesn’t lie; you can plug $100,000 into a retirement calculator invested over different time spans, and the longest span of time will always produce the highest earnings. Starting with a zero balance and using 6% as an interest rate:
- $417 a month for 20 years will grow to $184,000.
- $278 a month for 30 years will grow to $263,000.
- $208 a month for 40 years will grow to $386,000.
Compound interest is bae.
Even if it’s in small amounts, you should start saving for retirement in your 20s. Make it easy on yourself by automating your savings. If your employer offers a 401(k) match, sign up to deduct from your paycheck at least as much as the company matches.
If you don’t have a 401(k), open a Roth IRA online through a mutual fund company like Vanguard, Fidelity or Schwab and enroll in automatic contributions. Roth IRAs are amazing, but they do have income limits. It’s best to start one when you have a lower income.
And who has a lower income than someone in their 20s, amiright?
Also, the government will literally pay you to invest when your income is low. If you’re below a certain income, the Saver’s Credit allows you to claim between 10% and 50% of your IRA or 401(k) contributions, up to $2,000 per individual.
How to Save for Retirement in Your 30s
Now that you have a few years of investing under your belt, it’s time to start optimizing your retirement savings.
Your next smartest move is paying off your debt. All the interest and fees you’re paying eat away at the amount you’re able to put toward retirement. And now that you’ve probably settled in a career and are getting raises, it’s time to double down and eliminate that debt.
If you didn’t open one in your 20s, open a traditional or Roth IRA and start maxing it out. As of 2018, the annual maximum you can contribute if you’re under age 50 is $5,500.
Because IRAs have a low limit and you never get those years back, start maxing out your IRA as soon as possible. The type of IRA you contribute to is up to you.
A traditional IRA lowers your taxable income, so if you’re within $5,500 of the next-lowest tax bracket, you can use a traditional IRA to slide in there. If you’re content with your tax bracket, you might like a Roth IRA, which won’t lower your tax bracket but grows tax-free.
A final thing to consider in your 30s is contributing to a health savings account, or HSA.
If you’re on a high-deductible health plan, you can contribute to an HSA. Contributions are deducted from your paycheck before taxes are taken out, and account balances above $2,000 can be invested just like they would be in a retirement account.
Your HSA can be used for any qualified medical expense at any time, and once you turn 65, funds can be withdrawn for any expense without penalty.
How to Save for Retirement in Your 40s
If you’re in your 40s, there’s a good chance you have kids, a house and a stable position in your company. You might start thinking about getting a new car, upgrading the kitchen or maybe getting that boat you’ve been eyeing for the past 10 years.
Now is not the time to start giving in to lifestyle inflation. You’re at a critical time when your investment returns are ideally going to start outpacing your contributions every month, and it’s time to capitalize on that!
It’s also time to figure out what you want to spend in retirement. Now that you have perspective on life, retirement and investing, you can plan a more reasonable retirement budget and figure out how long it’ll realistically take you to get there.
If your plan includes increasing your savings rate, start working toward maxing out your 401(k). As of 2018, the maximum annual contribution you can make is $18,500. If you don’t have a 401(k), open a taxable account and contribute there. You can usually do it at the same place you have your IRA.
How to Save for Retirement in Your 50s
At age 50, you can take advantage of catch-up contributions to your 401(k) and IRA — even though you won’t need to, because you’ve been on track for decades.
As of 2018, you can put an additional $1,000 per year in your IRA and $6,000 per year in your 401(k) once you reach 50.
Annual Contribution Limits
|Under 50||50 and older|
Finally, it’s time to get a financial adviser. Most people who try to start with getting a financial adviser get frustrated when they pick the wrong one, because they didn’t know what they wanted in the first place.It’s also time to start thinking about Social Security. The longer you wait to collect, the more you’ll get each month. Look back at the 4% rule, and plan when you want to start collecting.
Now that you have a significant amount invested and an idea of what you want to do with it, it’s time to find an adviser with expertise in how to do that. They can help you optimize the final years of your contributions, protect what you already have and make a withdrawal plan that’s more accurate than the 4% rule.
This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can't personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.
Jen Smith is a staff writer at The Penny Hoarder. She gives money-saving and debt payoff tips on Instagram at @savingwithspunk.