A Guide to Saving for Retirement

Unless you’re fortunate enough to work in a field where there is a clear exit strategy with a pension and a golf course waiting for you after 30 years, retirement may seem like a distant and nebulous goal. 

As with most things in life, goals that you can’t visualize are difficult — if not impossible — to plan for. So it comes as no surprise that many people go quietly into their golden years without a real plan in place about how they’ll fund their retirement. In fact, 40% of older Americans now rely solely on Social Security benefits for retirement income.

You can avoid this fate by planning ahead and starting now. This article explains exactly how to make that happen.

How to form a retirement plan

  1. Conduct a personal financial audit
  2. Invest for retirement
  3. Save for retirement
  4. Stay the course
  5. Start a side hustle

In short, a retirement plan is an exit strategy from your normal working life. It’s a roadmap to get to a point where you can start living life on your own terms. And keep in mind that it doesn’t have to mean you go cold turkey on work. You could transition to a bridge job, where you work fewer hours or for less money but you’re doing something you truly love.

Most people associate retirement with a specific age. However, retirement has little to do with age apart from when certain funds become available to you, which I’ll touch on shortly. 

At this point, you should have a basic idea of when you want to retire in life, and how much you want to have in the bank. 

The next step is to put a plan into motion.

1. Conduct a personal financial audit 

Before you do anything, take some time to conduct a personal financial audit. Figure out where all of your money is and what your net worth is (i.e., the amount that you own versus what you owe). 

If you have been working for several years, it’s possible that you have a significant amount of money stashed away in the bank. Or you may not. It could just be a matter of organizing your funds and allocating them into the right accounts. 

Now is the time to check in on your 401(k) to see how much you have accumulated, and how the account is performing. You may be pleasantly surprised at what you find.

If you’re just starting out in your career, this is a great time to assess your options and get started on the right track.

2. Invest for retirement

The next step is to put money away for tax-free or tax-deferred growth so that you can build a nest egg. This is going to be your primary pool of money that you draw from when you retire. 

If you are young, best practices suggest an asset allocation that is more focused on high-growth equities, and something like the Vanguard Total Stock Market Index Fund (VTSAX) can get you instant diversification across a number of stocks and industries. As you approach retirement, many people tend to shift their assets toward more stable investments (e.g., bonds). 

When looking at your investment accounts, your options include taxable and tax-advantaged. Here’s the difference between the two types.

Taxable vs. tax-advantaged accounts

Taxable accounts offer no tax protection for investors. For example, brokerage accounts enable you to purchase a variety of stocks, bonds, index funds, exchange-traded funds (ETFs), and mutual funds, but you’ll have to pay income taxes on any gains or dividend distributions that you take. 

On the other hand, tax-advantaged accounts can protect you from having to pay taxes upfront on gains that you make through investments. You can benefit from tax-deferred or tax-free growth, in combination with compound interest, which maximizes the growth of your funds in the stock market during your prime earning years.

Types of tax-advantaged retirement accounts

Individual retirement account (IRA)

One of the most common types of tax-advantaged retirement accounts today is an individual retirement account (IRA), which you can easily set up through a brokerage firm like Schwab or Fidelity. 

There are three common types of IRAs to choose from.

Traditional IRA

A traditional IRA allows for tax-deductible deposits and tax-deferred growth while the money is in your retirement account. 

Upon retirement age, the IRS treats your disbursements as ordinary income, which means you have to pay income taxes on them. A traditional IRA is ideal for investors who anticipate being in a lower tax bracket when they retire. 

Roth IRA

A Roth IRA works a bit differently. With a Roth IRA, you pay taxes upfront which eliminates an immediate tax deduction. However, the money then grows tax-free in your account until retirement age, and you won’t have to pay taxes when you take the money out.

Consider a Roth IRA if you think you’ll be in a higher tax bracket at retirement age. 

Both traditional and Roth IRAs have a combined annual contribution limit of $6,000 for tax year 2021.


If you’re self-employed and want to set aside more money for retirement, look into a simplified employee pension account (SEP IRA). Under a SEP IRA, you can deposit up to $58,000 for tax year 2021.


Another common type of retirement account to consider is a 401(k), which you can access through an employer-sponsored plan. 

A 401(k) can provide tax-deferred or tax-free growth just like an IRA, and it has a higher contribution limit at $19,500 for tax year 2021. Plus, employers often provide matches for 401(k), offering a way to make more money from your job. 

Traditional 401(k) 

With a traditional 401(k), you’ll make contributions using pre-tax dollars. Just like with a traditional IRA, you’ll receive an immediate tax break and tax-deferred growth until retirement. 

Roth 401(k)

Likewise, a Roth IRA lets you make contributions using after-tax dollars, meaning you can access tax-free growth and avoid paying taxes down the line. 

How 401(k) rollovers work

Chances are you’re not going to work for the same employer forever. Millennials today generally aren’t reluctant to switch jobs when a better opportunity arises, and so you might work several jobs over the course of your career. 

When you leave a company and have a 401(k) through that organization, you’ll usually have the option to either keep your account open or conduct a 401(k) rollover. 

A 401(k) rollover involves transferring a 401(k) into either a new plan or into an IRA. The IRS gives you 60 days to transfer the money into a new tax-advantaged account. 

TIP:Consider selecting a direct rollover, instead of an indirect one. With a direct rollover, your 401(k) provider automatically transfers the money into a new account without requiring your involvement. If you do an indirect transfer, the company may withhold 20% for taxes — and you’ll have to come up with the remaining balance or risk losing your tax-advantaged status. It’s much easier and more cost-effective to do a direct rollover.

Alternative tax-advantaged accounts to consider 

The majority of investors choose to set up IRAs and 401(k) plans. However, there are other types of accounts that you can use for tax-advantaged retirement growth. 

Here are a few of them: 

Life insurance: Some life insurance policies provide more than just a death benefit, enabling investors to maximize tax-deferred growth.

If you have a family, life insurance is important. Talk to an insurance agent about how you can set up a life insurance policy that can protect your beneficiaries while also allowing you to put your money away for long-term growth. 

Just keep in mind that these types of plans often require you to cash out at a certain point before you die. If you wait until after you die to cash out, the company may absorb your money. Make sure you’re up to speed on all of the rules that come along with your life insurance policy and consider having an attorney review them to explain the fine print. 

On the whole, I recommend putting most of your retirement funds in long-term stock market investments rather than into life insurance accounts.

HSA: If you have a high deductible health plan (HDHP), you may be eligible for a health savings account (HSA). This is a type of tax-advantaged medical savings account that you can use to pay for healthcare expenses. Money that you deposit into an HSA isn’t taxable, even when you make distributions for qualified expenses. 

One of the best parts about HSA is that when you reach age 65, you can take money out of your HSA for any reason. It doesn’t have to be for medical purposes, meaning the account can act as an IRA.

529 education plan: A 529 education plan is a type of tax-advantaged plan you can use to set aside money to fund your kids’ education. A 529 plan provides tax-deferred growth, and the money isn’t taxable at withdrawal.

529 plans are flexible, so even if your child doesn’t go to college you can either transfer the funds to another family member to pay for school, or you can pay a 10% penalty and access the money yourself. 

Just keep in mind that colleges have visibility into 529 savings, meaning they will consider it when offering you financial aid. For this reason, many parents choose to provide sheltered plans to protect themselves during the FAFSA process and receive more funding.

3. Save for retirement 

The above-mentioned strategies are mostly for investing. It’s also important to put money aside for secure growth. 

First and foremost, the stock market is volatile. You could potentially make bad investments and lose money in the stock market. Investing can be hard, especially if you don’t know what you’re doing. People who try to time the market or think of stocks as lottery tickets instead of a small ownership stake in a company they believe in tend to lose more money than they make.

What’s more, if you’re planning to retire early in your 40s or 50s you’ll have a long way to go before you can access your tax-advantaged accounts or even Social Security, which kicks in at age 62. 

Here are some options for long-term savings. 

High yield savings account (HYSA)

An HYSA is similar to a traditional savings account. This type of account usually comes with an interest rate that’s significantly higher than the national average.

HYSAs are flexible, meaning you can access them at any time without having to pay taxes on withdrawal or penalties. However, you’ll still have to pay taxes on any interest gains that you make through an HYSA. 

The major downsides to using HYSAs is they typically don’t come with a debit card or ATM access, they have variable rates and can fluctuate without notice, and they don’t always come with robust customer support. Still, they are a great alternative to the low rates that banks typically offer for savings accounts. 

Certificates of deposit (CDs)

If you don’t like the idea of fluctuating interest rates for an HYSA, you could look into setting up CDs for your retirement savings. 

By setting up a CD, you can lock in a fixed interest rate for a set period of time. CDs can be as short as a month, or as long as 10 years or more. You can also set up CD ladders, to roll accounts into different plans at various intervals.

Just use caution when setting up CDs, because you won’t be able to access your money when it’s tied up. If you try to access your money while it’s locked into a CD, you could face a penalty that could wipe out interest gains.

4. Stay the course 

Planning for retirement isn’t easy. It could require a lifestyle adjustment that many young people are simply not prepared to handle — especially those on fixed or limited salaries, who aren’t earning very much.

For this reason, it’s important to get organized before starting an aggressive retirement plan so you don’t falter along the way. 

Here are some things you can do to make your retirement savings plan easier to achieve. 

Form a budget 

Analyze your cash flow and expenses, and take a hard look at where your money is going on a daily basis. Chances are you can eliminate certain expenses without even really noticing the difference. 

For example, think of the gym membership that you never use or the music subscription service that’s been sitting dormant for months. Consider canceling things you don’t need and put money back into retirement growth.

A budget is like a roadmap for retirement. It can make it easier to plan and get ahead. 

Maintain discipline 

Once you are under way and planning for retirement, it’s going to be tempting to try and access your funds — especially once the money starts to accumulate.

The general rule of thumb is to avoid touching your retirement funds. You’ll pay early withdrawal fees, and possibly taxes. Plus, you’ll be taking money away from your future self. 

Maintain discipline, and make adjustments to stay the course with retirement savings. It’s not easy, but it will be worth it in the long run if you hope to retire someday.

5. Start a side hustle 

One of the best things you can do to help ease the pain of retirement savings is to start a side hustle to increase your monthly cash flow and savings rate. 

A side hustle basically involves the pursuit of a secondary source of income. For example, you can help businesses rank higher on Google using SEO, you can babysit, or work odd jobs in your neighborhood. 

By starting a side hustle, you can put more money aside for tax-free growth while also making it easier to save. For example, if you’re putting $500 per month away for retirement savings, a side gig could easily enable you to save twice that amount, but only if you hustle. 

Just make sure that your side hustle doesn’t conflict with your main employer. Review your contract for any clauses that may prevent you from making money on the side. You may also want to talk with an attorney. Generally speaking, most side hustles should be OK to pursue if you’re not directly competing with your primary employer. 

Once you get the green light, then start a side hustle  — or two, or three — and start bringing in more money as soon as possible. You should also strongly consider negotiating a raise with your boss. 

What does retirement mean to you?

The first step is to sit down and visualize your retirement. This exercise helps with two important tasks.

First, it helps determine an acceptable retirement lifestyle. Think about the house you’ll be living in, the food you’ll be eating, the car you’ll be driving, or even the beach you’ll be sitting on. 

Second, it enables you to determine a time horizon or your expected target date for retirement — and this part is important. 

The truth is, most people spend at least 30 to 40 years working and only spend 10 or 20 healthy years in retirement. And some don’t even last that long before they have to go back to work or get sick. 

If you plan accordingly by saving, investing, and living within your means while you’re young, you may be able to accelerate your retirement age by many years and squeeze more enjoyment out of your non-working years.

Tips for retirement planning

Here are some additional things you can do to plan ahead for retirement now.

Look into real estate 

Real estate can provide stable, long-term growth, while also adding diversification to your investment portfolio. It can also come with some great tax advantages.

For example, suppose you start by putting $20,000 to $30,000 down on an investment property. That could lead to monthly residual cash flow, enabling you to pay down your mortgage.

If you don’t want the hassle of dealing with direct real estate, look into real estate investment trusts (REITs), which you can buy just like regular stocks. This option comes with a much lower barrier to entry than traditional real estate investing.

Work with a financial advisor

There’s nothing worse than getting five or 10 years into your career and realizing that you’re off-track for retirement. 

You can always make adjustments to maximize growth, but you can’t recoup lost time. For example, you may look back and wish that you were more aggressive about investing during your 20s or 30s. By the time you reach your late-career stage, you’re probably going to want to scale back with investing to protect yourself from market volatility. 

Consider working with a financial planner to keep you on track.

Push forward with taxable accounts

Don’t get so caught up in planning for retirement savings that you forget to invest for the medium-term with a brokerage account. 

You do have to pay income taxes on the money you deposit into your brokerage, but it’s still going to produce far better annual returns than a savings account. You can access your money fairly easily too, giving you more money to play around with during your prime earning years.

You also absolutely need to have an emergency fund saved to cover unforeseen expenses.

Frequently Asked Questions

What is a contribution limit?

The IRS restricts how much you can put into a retirement account on an annual basis. For 2021, the limit is $19,500 for a 401(k), $6,000 combined for traditional and Roth IRAs, and $58,000 for SEP IRAs. 

If you exceed annual contribution limits for retirement accounts, you’ll have to pay an excise tax.

The main takeaway here is that there are limits to how much you can save in tax-advantaged retirement accounts, such as IRAs and 401ks, but there are no limits to how much you can save in your bank account or brokerage account.

Do people work in retirement?

People are working more than ever in retirement these days. In most cases, this is because they didn’t put aside enough money. In other cases, it’s largely due to boredom. To be clear, there’s nothing wrong with continuing to work if that’s what you love to do.

Again, working during retirement isn’t the end of the world. The goal should be having the freedom to work, if you want, as opposed to needing a job to make ends meet.

If you do work during retirement, wouldn’t it be cooler to help your community, or achieve a personal goal? It could be the last chance in life to make a name for yourself and stamp your legacy. 

Use this as a motivational factor when planning ahead for retirement. Think about what you want to accomplish during retirement, and work to make that a reality. For example, maybe you will write a bestselling book or contribute to a local charity organization in a big way. 

Can Social Security provide enough retirement income?

Social Security doesn’t provide nearly enough for retirees to live a happy and fulfilling lifestyle. It’s meant to be a supplementary source of income alongside IRA contributions, a pension, or a 401(k). 

Unless you plan on living an extremely frugal life, do not make the mistake of thinking that Social Security will float you at retirement age. It can, but you’re probably not going to enjoy the experience. 

You work hard for your money and put a lot of effort into your job — give something back to yourself by putting money away for retirement. I can’t understate the importance of this goal.

The Bottom Line

The bottom line is that planning for retirement does not have to be a painful process. By forming a game plan, you can put enough money aside without impacting your life too much. The earlier you get started the better.

Remember that retirement planning is a marathon and not a sprint. You may have to adjust your approach at various times to make sure you are on track for your retirement goals.

The more you do now for retirement, the better off you’ll be in the long run.

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