Best Ways to Save for Retirement


According to a recent survey conducted by Bankrate, 1 in 5 Americans aren’t currently saving any money towards retirement. The study also revealed that only 14% of respondents were putting more than 15% of their income away for retirement on an annual basis.

In the Federal Reserve’s most recent release of the Economic Well-Being of U.S. Households report, it found that only 2 in 10 non-retirees under age 45 feel like their retirement savings are on track with where they should be at their age.

All of these statistics make it clear that many American are struggling to save for retirement and are looking for help. Today I’ll share my thoughts on why and how you should begin investing money for your retirement.

You need to save for retirement because you’re the only person you can count on to look out for your future financial security and there’s usually free money to be had. Roth IRAs and 401(k) are two of the best places to save for retirement. Other strong options include a Traditional IRA, a SEP IRA, Health Savings Account (HSA), taxable brokerage account, and your own home.

Why You Need to Save for Retirement

If you’re young and don’t expect to retire for a long time, you may not feel the need to make retirement savings a priority right now. But here are two reasons why everyone should be saving at least a little towards retirement if they can.

1. Because You Can Only Count On You

You’re the only one who can ensure you’re ready for retirement. You certainly can’t count on the Government. Are you going to ask your friends and family to support you? Are you going to be able to take out a loan?

No. You need to be prepared yourself. No one is going to save up all that money for you. And you don’t want to be relying on the charity of others to help you get by. Imagine how many trips or golfing green fees they’ll want to fund for you.

2. Because There’s Usually Free Money to be Had

There are rewards to be had for those who save for their retirement. The government is willing to give away free money in tax savings when you contribute to an IRA or an employer-sponsored retirement plan.

And your employer may have free money on the table as well in the form of matching 401(k) contributions for those who take part in the plan.

These types of “free money” benefits make your retirement dollars stretch further. Are you getting your share?

How Much Do You Need in Retirement?

A lot of people will tell you that you need to find a specific number to shoot for in retirement. At some point this may be true, and there are some great retirement calculators to help you determine this like Blooom and Personal Capital.

But, initially, you just need to get started. As with most financial issues, it’s the starting that makes the biggest difference. Knowing a number and fully understanding all the issues are secondary to just starting. But, if you just have to have a number, here are some percentages for you.

  • If you’re in your 20s, 10% of your income will likely get you to a very comfortable retirement.
  • For those in their 30s, 20% contributions might be necessary if you’re just getting started.
  • If you’re in your 40s or 50s and just starting to save for retirement, you’ll likely need to start saving around 50% of your income.

I’m in my mid 30s and I saved around 25% of my income towards retirement this last year.

How to Save for Retirement

About half of us here in the U.S. don’t have access to a 401K. That’s a shame, because the 401K, with matching contributions, is one of the best ways to save for retirement.

If you’re self-employed or a side hustler, you most likely qualify to open a Solo 401(k). But W-2 employees who don’t have a side hustle can’t take advantage of 401(k) benefits unless they have access to an employer-sponsored plan.

Read more: Which Retirement Plan Should You Choose for Your Business?

Many people, therefore, turn to the Roth IRA to save for retirement. Good move, too! But there is a maximum limit to what you can contribute each year to a Roth IRA. In 2020, that limit is $6,000 ($7,000 for those 50 and older).

Also, there is an income limit that doesn’t allow some earners to even use a Roth IRA. In 2020, if you have an adjusted gross income of $139,000 (individuals) or $206,000 (couples), then you can’t contribute to a Roth IRA.

Related: Understand Roth IRAs and Use Them for Your Advantage

Best Ways to Save for Retirement After You Max Out Your Roth IRA

Now that we have that out of the way, let’s look at some best ways to save for retirement outside of the 401K and Roth IRA. These are in no particular order.

Traditional IRA

Roth and Traditional IRA contributions share the same annual limit. So, if you’ve already got $6,000 going to a Roth, then you can’t consider tax-deductible contributions to a Traditional IRA. Move along. Nothing to see here.

However, many folks come to the Traditional IRA because they made too much to contribute to the Roth. If that is you, then consider the Traditional IRA your next stop in retirement savings.

SEP IRA

If you are self-employed, or if you have some side income, then you should be looking into the SEP IRA as your next logical place to save for retirement. The simplified employee pension (SEP) IRA is designed to allow small business owners and their employees to get in on the tax-deferred retirement savings game.

The SEP works like a Traditional IRA in that no tax is paid on the contributions to the account. You are only taxed on your distributions in retirement.

Read more: Everything You Need to Know About the SEP IRA

Health Savings Account (HSA)

A HSA is a powerful savings tool. The account is funded with pre-tax funds, and the distributions from the account aren’t taxed as long as they are used towards qualifying medical expenses.

Here’s the catch, you can contribute several thousand dollars to your HSA each year, but you don’t have to use it right away. In fact, you can save it all up and use it in retirement penalty-free.

This is what many people are doing with their HSAs. They’ve basically turned it into a retirement health savings account.

Learn More: Where and How to Open a Health Savings Account

Taxable Brokerage Account

If you’ve maxed out your other tax-advantaged retirement options, there’s nothing wrong with turning to a traditional investing brokerage account. You can open up a brokerage account with one of the discount online brokers in as little as 5 minutes.

With these accounts you’ll be able to invest in a wide variety of asset classes and some options that you don’t have with a tax-advantaged account. Taxable accounts are also good for the investor who’s not 100% certain he/she wants to use the funds for retirement.

Read more: The Best Online Stock Brokers for Cheap Stock Trading

Regular Taxable Savings Account

I’m not sure why anyone would use this approach, other than the desire to have ultimate flexibility with their money. But you certainly can save for your retirement with a savings account or CD outside of an IRA. Know that you can have a CD and a savings account within an IRA if you want.

Related: The Best High Yield Online Savings Accounts

Your House

Another option is to pour all your money into your home. If you have a mortgage, use your excess funds to pay it off as soon as you can. This is not the most diverse strategy, as you’re putting all your money into one, non-liquid asset.

Still, some people find it makes sense to invest in the place they call home. After all, you can’t live in a mutual fund.

Related: Here’s Why You SHOULD Pay Your House Off Early

The Bottom Line

If you’re unsure which stocks or funds to invest in, it might be easiest to start with a robo-advisor like Betterment or M1 Finance.

As your knowledge matures and you get more comfortable rocking that retirement savings routine, you can move towards different options. For example, you may want to eventually consider opening a self-directed IRA or 401(k) with a provider like Rocket Dollar or Alto IRA so that you can invest in more asset classes, like real estate, startups, and precious metals.

Most importantly, don’t get caught up in paralysis of analysis. Retirement savings can be confusing at first glance because there seems to be too many choices. But don’t let your response be inaction. Just get started with something.

How are you saving for retirement?

Photo by Ben Turnbull on Unsplash

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About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  1. Kevin@RothIRA says

    Having several action plans in place really is the best way to retirement. A 401k alone might work, but 100% of the withdrawals will be taxable and that will cause other problems. A 401k with a Roth IRA, a house (that’s PAID for!) and some non-retirement savings will get the job done because each asset addresses a different concern.

    We probably could (and should) add some type of post-retirement career to the mix, even if its’ something completely different from what you’re doing now.

  2. Godfrey Sserwanja says

    Thank you for sharing with me about preparing for retirement. In Uganda, this topic is rarely taught in schools, neither do people regularly discuss it!
    Your tips will help me to plan well for the ten years I am left with, to retire.

  3. It’s a shame traditional IRA does not have the same cap as a 401k. Those without 401k’s are further penalized by the IRS with lower retirement effort deductions.

  4. Love this quote “Don’t let your response be inaction. Just get started with something.” I usually max out my Roth IRA right before Tax Day, this year I’m working on doing it earlier in the year so I don’t feel so rushed.

  5. Philip Taylor says

    Thanks for sharing, Jeb. I’ll admit that I don’t know much about using insurance for retirement savings. Evan has offered to write a guest post on using whole life for extra retirement savings. Maybe he’ll give us his opinion of VULs.

  6. These are all good ideas. I contribute to my 403B because a 401K is not an option. We also max out our Roth IRAs each year and have always wondered what some other options would be. I guess I had forgot that there was a income max for the IRA’s, but I’m not there yet…so no worries. My wife and I use a Variable Universal Life policy for an additional source for retirement which seems to be safe and growing steadily. I don’t know too much about the the VULs which is my fault since I’ve been in it for 10 years now. It made sense when I signed up….when you looked at the future projections.

  7. Derrik Hubbard, CFP says

    The book “Tax Free Retirement” by Patrick Kelly makes the case that in view of increasing taxes on the horizon that it makes sense to use the tax free loan withdrawal provision in retirement that certain types of permanent life insurance offer.

    In particular with Kelly he promotes fixed, indexed universal life.

    Also there are tax deferred annuities, rental real estate, real estate investment trusts, to mention a few as other alternative strategies.

    Derrik Hubbard, CFP

  8. Philip Taylor says

    @Evan – Could you do me a favor and provide a summary (4 or 5 sentences) of your Whole Life argument here in the comments? Thanks!

  9. I am a huge fan of using Whole Life as a way to save retirement in certain cases (i.e. when you are looking for additional buckets). Before you judge at least look at some numbers:

    http://www.myjourneytomillions.com/articles/create-your-own-pension-using-whole-life-insurance/