Take These Simple Steps to Saving for Retirement

While most people recognize the importance of saving for retirement, many Americans feel woefully unprepared. According to PwC’s Retirement in America report, 25% of Americans have no retirement savings at all. And among those 60 years old or older, 13% have nothing set aside for retirement. While there may be several factors at play here, one great place to start is making sure we understand some basic principles, which help us see how simple (and less intimidating) retirement savings can be. 

In this article we’ll discuss four things: when to start saving, where to save, what to invest in, and how much to save. 

When should you start saving for retirement?

When you run the numbers, the power of compounding interest and the “time value of money” will certainly show the value of saving early. But everyone’s different, and perhaps the best approach is to view this in terms of priorities. Obviously, both your age and income will dictate your priorities, but a general rule of thumb is to “pay yourself first” by eliminating costly debt and ensuring you have an emergency fund in place before focusing on future savings.

First, it often makes more sense to focus on eliminating consumer debt (credit cards, not necessarily your mortgage) before saving for retirement. Not only does this lower your monthly expenses, but more importantly, this allows you to step into a new phase of your financial life, which is a phase marked by freedom – freedom to invest, save, and give as you are able and so desire.

Second, building an emergency fund of about three to six months of living expenses allows you to be prepared for unexpected expenses ahead, while minimizing the risk of taking on consumer debt in the future. 

Where should you save?

There are a variety of retirement accounts to choose from, with the most common being an employer-sponsored 401(k). As of 2021, 68% of private industry workers had access to retirement benefits through their employer, according to the U.S Bureau of Labor Statistics. But for those not covered by an employer’s plan or would like to save in addition to their retirement plan, there are plenty of other ways to save.

Here are just a handful of some of the more common options:

401(k). This is the standard employer-sponsored retirement account. Many companies match the amount you contribute up to a certain limit. Depending on the type of 401(k) you have, you’ll either pay taxes on the money before it enters your account (Roth), or when you withdraw the funds in retirement (called “traditional” or “pre-tax”). In 2022 an employee can contribute up to $20,500 to a 401(k), or $27,000 if over age 50.

Traditional IRA. You won’t pay taxes on Individual Retirement Account (IRA) contributions until you withdraw the funds (typically after age 59½ to avoid a penalty). In 2022 you can contribute up to $6,000 to an IRA, or $7,000 if over age 50.

Roth IRA. Unlike a traditional IRA, the contributions you make to a Roth IRA are taxed before they enter your account. As a result, no taxes are deducted when it’s time to begin withdrawing your funds. It often makes sense to pay taxes now when one’s projected tax bracket in retirement may be higher.

SEP IRA or Solo 401(k). Simplified Employee Pension IRAs and Solo 401(k)s were created to allow small-business owners and self-employed individuals without access to an employer’s 401(k) a similar way to save for retirement. 

What should you invest in?

Broadly speaking, stocks (also called “equities”) and bonds (often referred to as “fixed income”) are the two most common investment options for retirement savings. As with the style of plan you choose, it’s always wise to consult an expert to find the right mix of investments for you.

Stocks. Buying stock allows you to become a shareholder in a corporation. As a result, you make or lose money as the corporation’s value increases or decreases, and many companies pay shareholders a portion of earnings in the form of dividends.

Bonds. Buying bonds is essentially lending your money to corporations and governments. During the life of the loan, you're repaid with interest payments, and when the bond matures, you’re repaid the initial loan amount.

Mutual funds. Mutual funds take money from a group of people and invests in a collection of stocks, bonds, or other securities. Investing in mutual funds is often a way to easily diversify your investments.

Exchange-traded funds (ETFs). Like mutual funds, ETFs can be made up of a basket of securities. But unlike mutual funds, ETF prices fluctuate throughout the day, and are traded on an exchange like a stock.

How much should you invest?

As with most questions ... it depends. But a great place to start is to target saving about 10-15% of your income for retirement. Depending on your desired spending range, you may need or want more or less than that figure.

As we have mentioned, every individual’s situation is different. Financial advisers may use a range of calculations to help investors determine how much they need to save, so it may be wise to consult with an expert to ensure you’re leveraging your money in the best way possible.

With a little bit of homework and some sound advice from a professional financial adviser, our hope is for you to see that saving for retirement saving doesn’t have to be too complicated or intimidating, and for you to be well on your way to achieving your goal of retirement.

Hunter Yarbrough, CPA, CFP, is a vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.