The Complete Beginner’s Guide to Saving for Retirement

Saving for retirement is one of those topics that you can easily hit snooze on and ignore for years.

“Retirement? I just started working a few years ago, why would I need to be thinking about that now?”

You probably picture your grandparents, moving to Florida to play tennis with other elderly folks, or other boring old people with nothing to do all day.

You probably haven’t even thought about what your life will look like in 40 years, either.

Here’s the thing: saving for retirement is hugely important. And if you start when you’re young, you don’t have to wait until you’re 65 to finally start enjoying your life!

I know it’s not the sexiest of topics, but getting the right financial foundation built early on will make the rest of your life insanely easier.

Making a few sacrifices in your 20’s so that you can get your retirement fund started is so so worth it.

I am so glad that I started saving for retirement with my first “big girl” paycheck age 23. I remember being so confused about investing, what funds I should pick for my 401k, and how to choose the best retirement accounts.

It was intimidating to say the least!

You might be wondering, “where do I even start with my retirement fund?”

Everyone always talks about the importance of saving for retirement early on in your career, but how do you actually do it?

This beginner’s guide to saving for retirement will show you exactly how to figure it out!

I’ll be walking you through why you should start saving for retirement, how much you should be saving, and where to save that money to grow for the future.

The Importance of Saving for Retirement Early

It’s important to note that the phrase “saving for retirement” really means investing your money for retirement.

Investing your money in stocks, bonds, and index funds will yield a much higher return than a basic savings account. Since retirement is a long-term goal, it’s important to invest that money, not save it.

Before we talk about how to save for retirement, it’s important to understand why it’s so important to start early in the first place.

Investing early will allow you to take advantage of compound interest.

Think of compound interest as a snowball rolling down a hill. You pack some snow in your hands and send your tiny snowball down an endless hill. It will take awhile for the snowball to start really growing, but once it it reaches a certain size it starts growing exponentially.

The same goes for your investments! Except that the intial snowball is your first retirement contribution and time in the market is the hill. The more time your money has to grow in the market, the quicker that exponential growth will happen and the sooner you can retire.

Starting your retirement savings when you’re young gives you more time in the market for compound interest to start doing the heavy lifting for you.

If you invest $500 per month at an 8% average annual return, you’ll have over $1 million dollars in 35 years! The crazy awesome part is that you have only contributed a total of $210,000 of your own money.

The other $800,000 is all interest and earnings.

That’s the power of compound interest, baby.

Retirement isn’t an age, it’s a number. No one is going to hand you a paycheck every month once you turn 65 (unfortunately).

Once you have enough money invested to cover your living expenses, you can retire and do what you want! You could realistically retire much sooner than age 65.

Even if you don’t know when you want to retire or what you want to do in the future, it’s still a good idea to start saving as soon as possible. You can probably assume that you won’t want to be working the same job in 30 years and that you’ll need money.

“I don’t know what I want to do in the future, but I do know that it will cost money.”

-Megan Makes Sense, 2021

Gone are the days where you’d work at the same company for 30 years and get a pension.

Your retirement is up to YOU. If YOU don’t start saving ahead of time, YOU will be broke at retirement.

Which means you’ll have to work until the day you die. And nobody wants to do that.

This post may contain affiliate links, which means I get a small commission should you choose to purchase or sign up through one of my links, at no extra cost to you. I only recommend products that I personally use and believe in. You can read more about this in my disclaimer.

When Should You Start Saving for Retirement?

If I knew how expensive life was, I would have started saving for retirement decades ago!

Just kidding (who has money to invest when they’re in kindergarten?).

However, there are a few financial checkpoints you want to hit before you start investing for retirement:

• You make a steady income
• You can consistently cover all of your bills (housing, food, transportation, and other basic needs)
• You are budgeting consistently (here’s a budget template to help you with this!) and can make room for investment contributions
• You have an emergency fund of at least 1-3 months of expenses
• You don’t have any credit card or high-interest debt

Is this you? Congrats, it’s time to open a retirement account!

When you contribute to a retirement account, you’re locking that money away until you’re 59 and half (in most cases), so you want to make sure that you’re stable financially before doing so.

If you’re not quite ready to save for retirement just yet, it’s time to get to work! Focus on making more money, saving an emergency fund, and paying off your high-interest debt first.

Related: The Ultimate List of Investing Terms Every Beginner Investor Needs to Know

How Much Should You Be Saving for Retirement?

The more money you save for retirement early on, the sooner compound interest will start to do it’s thang. So ideally, you should save as much as possible!

But, I know that living in your mom’s basement forever and only eating rice and beans isn’t realistic for most people (and your life would suck).

Like everything in life, you have to achieve a balance with your personal finances. You want to maintain a decent quality of life now, while saving and investing for future you.

A good rule of thumb is to save around 15-20% of your gross annual income. This is income before taxes and payroll deductions.

(20% x your gross annual salary) / 12 = your monthly retirement contribution.

If you’re starting out super young (20-25), you can probably get away with saving less.

However, if you have the room in your budget, I will always encourage people to save as much as they comfortably can for retirement. (Remember that more money saved now = less time you have to work later!)

If you’re just starting with saving for retirement in your 30’s, try to save 20-25% off your gross income to “catch up” on missed contributions.

If you’re older than that, save as much as possible. Retirement is your number one priority right now.

How to Start Saving for Retirement

Now that you understand why it’s so important to save for retirement and how much you need to save, it’s time to talk about how to actually start saving for retirement.

You save for retirement inside of a retirement account. Simple, right?

Retirement accounts have different tax benefits, contribution limits, and eligibility rules.

You’ll also see retirement accounts classified as “Roth” or “Traditional.”

“Roth” means that you contribute to the account with post-tax dollars, but the money will grow tax-free.

“Traditional” means that you contribute pre-tax dollars, but will need to pay taxes upon withdrawal. You get a tax break when you contribute.

Let’s go over the basics of the most common retirement accounts.

Retirement Accounts 101

It’s important to note that a retirement account isn’t an investment in and of itself. It is an account that holds investments.

When saving for retirement, you’ll contribute money from your bank account into a retirement account. You then have to buy investments with that money inside of the account.

Opening a retirement account and not actually investing the money is a common mistake beginner investors make. Don’t let this be you!

You also don’t need to use a financial advisor to invest for retirement! Opening an a retirement account with Vanguard, Fidelity, or TD Ameritrade is super easy and can be done in 5 minutes. Seriously.

Alright, here is the rundown on retirement accounts:

401k

Your 401k is probably the first thing that comes to mind when you think about retirement accounts.

This account is tied to your employer and a part of your overall compensation package. You elect to contribute a portion of your salary to your 401k from every paycheck.

401k’s are generally pre-tax accounts, but Roth 401k’s have become more popular recently.

If you have a 401k employer match, make sure you’re taking advantage! A 401k match means that your employer will “match” a portion of your retirement contributions (ex. you contribute 5% of your salary and your employer contributes 5% of your salary on your behalf).

A 401k match is free money! You double your investment immediately before it grows in the stock market!

This is why I always recommend starting your investing with your 401k. It’s easy to set up, automated (so you don’t forget to contribute), and you double your money immediately if you have a match.

Your 401k will likely default to a target-date retirement fund based on your age, which isn’t a bad place to start! The funds will automatically rebalance to more conservative assets as you get older. If you’re curious about how I chose my 401k funds, check out this post!

Tied to employer? Yes

Annual contribution limit: $19,500

Income limit: None

Roth IRA

A Roth IRA is my absolute favorite retirement account, because it grows tax-free! IRA stands for “individual retirement account” and is not tied to an employer.

Therefore, you can open one if you don’t have a 401k at work and still save for retirement!

Even if you do have a 401k at work, I still recommend opening a Roth IRA as well (yes, you can have both a Roth IRA and a 401k!).

Individual retirement accounts give you more control over your investments, and you don’t have to worry about rolling them over when you leave a job.

The IRS knows how amazing Roth IRA’s are, so they have income eligibility requirements and low contribution limits. Maxing out your Roth IRA every year is a great financial goal to hit (as long as you’re eligible, of course)!

I wrote a whole blog post all about the ins and outs of Roth IRA’s and why they’re so powerful for wealth-building.

Tied to employer? No

Annual contribution limit: $6000

Income limit: Less than $140,000 per year if single / $208,000 per year if married filing jointly

Traditional IRA

A traditional IRA is similar to a Roth IRA except that you fund it with pre-tax dollars, meaning you get a tax-write off for the year you contributed. You’ll pay income taxes upon withdrawal in retirement.

Traditional IRA’s aren’t tied to an employer and have the same $6000 per year contribution limit. They can be great for high-income earners that aren’t eligible for a direct Roth IRA!

There is a small catch with IRA’s, though. You can’t max out both a Roth and traditional IRA in the same year.

You can only contribute $6000 between the two accounts (the IRS won’t let us have too much fun getting rich for retirement, unfortunately).

I recommend going with the Roth IRA as long as you’re eligible. If you’re young, Roth IRA’s are especially powerful because most of the money in your account at retirement will be investment growth.

And it’s all tax-free!

Tied to employer? No

Annual contribution limit: $6000

Income limit: None

Health Savings Account (HSA)

I bet you didn’t expect to see this one on the list!

Health savings accounts are the most under-utilized accounts out there, and they make pretty dang amazing retirement accounts.

You can invest it in the stock market and the money rolls over each year. Don’t confuse your HSA with an FSA– they’re totally different accounts!

Oh, and you also contribute with pretax dollars, it grows tax-free, and you can withdraw money tax-free for eligible medical expenses! It also becomes a traditional IRA at the age of 65 (meaning you can withdraw money penalty-free for any reason).

In order to be eligible for an HSA, you must be on a high-deductible health insurance plan. I have a whole blog post about why HSA’s are so great and how to use them for retirement here.

Tied to employer? No

Annual contribution limit: $3600 if single / $7200 if married or on a family plan

Income limit: None

How to Prioritize Retirement Accounts

If you just read that last section and are still confused, don’t panic! Here are my recommendations on retirement accounts.

I’m not a financial advisor, so always do your own research before investing! But here is how I personally prioritize my retirement investing as a 26-year-old, married, young professional on a high deductible health insurance plan.

If you’re in a similar stage in life, these recommendations will probably make sense for you too!

Don’t worry if you can’t complete all of these steps just yet! Start with number 1 and work your way up as you increase your income, pay off debt, and cut unnecessary expenses.

Make sure to link your retirement accounts to Personal Capital’s FREE net worth dashboard! The interface is super intuitive and it only takes a few minutes to set up. You can link your 401k (seriously, they even had my employer’s plan listed as an option!), Roth IRA, credit cards, student loans, and bank accounts!

Your accounts refresh every day and it’s seriously so motivating to see your net worth increase over time.

1. Contribute to Your 401k Up to the Company Match

Your 401k with a match is the only place that you’ll get a guaranteed 100% return on your money before it grows in the stock market! If you have a match, MAKE SURE YOU ARE CONTRIBUTING ENOUGH TO GET THE FULL MATCH.

I don’t care how much debt you have or what Dave Ramsey says about investing while paying off debt.

If you don’t do this, I will find you and shake you until you do. It’s such a small percentage of your salary that you won’t even notice it in your paycheck.

Since I’m young, I opt to do the Roth 401k option. Your money will grow tax-free, but the employer matching contributions will always be pre-tax.

This helps you diversify your nest egg for tax purposes at retirement (you’ll have a pile of money that is tax-free, and a pile of money that you will pay taxes on).

If you don’t have a 401k match, I’d skip this step and move to number 2!

2. Max Out Your Roth IRA

You read above why I love Roth IRA’s so much, so it makes sense that it’s high up on my priorization list! As long as you’re eligible, make it a huge priority to max out your Roth IRA every year.

It’s only $500 per month, which really isn’t much.

If you’re struggling to find $500 in your monthly budget, it’s time to either 1) make more money or 2) take a look at your largest expenses. Is your housing payment more than 30% of your take-home pay? Did you buy a car you couldn’t afford? Do you spend way too much on food?

If you’re out here balling out on a high salary ($140,000+), I would open a traditional IRA and do a backdoor Roth conversion. This can be a complex process, so I won’t go into too much detail here. Read this article to learn more about backdoor Roth IRA’s!

Related: 5 Key Reasons a Roth IRA is Better Than a 401k After Getting Your Company Match

3. Max Out Your HSA (if Eligible)

Once you’ve got your 401k going and are maxing out your Roth IRA, it’s time to fill up that health savings account!

I honestly go back and forth between prioritizing my HSA and Roth IRA. Both are extremely powerful for wealth-building and have different advantages. Maxing out both of these accounts is a huge priority for me.

The HSA allows me to save money on taxes now (since it’s a pre-tax account), and the Roth IRA will give me a tax-free nest egg in the future.

Of course, if you don’t have a high deductible health insurance plan, skip this step!

4. Max Out Your 401k

At this point, you’re already investing a lot of money each year, so congrats!

If you still have more money to invest, increasing your 401k contributions is a great idea.

Don’t freak out if you can’t max out the full $19,500 limit. That’s a lot of money to invest, so don’t be too hard on yourself!

Consider bumping your contribution up by 1% at a time until you get to a comfortable amount. You can change your 401k contributions at any time, so experiment and see what works best for you!

This post was all about the basics of saving for retirement.

I hope this post helped illustrate the importance of saving for retirement early!

Did this post help motivate you to figure out your retirement planning strategy? How much are you currently saving for retirement? Let me know in the comments or dm me on Instagram!

I’d love to hear from you!

-Megan