Like so many of you, I’ve spent a lot of time thinking about the best way to save for retirement so I can retire worry free. And I’ve also wondered when was the best time to start saving for retirement.
The good news is that it’s never too late to start saving for retirement. All you need is the right combination of Roth 401(k), 401(k), Roth IRA, and traditional IRA. Let’s look into these powerful retirement savings accounts in more detail and get you started with your very own retirement savings plan.
How to Save for Retirement and Retire Worry Free
Saving for retirement is really just a matter of putting the right amount of money in the right combination of retirement savings accounts. All you need is a plan and then the discipline to stick with your plan. It’s that simple.
How Much of Your Income to Put Towards Your Retirement
That’s a very important question, and the answer depends upon your current stage in life.
Just Starting Your Career and Family
Perhaps you’re relatively young and are methodically following the Stepping Stones to financial and personal freedom. If that’s the case, then you’ll put 15% of your gross (before tax) income towards your retirement savings plan.
If you’re a new visitor to our website and have never heard about the Stepping Stones before, then please take a look at the process, when you get a chance, just to make sure you’re doing things in the right order. After all, you’re going to need a rock-solid plan to get you set for retirement.
Mid-Career Point
If you’re at this stage in life and have been following the Stepping Stone, then the answer is 15% of your gross income.
But perhaps you’re in your 40’s, married, have one or more kids, two vehicles, and a mortgage. And you started thinking about retirement savings because with so much money going out the door, you’re wondering how much to put towards your retirement and when to start.
If that’s the case, and you came upon this article via an internet search, I recommend reviewing the Stepping Stones from the beginning. Maybe you’ll find it’s best to start with Stepping Stone #1 just to ensure you do things in the right order.
Close to Retirement
Don’t worry, you’re still going to be able to save for retirement and retire worry free. It’s just a matter of putting some additional focus on how much money you put towards your retirement savings plan.
The good news is, whether you’ve been following the Stepping Stones or not, you probably have a lot less debt to worry about than someone just starting their career.
And that actually gives you a bit of flexibility to put more than 15% of your gross income towards your retirement savings accounts. Again, just please make sure you’ve followed the Stepping Stones and have your debt under control.
And if your debt is all paid off, with the possible exception of your mortgage, then you need to max out your savings account contributions. That means you may contribute much more than 15% of your gross income to your retirement savings account.
Retirement Savings Accounts
In order to properly save for retirement and retire worry free, you need to participate in one of, or a combination of, four retirement savings accounts. And just to cut straight to the chase, I’m going to summarize them via a chart first, then explain them in more detail later in this article.
Here’s a quick summary of each type of account:
| Max Contribution | When Taxed | |
| Roth 401(k) | $19,000 for those under 50 | Before contribution |
| $25,000 for those over 50 | ||
| 401(k) | $19,000 for those under 50 | When withdrawn |
| $25,000 for those over 50 | ||
| Roth IRA | $6,000 for those under 50 | Before contribution |
| $7,000 for those over 50 | ||
| Traditional IRA | $6,000 for those under 50 | When withdrawn |
| $7,000 for those over 50 |
Note: max contributions are for BOTH Roth 401(k) and 401(k) and for BOTH Roth IRA and Traditional IRA. In other words, you need to split the max contribution between both types of 401(k) and both types of IRA. I know, it sure would be nice to be able to double-up, but you can’t.
How to Save for Retirement with a Roth 401(k)
The Roth 401(k) combines the power of a 401(k) with the tax benefits of a Roth plan. And that can indeed be a powerful combination, if it’s available from your employer.
Roth 401(k) Employer Match
First of all, as with any employer 401(k) plan, your employer typically matches a certain amount of your contributions to your Roth 401(k). And that’s a huge benefit, because every dollar of that match is FREE money. So, try to max out your employer match because you want to get as much of that free money as possible.
Roth 401(k) Withdrawals Are Not Taxed
Second, a Roth 401(k) is a slightly different animal because your contributions are made AFTER tax. And that means that when you retire, your withdrawals will not be taxed. Which in turn can be really helpful as you come up with your own plan for saving for retirement and retiring worry free.
Think about it this way. Let’s say you’ve saved up $1 million in your Roth 401(k). Well, when you retire, you’ll get every bit of that $1 million.
But if you had put the same amount of money in a traditional 401(k), your withdrawals would be taxed. Say for arguments sake your retirement tax rate will be 22%. Well, when you make those withdrawals in retirement it’s like losing $220,000.
Moving on to the next retirement savings account: a regular 401(k).
How to Save for Retirement with a 401(k)
A 401(k) is a really powerful retirement saving account because, as wit the Roth 401(k), there will be a certain level of employer match.
401(k) Employer Match
Here we go again with FREE money! If your employer offers a 401(k) with an employer match, then you need to thank your lucky stars. And once you’re finished thanking our lucky stars, you need to max out that employer match.
401(k) Withdrawals Are Taxed
Which makes sense, because your contributions are not taxed. So just bear that in mind when you are considering the 401(k) plan.
Ideally, your tax rate will be lower when you retire. If that’s the case, then perhaps the conventional 401(k) plan is the best way to go.
But just remember the retirement tax example with the Roth 401(k). If we use the same numbers and tax rate, you’ll lose the equivalent of $220,000 when you withdrawal your money from your 401(k).
Moving on to a discussion of both the Roth IRA and traditional IRA.
How to Save for Retirement with a Roth IRA
Think of a Roth IRA like a Roth 401(k), but without the employer match.
Roth IRA’s are really neat because your investments in your Roth IRA grow tax free and your withdrawals will NOT be taxed. And that can be a huge benefit to a Roth IRA.
Additional Benefits of a Roth IRA
Here are some more really neat bonus benefits of Roth IRA’s.
First, unlike a traditional IRA, you’re not required to start making withdrawals at 70 ½.
Second, assuming your income limits still fall within Roth IRA income limits, you can keep contributing to your Roth IRA if you decide to work past retirement age.
Third, you can actually transfer your Roth IRA in your Will. And better yet, your beneficiaries will be able to make tax-free withdrawals as well.
Those are some really significant benefits worth taking some time to consider as you’re trying to figure out how to save for retirement and retire worry free.
And now for the traditional IRA.
How to Save for Retirement with a Traditional IRA
The traditional IRA has been around for a LONG time, and still continues to have its own set of benefits.
One of the biggest benefits to the traditional IRA is your ability, in most cases, to take tax deductions on your contributions. And this can be a big deal as you try to minimize your taxable income every year.
And the traditional IRA has another benefit worth mentioning. Specifically, and unlike the Roth IRA, there are no income limits that restrict your ability to contribute to an IRA. Therefore, for those of you with relatively high incomes, this may make the traditional IRA a fantastic retirement savings account.
Which Retirement Savings Account Should You Pick
And that’s an important question to ask as you try to figure out how to save for retirement and retire worry free. Here’s a two-part answer to that question.
First, remember the KISS (Keep It Simple Stupid) principle and you can’t go wrong. You can’t lose here. Meaning that whatever option you pick, or combination of options you pick, you’ll be a heck of a lot better off by making any choice at all versus doing nothing at all.
If I had to rank them from “awesome” to “good”, I would put them in this order: Roth 401(k), 401(k), Roth IRA, then traditional IRA. But again, the final choice is yours.
What if Your Employer Doesn’t Have a Roth 401(k) or 401(k)
If you find yourself with an employer that doesn’t offer either 401(k) option, then load up your Roth IRA.
And quite frankly, unless you absolutely love working with that employer, you may want to find an employer that DOES care enough about its employees to offer 401(k) options.
Don’t Forget Your Spouse
It’s kind of funny, but have noticed that when you research something, you often just think about yourself? You’re not being bad. It’s just kind of natural.
But do take time here to think about your spouse (if you are so blessed to have a spouse). And the thinking shouldn’t take you more than a second!
The best thing your spouse can do is mirror what you’re doing, all things being the same. Meaning, if your spouse has the option to participate in a Roth 401(k), then have your spouse max out the contribution. And same goes for the 401(k), Roth IRA, and traditional IRA.
Do You Need Help Picking the Best Retirement Savings Account for You
Sometimes, it’s best to get a bit of advice from a financial advisor on exactly what mix of retirement savings accounts to pick. After all, each one of us has our own unique situation we’re trying to manage. And then there are those darn changes in tax laws to consider which can be a bit much for us to keep track of on our own.
The question is, who can you trust?
Help in Choosing a Retirement Savings Account Advisor
Click here to begin your search for an advisor who can tailor a plan that fists you perfectly and helps you save for retirement and retire worry free.
Notice that I wrote “begin your search.” That’s because you’ll need to spend some time interviewing multiple financial advisors before you select the best one for you.
Putting your retirement savings account planning in the hands of another person is a big deal. So, take your time. Make sure that advisor is right for you. Make sure he or she LISTENS to you. Afterall, how can they help you if they can’t listen to you?
Conclusion
Taking the time to ensure you know how to save for retirement so you can live a worry-free retirement is very important. And exciting! It’s a huge step down the path towards personal and financial freedom.
Now you know how much of your gross income you should be saving for retirement: at least 15%. And you also know the best retirement savings account types to put that money in. Furthermore, if you need help in making a decision, you even know where to go for expert advice on choosing the right mix of retirement savings accounts for you and your family.
So, get those accounts set up ASAP and get ready for Stepping Stone #6: College Funds.
Next Steps
You’re doing great! At this point, you’ve partnered with a super bank or credit union, set aside six months of expenses, paid off all of your debt except the mortgage, and learned how to use credit cards to your advantage.
And now you even know how to save for retirement and retire worry free!
That’s a heck of a list of accomplishments.
Once your retirement savings accounts are up and running, it’s time to move on to Stepping Stone #6: College Funds.
Let this next Stepping Stone provide you the guidance necessary to ensure you’re financially prepared for those college bills.
