Everything You Need to Know About Saving for Retirement

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A couple plans their retirement savings together

Youve heard you should be saving for retirement, but aside from putting a little money away every month, what does that actually mean? You get that you dont want to be working forever, and that one day your income will stop coming in. But how do you start to understand the complex rules of retirement planning? And, most importantly, whats the best way to save so that you dont run out of green in your golden years?

This in-depth look at savings and retirement will help you understand the ins and outs of retirement planning, including the concept of compounding interest, the time value of money, how (and when) to start saving for retirement, and helping you to understand the best savings options for you.

The Best Time to Start Planning for Retirement

When is the best time to start planning for retirement? Whether youre just starting your first job or youre well into your career (or anywhere in between), the answer is the same — start now! The sooner you start planning for retirement, the more time youll give for your money to grow.

If you feel like youve procrastinated your retirement planning a little too long, dont fret. While its never too early to start planning for retirement, its never too late either — even if it means pushing your original retirement goals back a few years or finding faster ways to grow your money.

The Time Value of Money

Speaking of time, youve probably heard of a concept called the time value of money. Essentially, that means your money is worth more tomorrow than its worth today. Its true! If you invest $1,000 today at an interest rate of 5%, in one year you will have $1,050. Thats an extra $50 that you didnt have to work for—your money made it for you simply by being in the right account at the right interest rate. If you invested that same $1,000 at an interest rate of 5% compounded annually, in 30 years you would have $4,321.94—an appreciation of over $3,300.

The great thing about the time value of money is that the longer you save (and the more you can keep contributing to your savings), the more your money will compound and the faster it will grow. Your moneys earned interest is automatically reinvested and earns interest on its own, which helps your savings gain momentum and snowball over time.

How to Start Planning for Retirement

So, how do you take advantage of this snowballing effect? As with any good plan, the best way to start saving for retirement is to determine where you are now and where you need to go. How much money do you currently bring home every month? How much do you spend? How much monthly retirement income will you need? How different will your future needs/expenses be than your present needs/expenses? Answering all these questions can help you determine how much money youll need to retire comfortably.

Where are you now?

Start by determining your current monthly and annual income and expenses. Since youre taking a look at the big picture (and since retirement lasts for a period of many years, hopefully), it may be more accurate to look at the annual numbers. Write down your annual income and expenses, as best you can. Then project those expenses into the future.

Try to account for those expenses that may disappear altogether, like mortgage payments, student loans, non-recurring debt expenses, etc. And, include any expenses you may want to add during retirement that you may not have now—yearly travel expenses, etc. Now, add all your projected expenses together to get a rough idea of your retirement income needs and compare it to what youre currently making.

Where do you want to go?

In general, experts suggest trying to replace 70% to 90% of your annual pre-retirement income in retirement. That means if you currently make $50,000 per year (approximately $4,000 per month), you should plan to replace that income with $35,000 to $45,000 per year (approximately $2,900 to $3,750 per month) through social security and your own retirement savings.

Achieving this savings goal will help you replicate your current standard of living in retirement. Of course, if you plan to spend more money in retirement than you do now (see your original calculations above), you may have to increase your savings goals.

It stands to reason that if youre planning to live on 70% to 90% of your current income in retirement, you could start practicing early by living on that same amount now, while saving the extra 10% to 30% of your current income for retirement.

How to Save For Retirement

Saving for retirement will be different for every person. But, there are several investment options that can help you take advantage of the time value of money and the benefit of compounding interest to earn more. But where to start?

If your employer offers a retirement savings plan, and especially if your employer matches contributions to such a retirement plan, you should absolutely consider starting there. These retirement plans are often called 401(k)s—named after the section of the tax code that establishes the plan.

A 401(k) deducts money automatically from your paycheck and gives you a tax break on the money you contribute to the plan (the portion of your income you contribute either wont be taxed right away or when you withdraw, depending on your plan). This money is then invested in different funds that can return gains to your account, which are also tax shielded and tax deferred.

The best part about a 401(k) is that often employers will match your contributions, up to a certain amount. If youre uncertain whether your employer contributes to your plan, its worth asking questions to ensure that youre getting the most bang for your retirement bucks. In other words, if your employer will match your contributions up to $500 per paycheck, you should try to arrange your finances in such a way that you can contribute $500 of your own money, thus doubling your investment and your earning power.


A couple plans their retirement savings together

Other Popular Retirement Plan Options

A 401(k) is a great place to start saving for retirement, but its not the only option. If your employer doesnt offer a 401(k) savings plan, consider looking into one of these other retirement savings accounts:

Traditional IRA: IRA stands for individual retirement account. You make pre-tax contributions to your account (meaning your income isnt taxed at the time you make your contributions). When you retire, you pay taxes on the money you withdraw. As of 2022, you can contribute $6,000 per year to an IRA, or $7,000 per year if youre 50 or older.

Roth IRA: A Roth IRA is similar to a Traditional IRA, except you pay taxes on the money you contribute to the account upfront. Then, your money grows tax free and you dont have to pay taxes on withdrawals when you retire (after 59 ½ years old). Like a Traditional IRA, as of 2022, you can contribute $6,000 per year to an IRA, or $7,000 per year if youre 50 or older. As of 2022, if you’re single and making between $129,000 to $144,000 or married filing jointly making $204,000 to $214,000, you can contribute a reduced amount. If you’re single making over $144,000 or married filing jointly making over $214,000, you cannot contribute.

SIMPLE IRA: Similar to a 401(k), a SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees), allows eligible employees working for small companies (fewer than 100 employees) to invest pre-tax income, while receiving employer contributions. Contributions are tax-deferred until you make withdrawals in retirement.

SEP IRA: This retirement account allows business owners and self-employed individuals to make tax-deferred contributions to an account until retirement. You can invest the lesser of $61,000 of your income or 25% of your compensation into an SEP IRA, as of 2022

One-Participant 401(k): Business owners without any employees can contribute up to $61,000 per year ($67,500 for 50 or older) to a one-participant 401(k), as of 2022. You can choose between a tax advantage at the time of contribution, or upon withdrawal in retirement.

403(b): Similar to a 401(k), a 403(b) plan allows employees of non-profits to contribute up to $20,500 ($27,000 for 50 or older), as of 2022, tax-free until you withdraw funds in retirement.

457(b): This government-sponsored account allows eligible participants to contribute $20,500 ($27,000 for 50 and older), while withdrawing funds before retirement (59 ½) without penalty.

How Your Contributions Grow

When you contribute to one of the above retirement accounts, your money is put in different types of investments to help you earn returns based over time. These investments range from low risk, expected reward to high risk, potentially high reward. If you have the option to choose, most experts suggest being more aggressive when youre younger. For example, you could invest in stocks and withstand the short-term volatility of the market, while watching your investments generally grow over time. Here is a quick overview of the most common investment types.

Stocks: Investors own shares in publicly traded companies and earn dividends and benefit stock prices increase. Stocks dont guarantee profits and are subject to losses, which makes them somewhat risker than other investment types.

Bonds: Bonds are debt instruments issued by businesses or governments that you can purchase and earn a stated interest rate.

Mutual Funds: Mutual funds represent pooled investments (more than one investor) that are allocated into a mix of stocks, bonds, and other securities, and managed by professional money managers, who work to bring you higher returns.

Other Investments: You dont always have to put your money into a retirement account. You can make cash investments into money market accounts or certificates of deposit, which are much less risky, but offer much more modest returns. You can also invest in real estate (you may have already done that if you bought your own house) or direct investors to invest in real estate with your money.


Planning for retirement might feel daunting—it may well be the biggest plan you ever undertake. It takes years of preparation and planning to do it right, and getting started requires some amount of education on your part. But now that you understand the basic principles and some of the more in-depth aspects of how your money will be invested and how retirement plans differ, make the decision to start your journey to retirement now. The sooner you get started, the closer you will be to accomplishing your financial and retirement goals.