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How to Save for Retirement

In this guide to how to save for retirement, we'll walk you through which retirement accounts are best for you, then help you figure out how much to save.
Jan. 14, 2019
Investing, Retirement Planning
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The best way to save for retirement is in a retirement savings account.

We’re not trying to be cheeky. Just super literal.

There are lots of different types of investment accounts, but retirement accounts like IRAs and 401(k)s were created specifically to give people incentives to save for retirement.

These accounts are some of the best deals going: Unlike regular investment accounts, they give you a tax break on your savings, either upfront or down the road when you withdraw funds. And in between, your investments are shielded from the IRS and grow without being taxed.

So when we’re asked how to save for retirement, our answer is to take full advantage of the retirement savings accounts available to you.

How to save for retirement in three steps

  1. Get your free money. If your company offers an employer-sponsored retirement plan, like a 401(k), and matches any portion of the money you contribute, direct your first savings dollars into that account, at least until you receive the full match. If your plan doesn’t offer matching contributions, or you don’t have a workplace retirement plan, start with the next step.
  2. Contribute to an IRA. We’ll help you figure out which type of IRA is better for you — a Roth or traditional — in a moment. You can contribute up to $6,000 to an IRA in 2019 (or $7,000 if you’re 50 or older).
  3. If you max out the IRA, turn back to your 401(k) or other employer plan and continue making contributions there.

The 411 on 401(k) Plans

There are a lot of perks to having access to an employer-sponsored retirement plan. A few of the biggies:

  • It makes it easy to save on autopilot: Money is taken out of your paycheck.
  • You may get paid to save: Many employers match a portion of employee contributions.
  • It’s one of the biggest tax havens: The IRS lets individuals save more than three times as much as in an IRA.
  • Investment gains are tax-deferred: As long as the money remains in the plan, you owe nothing as it grows.
  • You can take it with you: When you leave your job, you can roll the money over into an IRA or your new employer’s plan.

The downsides:

  • Investment choices are limited: Investments available through a 401(k) are picked by the plan administrator and the selection is typically small.
  • Fees can erode your returns: In addition to investment expenses (which are charged by the investments themselves, not the 401(k) plan), there may be administrative fees charged by the company that manages the plan.

The conclusion: Invest up to the match and pay attention to fees. Even if it’s a crummy plan (lame funds, lame fees), the money you contribute still lowers your taxable income for the year and you get tax-deferred growth on investment gains.

Once you leave your job, you might want to roll over the money into an IRA to take control. Here’s how to decide if that’s the right move and how to do a 401(k) rollover into an IRA.

Retirement investment account types in a nutshell

We just threw a lot of retirement-account-related particulars at you. Just wait until we get to the minutiae of the underlying tax code.

Kidding! We memorized all that stuff and have distilled it into plain English so that you don’t have to slog through it on your own.

Here are the must-knows about the main types of investment accounts for retirement savings — 401(k)s (which come in regular and Roth versions), the Roth IRA and the traditional IRA — starting with the pros and cons of each:

401(k) (regular and Roth versions)
Traditional IRA
Roth IRA
2019 contribution limit
$19,000 for those under age 50; $25,000 for those age 50 and above. $6,000 as a combined IRA limit; $7,000 for those age 50 and above.
Setup and funding
Employee enrolls in plan set up by employer. Funded via automated payroll deduction. Set up and funded by individual through a financial institution.
Key pros
  • Employer match, if offered.
  • High contribution limit.
  • Eligibility is not limited by income.
  • Large investment selection.
  • If deductible, contributions lower taxable income in the year they are made.
  • Qualified withdrawals in retirement are tax-free.
  • Contributions can be withdrawn at any time.
  • Key cons
  • No control over plan and investment costs.
  • Limited investment choice.
  • Distributions in retirement are taxed as ordinary income, unless a Roth 401(k).
  • Contribution limits are lower than a 401(k).
  • Deductions may be phased out.
  • Distributions in retirement are taxed as ordinary income.
  • Contribution limits are lower than a 401(k).
  • No immediate tax benefit for contributing.
  • Ability to contribute is phased out at higher incomes.
  • Early withdrawal rules
    Unless you meet an exception, early withdrawals of contributions and earnings to a regular 401(k) are taxed (in a Roth 401(k), only earnings are taxed) and subject to a 10% penalty.Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty.
  • Contributions can be withdrawn at any time, tax- and penalty-free.
  • Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.
  • Now let’s figure out which type of IRA is right for you.

    Roth IRA vs. traditional IRA

    There are other types of IRAs, but the two biggies are the Roth and traditional IRA. The main difference between them is how taxes work:

    Traditional IRA: The money you contribute may be deductible from your taxes for the year, meaning you fund the account with pretax dollars. You’ll pay income taxes on money you withdraw from the account in retirement.

    Roth IRA: Contributions are not deductible — the account is funded with post-tax dollars. That means you get no upfront tax break as you do with the traditional IRA. The payoff comes later: Withdrawals in retirement are not taxed at all.

    There are other differences as well. (Interested parties can take a moment to hear more from both sides in our Roth IRA vs. Traditional IRA deep dive.) But for most people, choosing between the two comes down to the answer to this question:

    When you retire and start drawing money from your investment accounts, do you anticipate that your tax rate will be higher than it is right now?

    Not sure how to answer that question? That’s OK: Most people aren’t. For this reason, and the es outlined in the table above, you may want to lean toward the Roth.

    Taxes are low right now, which means most people who qualify for a Roth are probably going to benefit from its tax rules down the road. So, you’ll pay taxes now when your tax rate is low, and pull the money out tax-free in retirement, dodging the higher rate you expect later.

    If you believe your taxes will be lower in retirement than they are right now, taking the upfront deduction offered by a traditional IRA and pushing off taxes until later is a solid choice.

    Still undecided? You can contribute to both types if you’d like, as long as your total contribution for the year doesn’t exceed the annual limit. (See the contribution limits in the table above.)

    Note: Some employers also offer a Roth version of the 401(k). If yours is one of them, follow this same line of thinking to decide whether you should contribute to that or the standard 401(k).

    A word about IRA eligibility

    Both traditional and Roth IRAs have restrictions in certain circumstances, which means that the choice between the two may be out of your hands. For example, if you earn too much, you may not be eligible to contribute to a Roth IRA. If you have a 401(k), you may not be able to deduct traditional IRA contributions at certain incomes. For a full breakdown of those limits and phaseouts, see Roth and Traditional IRA Contribution Limits.

    Figuring out how much you need to save

    Now that you know where to sock away money for retirement, the remaining question is: How much should you be saving?

    Answer: As much as it’ll take to cover your retirement expenses.

    OK, that time we were trying to be cheeky. But back to serious business: the brass tacks of calculating how much to save for retirement.

    Aim to save at least 10% to 15% of your pretax income

    That’s what most experts recommend, and it’s a good starting point for your own calculations.

    If you decide that’s the only retirement savings math you’re going to do, you’ll be in pretty good shape. (Although if you’re a really late starter, you may have to make some adjustments.) But with just a little more effort, we can come up with a much more personalized retirement savings goal.

    How much will you really need to retire?

    That’s the million-dollar question ( or minus several hundred thou).

    But seriously — don’t be intimidated by the high dollar figures we’re about to bat around. Time (the passage of which will allow your investments to grow), tax breaks and compounding interest will provide the wind you need to propel your retirement portfolio returns.

    We told you upfront we’d spare you any mathematical heavy lifting. True to our word, all you need is your current age, pretax income and current savings for’s retirement calculator to tell you how much money you need to exit the working world by age 67 (Social Security’s full-benefits age for those born from 1960 on), or whatever retirement age you choose.

    Plug those numbers in below and you’ll launch our retirement calculator, which will open in a new page. The calculator will project how much monthly income you’ll have in retirement, based on your current savings, as well as how much you’ll need to sock away.

    Are you on the right track to retire?

    I am

    years old, my household income is

    and I have a current savings of


    Don’t like what you see? Consider that these results…

    • Aim to replace 70% of your annual pre-retirement income, which is a standard formula for calculating retirement needs. Why only 70%? Because some expenses will be lower, like commuting costs. And remember,  you’ll no longer be saving 10% to 15% of your income for retirement.
    • Do not include any expected Social Security benefits, or any other sources of income, like a pension, rental income or part-time work.

    With the right tools (an investing account that rewards retirement savings) and a little investing know-how (which we cover in detail in our guide to investing 101), you’ll be on your way to becoming the very picture of retirement readiness.

    Practical matters

    Ready to open an IRA? Opening a Roth or traditional IRA is a simple process you can knock out in less than 30 minutes.

    1. Choose an online broker and open your account: Provide your information, Social Security number (for tax purposes), date of birth and employment information.
    2. Decide how to fund it: The investment firm can walk you through the process of initiating a bank transfer or moving money from an existing investment account.
    3. Choose your investments: More about how to do that in the next chapter. But you can do the first two steps right now and return to this one later.

    For detailed instructions on opening an account, as well as a list of’s top-rated IRA providers, see How and Where to Open an IRA.

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