How to save for retirement

Damian Carrillo avatar
Damian Carrillo
Natasha Carrillo avatar
Natasha Carrillo
Cover for How to save for retirement

How do I save for retirement?

Do you feel completely lost like I did when I first discovered I had to save for my retirement? Are you ready to set yourself up to live your best retirement life? Do you have a retirement account set up but don’t know what to do next? If the answer is “yes” to any of these questions, keep reading!

Remember to speak to an investment professional. If you have an employer-sponsored retirement plan, you can speak to someone that helps manage your company’s account, sometimes even a financial planner.

You can save your earnings in a traditional bank, but you will not have favorable tax treatment and inflation will eat away at your savings over time. Many people utilize retirement accounts to counteract inflation and ensure they have enough money to retire on. However, knowing the appropriate time to use a particular kind of retirement account is tricky since there are multiple kinds of retirement accounts, and each has different benefits.

Still, when you first enter the work force you will likely be forced to make retirement decisions that will impact you for the rest of your life. I was ill prepared for the decisions I was to make when I found myself in this situation, and I wish I had a resource like this to hold my hand through the process. Depending on what stage you are in life, you may be able to use this reference as a general checklist but really consider the decisions you make.

Am I self-employed?

First, you’ll need to decide if you are self-employed exclusively or not because you can potentially leverage your company’s retirement plan to your advantage. If you are self-employed, don’t worry! You should still save for retirement. There are accounts available to you as a self-employed individual that you may have access to, including a SIMPLE IRA, Individual 401K, or an SEP-IRA.

Does my employer offer a retirement account?

There are a few different types of employer-sponsored retirement accounts, but they are all generally similar in that your employer serves as an intermediary between you, the employer, and the IRS, whom you pay taxes on your wages to. Your payroll department will direct some portion of your wages to an individual account prior to it touching your hands.

Does my employer match?

In some cases, your employer will make a fully vested contribution on your behalf - otherwise known as a match. In plain English this means that whenever you contribute to your retirement account, so will your employer. You’ll generally want to contribute as much as necessary to get the entire portion of your employer’s fully vested contribution (match).

If you are unsure of whether your employer matches, you can generally check in two places: your benefits package or your pay stubs. Your benefits package will generally mention something about having a match if you do have one, or your pay stubs will mention a “safe harbor match” or something similar. If you are unsure of whether or not your company offers a match, please ask around so you can plan accordingly. Don’t leave this money on the table.

Contribute enough to your employer-sponsored retirement account to get the full match

The specifics of an employer match may vary. Many employers will match up to a certain percentage. As an example, an employer may offer a 50% match up to 5%. So, when you contribute any amount up to 5% of your income into your retirement account, your employer will match those contributions by 50%. In other words, for every $1.00 you contribute, your employer will contribute 50 cents into your retirement account. Your employer will continue contributing up to 5% of your income.

Another example is that some employers will match up to a certain dollar amount. For instance, an employer may choose to contribute up to $5,000. Again, the specifics of how this works may vary and will be dependent on your employer’s plan.

Max out your IRA

An IRA is an Individual Retirement Account (also sometimes referred to as Individual Retirement Arrangement), and like a 401(k), you’ll also receive favorable tax treatment for this type of account whether you earn income through self-employment or from an employer/company. In 2021, you could contribute $6,000 or $7,000 if you’re 50 years or older. See this page for the amount you can contribute, in case it’s changed since I wrote this article. You open these types of accounts with a brokerage like Fidelity, Vanguard, or Charles Schwab yourself and they have nothing to do with your employer.

There are a few reasons to favor an IRA over a 401(k) that your employer administers:

  • You will have more investment options so the investments you choose can hug the curves of your investment strategy.
  • Your employer-sponsored plan will likely have higher expense ratios. Check on a site like MarketWatch or MSN Money and find the expense ratio to see how your employer-sponsored plan stacks up before committing fully to it.
  • You can open a Roth IRA - Contribute 15%

If you are dubious of random numbers like “15%”, feel free to read the following article from Fidelity: How much should I save for retirement?. We both questioned it because the number seems arbitrary, however this article convinced us that it was a worthy back-of-the napkin suggestion. The 15% target is a great goal to start with, but you may need to save more than this to comfortably retire. It is recommended that you increase your retirement savings by 1% each year until you max out the contributions.

If you’d like to work out the exact percentage of pre-tax income you should be saving, enter your details into the FINRA Retirement Calculator. This calculator will help you determine how much you should be saving for retirement based on your current age, income, and retirement age.

Contribute to Individual 401(k), SEP-IRA, or SIMPLE IRA to reach 15%

If you are self-employed, increase the amount you contribute to your retirement plan so that you save 15% of your pre-tax income for both your IRA and one of these retirement plans. If you cannot save 15%, create an actionable plan by budgeting and targeted saving to reach 15%.

Increase contributions in employer-sponsored retirement account to reach 15%

If your employer sponsors your retirement account, increase the amount you contribute to it so that you save 15% of your pre-tax income for both your IRA and your employer-sponsored retirement account. If you cannot save 15%, create an actionable plan by budgeting and targeted saving to reach 15%.

Contribute to a taxable account to reach 15%

Since your employer does not sponsor a retirement account, you should still be saving for retirement beyond the limit that you contribute to your IRA because that will likely not be enough. Open a brokerage account with Vanguard, Fidelity, or Charles Schwab (or others but watch out for fees) and contribute enough so that you save 15% of your income in your IRA and your new brokerage account.

Continue Investing

At this point you’ve set yourself up well for retirement, but you still may have additional income you’d like to invest. Now, you should carefully consider ways to save on the tax you’ll have to pay both in the present and in the future when you start taking withdrawals from your retirement accounts.

Max out retirement account contributions

When you’re self-employed and you’ve reached this point in your investing journey, you’ll want to max out your contribution to your retirement account to the yearly limit. Since you receive favorable tax treatment in one of these accounts, consider investing more money in it instead of sending it into a brokerage. The contribution limit of your account is as follows:

  • Your One-participant 401(k) will have a yearly contribution limit per year ($23,000 in 2025).
  • Your SEP-IRA will have a yearly contribution limit per year ($69,000 in 2025).
  • Your SIMPLE IRA will have a yearly contribution limit per year ($16,000 in 2025).

Max out employer-sponsored retirement account contributions

When your employer sponsors your retirement plan and you have additional income to save, you should consider contributing the maximum to that retirement plan. Since you receive favorable tax treatment in one of these accounts, consider investing more money into it prior to investing in a brokerage. In 2025, you could contribute up to $23,000 in your employer-sponsored retirement account.

Does my plan offer a Mega Backdoor Roth?

You may still have income ready to be invested after you have maxed out the amount you can contribute to your employer-sponsored retirement account. One option is to see if your employer-sponsored retirement plan offers an in-plan Roth rollover, commonly known as a Mega Backdoor Roth.

Check with the administrator (Fidelity, Vanguard, etc.) of your employer-sponsored retirement plan to see if it offers the following:

  • after-tax 401(k) contributions
  • in-plan Roth conversions

Have them explain the process to you because it’s a bit confusing. This page gives additional information that I found helpful when I was trying to understand the details.

Contribute to a Mega Backdoor Roth

Once you know that your retirement plan offers a Mega Backdoor Roth account, you can ask the plan administrator to set it up so that you make after-tax contributions that get converted.

Contribute to a taxable account

Now that you have exhausted all the options for favorable tax treatment, you can still invest any additional money in a traditional brokerage. You’ll of course pay taxes on the income as you make it and on the capital gains as it grows, but over a long enough time span the market has demonstrated that it will outperform a traditional savings account (even high yield ones). Remember to talk with a financial planner for specific recommendations to your situation.

Additional references