5 best ways to save for retirement: Secure your golden years by maxing out 401(k)s, opening IRAs, investing in tax-advantaged accounts, and exploring other top strategies to build a robust retirement fund. Get insights on retirement planning today.
5 best way to save for retirement? – Take Advantage of Retirement Accounts
Investing through tax-advantaged retirement accounts like 401(k)s and IRAs should be the cornerstone of your retirement savings plan. These accounts provide multiple valuable benefits:
Tax-deferred growth – You can grow your investments tax-deferred until retirement age when you’ll likely be in a lower tax bracket.
Employer matching – Many employers match 401(k) contributions up to a percentage of your salary, providing free money for your retirement.
Higher contribution limits – The annual limits are much higher than standard brokerage accounts ($22,500 for 401(k)s in 2023, $6,500 for IRAs if under 50).
Automated contributions – Setting up automatic payroll deductions or transfers make consistently saving easier.
Try to maximize contributions to capture all the tax advantages and employer match dollars. Roth options like Roth 401(k)s and Roth IRAs are also smart, providing tax-free withdrawals in retirement.
5 best way to save for retirement? – Take a Goal-Based Approach
Determining a retirement savings goal with projected costs can help you understand how much you’ll need to save each year. Consider factors like:
• Desired annual income for expenses
• Estimated healthcare costs
• Mortgage/rent and other debts
• Travel, hobbies, and entertainment
• Support for family members
• Expected lifespan and inflation
Many financial experts suggest aiming to replace 70-80% of your pre-retirement income through a combination of savings and Social Security benefits.
If your projected costs exceed your estimated income sources in retirement, adjust your savings rate and portfolio accordingly. The sooner you run the numbers, the more time you have to course-correct.
5 best way to save for retirement? – Build Tax Diversification
Having diversified streams of retirement income that are taxed differently in retirement can provide major tax efficiency. Consider contributing to:
Tax-deferred accounts like 401(k)s/Traditional IRAs that are subject to ordinary income tax in retirement
Tax-free accounts like Roth IRAs/Roth 401(k)s where withdrawals aren’t taxed
Taxable brokerage accounts where only capital gains and dividends are taxed
This ratio of taxable, tax-deferred, and tax-free “buckets” allows you to draw strategic withdrawals and control your taxable income during retirement.
5 best way to save for retirement? – Cut Unnecessary Expenses
Reducing excessive and discretionary expenses can free up more funds for retirement savings. Commit to:
• Minimizing debt by paying off loans
• Downsizing to reduce housing costs
• Cooking more meals at home
• Reviewing monthly subscriptions
• Limiting splurges on wants
This doesn’t mean you have to follow a spartan lifestyle. But evaluating your spending habits may reveal areas to cut back so more can be allocated to your retirement goals.
5 best way to save for retirement? – Embrace a Work Optional Lifestyle
While an extravagant retirement may require saving huge sums, the goal is really about building enough to cover your basic needs and some wants. This creates a “work optional” lifestyle where additional income is a choice rather than a necessity.
A general guideline is saving 10-12 times your desired annual income from a combination of retirement accounts and other investments. At that level, drawing a 4% withdrawal rate each year provides sufficient income while allowing your principal to last through retirement.
Ultimately, the “best” way to save for retirement depends on your specific retirement vision, costs, and resources. But utilizing the appropriate retirement accounts, striving for ample savings rates, tax diversification, and a smart spending plan, can put you in position for a truly enjoyable retirement.
