Confession time: Even when you work at a Fintech company like Kasasa, finances don’t come easy to all of us. No matter your day job, your age, or your income, retirement can be intimidating for anyone. Saving that amount of money? Diligently? Over the course of decades? You might feel like you barely have enough money for the lifestyle you want now.

Truth is, it takes a lot of dedication, discipline, and strategy to reach your retirement goals at a timely age. By timely age, we mean the standard retirement age. If you’re looking for retirement tricks to stop working in your 30s, well hey, so are we. But you’ll find this guide to be a bit more practical.

If you’re ready to get serious about saving for retirement, find the right plan for you, and start putting money away for your long-term future, this is a great place to start (but do talk to a certified financial advisor). Let’s take a look the available options for your personal approach to retirement so you can be on the fast track to kicking back and relaxing — not working well into your golden years. 

Think you’re behind on retirement? Don’t worry, you’re not alone.

And you might be further ahead than you think. That is, if you have any money saved for retirement at all. In fact, the numbers support this hypothesis: according to an Economic Policy Institute (EPI) study, “nearly half of families have no retirement savings at all” — which begs the question, how much should you actually have saved for retirement?  

How much money do you need for retirement?

What is the magic number? A straightforward question, right? Not exactly. Turns out it depends on who you ask. There are many schools of thought on how to best approach your number. Here are three popular methods to determine how much money you’ll need. 

3 ways to calculate how much you’ll need in retirement:

1. The income method

The income method multiplies your income by a factor to determine how much you need to retire. Exactly what that factor should be is subject to some debate, ranging from 8x to 12x your income once you reach retirement age (traditionally, age 67 for the average retirement). Fidelity recommends 10x your annual income.1 At first glance, you might think you’d run out of money after little more than a decade. But remember, you should hope to have some social security and interest earnings supplementing your retirement income at that point. Not to mention, most retirees live a scaled-back lifestyle from their working years — with the goal of living on a little less and working a whole lot less. 

2. The expense method

With the expense method, you analyze your monthly budget to arrive at your retirement number. You’ll need to think through what expenses you anticipate having at your retirement age — you’ll find some expenses take up more of your budget, while other longtime budget concerns no longer apply. For example, your healthcare costs and insurance premiums may start to rise as you age, but you may have also paid off your mortgage in full by retirement. Not to mention, you won’t be saving as aggressively for your future because — well, this is your future. You’ll have reached the spending stage where you think in terms of retirement income rather than retirement savings.

3. The savings method

The savings method concerns itself more with the process than focusing on an end number result. You simply set aside a percentage of your salary each year. As your salary grows, the total amount you’re saving on an annual basis grows as well (plus, the interest you earn in a retirement account).  It’s important you start saving a percentage of your income at an early age, even it’s just 10%. But if you’re really ready to prioritize retiring as soon as possible (and you have the means to still enjoy your quality of life) a 20% retirement savings goal will go a long way towards a more comfortable retirement. 

DO THE MATH: How much money do you need for retirement? You can find plenty of retirement calculators online that also factor in your age, how, much personal savings you have to date, how much you’re on schedule to save each year, and the expected interest you’ll earn in your retirement accounts. A typical retirement calculator takes the savings method approach to see if you’re on track, letting you input a percentage of income you plan on saving annually. 

Retirement investment account types

There are several types of retirement investment accounts — and the list isn’t mutually exclusive. In fact, if you’re planning right, you should be saving for your retirement in more than one place, spread out across several investment vehicles. Why? Because there are often limits to how much you can contribute per account each year. As we look at the various types of retirement savings accounts, we’ll call out certain contribution limits where they’re applicable.

 This video from CNBC Money also does a nice job of explaining the differences between several types of retirement accounts. 

401(k) retirement accounts

A 401(k) is an employer-sponsored type of retirement plan. It allows you, as an employee, to automatically transfer a percentage of your salary to a retirement account. Putting money into your 401(k) can be a great place to start saving for a retirement early in your career. 

And to help you save money in a more efficient way, there are tax benefits. The salary you contribute to a traditional 401K is your pre-tax earnings. That means you contribute more total dollars up front (instead of paying initial income taxes like you do on your ordinary paycheck) — you’ll still pay taxes, it just comes later. You usually have control over how these funds are invested (or you can automate it if you prefer), with a range of investment vehicles like stocks, bonds, mutual funds, and cash. 

Contribution limits

The 401(k) contribution limit for annual contributions in 2021 is $19,500. If you’re over age 50, you can contribute an additional $6,500 in “catch-up” contributions, raising your cap to $26,000 per year. This is the limit for how much you can contribute, but it doesn’t include any funds your employer is willing to match, so don’t let any additional work perks bump down your contribution level.  

A few key benefits of 401(k)s:

401 (k) employer match

If you’re lucky, you’ll work at a company that matches a portion of your contributions to your 401(k). This is extra money on top of your salary that you should use to your advantage. Many of these companies will match between 50 and 100% of your contributions up to a certain threshold (let’s say 3%, as an example). That means if you aren’t contributing at least 3% of your salary to your 401(k), you’re leaving free money from your company on the table. If you make $100,000 a year and your employer offers a 401(k) matching of 100% up to the first 3%, you’d be adding an extra $3,000 per year to your savings. Over the course of a 40-year career, that money really adds up.

401 (k) tax incentives

As mentioned, the money you contribute to your 401(k) is pre-tax income. So you won’t be taxed on those dollars until the time of withdrawal (after you’ve reached retirement age). But that’s not the only tax consideration to keep in mind. Your 401(k) contributions are separate from your annual income for income tax purposes, which can place you in a lower tax bracket — resulting in a lower income tax bill. It’s a win-win for your budget today and your retirement tomorrow. 

Also. your savings can grow tax deferred. Your dividends and capital gains are only taxed as ordinary income once you distribute the money from your 401(k). If you’re in a lower tax bracket in your retirement than at the time you’re making your contributions, this can help you keep a lot more of your investment earnings.

NOTE: A Roth 401(k) is an alternative to a traditional 401(k) that also offers tax incentives, but unlike a traditional 401(k), a Roth 401(k) reverses your tax timeline. You pay income tax upfront, but then your tax savings can grow tax-free — without additional taxation at the time of withdrawal.

401 (k) shelter from creditors

In a worst-case scenario, 401(k) funds are shielded from most creditors. The Employee Retirement Income Security Act (ERISA) protects you from claims by judgment creditors. Your other accounts may be subject to forfeiture or seizure, but the money in your 401(k) can make sure you keep some of your hard-earned assets.  

Individual Retirement Accounts (IRAs)

The difference between a 401(k) and an IRA is right there in that first letter — “I” for individual. Anyone can open an IRA; it doesn’t need to work through your employer. Of course, you’ll be the only one contributing to your IRA. There are multiple types of IRAs to consider based on your financial situation.

Traditional IRAs

A traditional IRA lets you contribute money in a similar, tax-deferred fashion as a traditional 401(k). In most cases, the income you contribute to your IRA is tax-deductible (or at least partially tax-deductible, depending on your income level), so you may be able to save money on your taxes. This also lets you invest a larger amount of money earlier on, so that you can earn more in interest over time. 

When you make withdrawals during retirement, the money is taxed as ordinary income. And remember, you can have both a 401(k) and an IRA, so if you’ve already hit your 401(k) contribution, you can still continue your retirement saving in your 401(k). 

At age 72, you’re required to start taking IRA distributions (making withdrawals from your IRA). You’ll have to take out at least a minimum amount each year to avoid tax penalties. That's why it’s important to start contributing to your IRA early so you can take advantage of as many years of compound interest as possible before you start making withdrawals. 

Roth IRAs

A Roth IRA is taxed differently than a traditional IRA. Your income is taxed as you earn it based on your current tax bracket. Your contributions aren’t tax deductible now. However, you avoid paying taxes on your earnings (such as capital gains taxes). When you withdraw the money, it’s tax-free. 

There are no age limitations or mandatory withdrawals for a Roth IRA like you’ll find with a traditional IRA. If you want to leave your money in your Roth IRA for a few additional years to earn additional interest, you’re welcome to. Or you can withdraw it if you need it. 

But you’re only eligible to contribute to a Roth IRA if you fall below set income thresholds. The income limit for Roth IRAs in 2021 is between $125,000 and $140,000 for single individuals — with higher caps for married couples — meaning that if you make more than that, you’ll either be ineligible to make Roth IRA contributions or you’ll be capped at a reduced amount. 

Contribution limits

For both Traditional IRAs and Roth IRAs, contributions are limited to a maximum of $6,000 per year. After age 50, you can contribute up to $7,000 thanks to “catch-up contributions.” 

SEP IRAs

SEP stands for “Simplified Employee Pension.” An SEP IRA is designed for people who are self-employed. Think independent contractors, freelancers, and small business owners. 

SEP IRAs follow the same tax-deferred advantages and withdrawal rules as traditional IRAs. But if you’re a small business owner and you set up an SEP IRA for your employees, you can deduct the contributions you make for your employees. Individual employees, however, are not able to contribute to their accounts.

Contribution limits

For 2021, SEP IRA contributions are capped at 25% of your income or up to $58,000 — whichever amount is less.

SIMPLE IRAs

SIMPLE stands for “Savings Incentive Match Plan for Employees.” Like a SEP IRA, a SIMPLE IRA for self-employed people and small business owners. And it, too, adheres to the same taxation policies and withdrawal rules as a traditional IRA. 

The difference between a SEP IRA and a SIMPLE IRA is that both employees and employers make contributions — with employers required to make contributions. Also, all employee and employer contributions are tax-deductible, meaning either you or your business could reduce your current tax burden. 

Contribution limits 

For 2021, the SIMPLE IRA contribution limit is $13,500 per year. But if you’re over age 50, you can contribute up to $16,500.

Other types of savings that could impact your retirement

HSAs  

An HSA or Health Savings Account offers a way to set aside money for your healthcare expenses while receiving some tax advantages when you use the money for qualified medical expenses. While you’re young and healthy, you can start setting aside money in an HSA for your future medical needs. And if you don't use it all in a year, you can hang on to it and, in some cases, invest it.

As you age into retirement, your healthcare needs (and costs) are only going to increase. Setting aside specific health savings — as well as knowing what your health insurance and Medicare coverage will provide — can go a long way towards keeping your retirement nest egg and making it last the duration of your lifetime.

Pensions

This is a type of employer-provided retirement income (from companies with pension plans) that requires an employee to work for them a certain number of years. The benefit usually increases with the length of time employed at the company. This often applies to government and public-sector jobs, like teachers, military, police, and fire departments. According to The Balance, “Large corporate employers may also offer pension benefits, but it is not as common as it was thirty years ago.”

Social Security

If you’re close to retirement now, you should be in line for Social Security income on top of your retirement savings. The younger you are, the less certainty you should place on Social Security as a retirement income supplement. Regardless of how long Social Security lasts or what it looks like with any reforms in the coming decades, as it stands, according to CNN Money, “your Social Security benefits will only replace about 40% of your previous income.

That likely won't cut it, even if you plan to live under the most frugal of circumstances. So you need to be planning beyond Social Security. Best case scenario, it’s an added bonus to your already comfortable retirement savings. 

High-yield savings accounts and investment accounts

Just because you’ve maxed out your 401(k) and IRA doesn’t mean you should stop putting away money for your future. No one has ever regretted saving too much or planning too well.

You can still earn a great return whether you’re playing it more conservatively with a high-yield savings account, or if you’d rather start growing your investment portfolio. Of course, as opposed to the money you put in a 401(k) or IRA, you’ll have to pay the standard taxes on your investment earnings. That’s why the government limits the contributions any one person can make to those special tax-advantaged accounts.

Capital gains taxes for investments will depend on how much investment income you’ve earned and how long you’ve held your investment. Long-term capital gains tax rates (held more than a year) are 0%, 15%, or 20% — your tax rate is based on your tax bracket. Short-term capital gains (held less than a year) are taxed as ordinary income.

You should expect to earn around a 6% rate of return annually with stock-market investments (though that number will vary with many up or down years). A high-yield savings account, on the other hand, tends pay closer to a 2% rate of return, but there’s significantly less risk. Money market accounts and certificates of deposit (CDs) can also net you a return with limited risk — offered at most banks and credit unions across the United States.

Tips for retiring at any age — retirement savings FAQs

Do I count my home equity as income?

You’re right to realize that some of the expenses you have today won’t necessarily be around by retirement age. The amount you’re currently setting aside for retirement is one, ideally your student loans are another, and of course, that brings you to a major investment — your home (assuming it’s paid off).

But according to TheBalance, “you'll also have retirement costs that you don't carry today, like certain out-of-pocket health and end-of-life care costs. And ideally, you'll also travel more, enjoy more hobbies, and indulge a bit. As a result, you may want to budget for retirement by assuming you'll spend roughly the same amount you spend now.” 

The Huffington Post further supports this outlook in Is Your Home Equity Part of Your Retirement Savings?, saying that “If you don’t plan to sell, then your home equity, while still an important part of your overall net worth, shouldn’t be included in your retirement savings calculation.”

You can always choose to downsize your home if you’ll be an empty nester in retirement — or maybe you simply no longer need as much space — and any profits you make from your home sale (post-tax) can strengthen your retirement nest egg.

Should I focus on paying off debt or saving for retirement? 

According to Dave Ramsey, it’s important to start with a firm foundation, and that includes addressing your debt first. In his post on The Truth About Retirement, Mr. Ramsey recommends that:

“You begin investing for retirement after you’ve done two things: you’re debt-free, and you have saved an emergency fund of three to six months of expenses. Three-fourths of the people on Forbes list of the 400 wealthiest people in America say getting and staying debt-free is the most important thing you can do when it comes to handling your money. The full emergency fund ensures you have a cushion in case of an illness or job loss and that your retirement funds stay where they are and keep growing."

Get rid of any high-interest debt first. Paying ahead on your loans to save money on interest where you can be your top priority before any savings goal. And you definitely don’t want to be bringing debt into retirement. Your debt with the highest interest rate is where to start. Once your debt is under control and you’re down to your more reasonable-rate loans (like your home mortgage), you can start saving for retirement.  

When is the best time to start saving for retirement?

The short answer: now. Or as soon as possible. That’s because there’s also another factor in play that could really work to your advantage — compounding interest — or the interest you can earn on interest. According to Tony Robbins, “by not saving, and by not investing, you are losing out on more money by waiting than you stand to lose by taking a small risk and starting your retirement account.” For a more in-depth breakdown of how compounding interest over time can make a big difference, see Tony Robbins’s article: Create a Money Machine.

Compound interest is your best friend when it comes to retirement planning. A decade of saving can literally make a difference of hundreds of thousands of dollars in how much money you’ll have when you retire. That means the sooner you start putting money away in your 401(k) or IRA, the better position you’re in for an early retirement — or at the very least, you’ll be able to retire on time. 

In summary:

It’s never too early to start thinking about retirement. You should be taking advantage of your youth and not just in the “get out there and live” making memories way. Rather, time is the one resource you’ll never get back for your finances, too. Since contributions are limited for all tax-advantaged retirement accounts, you don’t want to miss out on those extra years of earning interest on your retirement money.

It may be tempting to spend freely now and figure out retirement down the road. But if you start setting money aside in a 401(k) or IRA today, you’ll thank yourself later. And make sure you’re taking advantage of all the perks at your disposal. If your employer offers 401(k) matching, you should try to contribute enough to use it. If you’re still below the income cutoffs to open a Roth IRA account, you should really look into doing it.

Yes, saving for retirement is a daunting task — a faraway problem that might seem less pressing than your present concerns. Still, if you get the chance, talk to a certified financial advisor (they get paid to do this stuff for a reason) to see how you can be maximizing your retirement saving.