Most people want to know the best way to save for retirement, thinking it's a simple, clear-cut answer. But there's no single way to ensure you have the right amount of money saved up for your future. This is because a good retirement savings plan will include multiple sources of money to replace your employment income, and will take into consideration your ideal retirement lifestyle.
Understanding where your retirement income might come from will help you plan ahead to increase that figure. Visualizing the full picture of your future financial life in retirement can help you make smarter long-term decisions today.
In this article, we'll take a closer look at the best ways to save for retirement, including an explanation of the "three-legged stool" of retirement planning, the basics of Social Security and tax-advantaged retirement savings accounts, and the best time to start investing for your future.
The three-legged stool of retirement planning
There are three main income sources for retired people. Think of these as a three-legged stool of sources to provide a stable income for your retirement.
These can include your retirement savings plan (such as an employer-sponsored 401(k) or an individual retirement account (IRA)). Specific investments within your retirement accounts might include stocks, bonds, mutual funds, index funds, exchange-traded funds or target-date retirement funds.
2. Social Security.
The great news about Social Security is that it is one of the few sources of income you can't outlive. And, while most American workers qualify for Social Security income in retirement, you shouldn't assume that you can enjoy a comfortable lifestyle on these benefits alone. As of 2021, the average Social Security benefit for retirees was about $1,555 per month. Social Security is a complicated aspect of retirement planning. The amount of benefits that you receive from
3. Other guaranteed income sources.
In addition to Social Security, you might have other sources of retirement income, like a pension, an annuity or whole life insurance with cash value to supplement your retirement income.
Fully understanding the sources of your future retirement income can help you assess where you stand currently and see the gaps that you will need to fill before you retire. Even if retirement is many years away, planning ahead is always best. If you start saving early, and smartly, you can turn some of these options into consistent income that will last the rest of your life.
Ways to start planning for retirement
Put money into your 401(k) or other tax-advantaged retirement savings accounts
If your employer offers it, you can use a 401(k) or 403(b) to save money for retirement while reducing your taxable income. If your employer offers a matching contribution for your 401(k) (or similar retirement plan), like a 5% match, be sure to put in at least as much as it takes to get the match. Don't leave this free money on the table.
You might also want to use a traditional IRA that lets you save money for retirement on a pre-tax basis, or a Roth IRA that lets you set aside retirement money with after-tax dollars (if you meet the income requirements).1 There are also retirement savings account options for people who are self-employed, such as the simplified employee pension (SEP) IRA.
Pay attention to your Social Security account throughout your career
You can set up and view your personal Social Security account at
Some people are worried that Social Security won't be around when it's time to retire. This has led to misunderstandings and fears about the solvency of the Social Security system.
With the current reserves, the system will be able to pay 100% of promised benefits until 2034. After that point, they project
It seems unlikely that Congress would force retirees to take a 22% benefits cut. But the uncertainty facing Social Security reserves is another reason you should save as much as you can for your own retirement goals.
Consider working in other types of guaranteed income sources
Depending on your financial goals,
Some people might also have pension income from their careers. Pensions are a form of a
Staying on track for retirement savings goals
Once you understand the three-legged stool concept and where your retirement money will come from after you retire, think about how you can stay on track with your retirement savings goals. Start by understanding the ballpark of what you will need for retirement income by using the
Then, make a budget to ensure you can meet your savings goals. Use a budgeting app or even pen and paper to make a clear list of how much you spend each month and on what. Ask yourself: How much money do you need to keep your current lifestyle? Where could you cut back spending to make more money available for retirement contributions?
Here are a few more tips for smart savings:
Adjust or review your investment risk tolerance
Understanding your own personal
Stocks will always move up and down, but bonds and cash can be risky, too—and fixed-income investments don't always deliver a big enough yield to meet your goals. You should try to
There's no one combination of the right blend of investments to have in your retirement savings portfolio. It depends on your age, your income, your total savings rate, how much income you hope to have in retirement, and your overall risk tolerance.
For example, if you still have 30 years until retirement, you might feel comfortable investing in a portfolio that has a higher percentage of stocks instead of bonds and cash. Riskier investments in the short term might give you a better chance of long-term growth. But if you don't have as much time left before retirement age, depending on the size of your retirement portfolio, you might need to consider a less-risky blend of investments to protect the wealth you've built so far.
Use tax-efficient strategies
Another aspect of retirement investing is
If you're concerned about tax-efficient strategies, talking to a Thrivent financial advisor can help. While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney. Your tax situation in retirement might be different than when you were working. Depending on your income and tax bracket, there might be opportunities for you to be strategic about when and how to take distributions from your tax-deferred retirement accounts, which investments to hold or liquidate, and how to make charitable contributions for maximum tax benefit.
Watch out for these retirement saving roadblocks
It's important to keep saving and investing for your future—every paycheck, every month. However, life is complicated, and people sometimes experience financial challenges or events that interrupt their plans. Watch out for some of these common obstacles that could impact how much you're able to save:
Credit card debt.
If you have high-interest credit card debt or other consumer debt, make a plan to pay it down.
Real estate purchase.
If you buy a house that costs more than you can comfortably afford, your monthly mortgage payment might cut into the amount you can save for retirement. You might consider staying in your "starter home" for a few years longer than you had planned. This can free up more money in your budget.
Taking out a loan for your car or truck is often considered "good debt." But if you're paying too much money in monthly auto loan payments, your retirement savings goals might get left behind. Resist the temptation to buy or lease a new car every couple of years. This could help you invest hundreds of extra dollars a month.
Having to miss work for several months or longer because of severe illness or injury can harm your retirement savings and your income potential. You may be able to protect yourself from the full financial burden of health problems with
Ending a marriage can cause your retirement savings to take a big hit. If you go through
If you come up against one of these roadblocks, build back to healthy retirement contributions slowly. Even if you can only afford to save a small percentage of your income, start with that amount. Each year, try to increase your retirement contributions by another small percentage of your income or more when you can.
You also can push any financial windfalls toward your retirement accounts to catch up. If you get a pay raise, put it into retirement savings if you can. If you receive a tax refund, an inheritance, a gift or proceeds from a business or property sale, put some (or all) of that one-time money into long-term retirement savings.
The best way to save for retirement is to start early
How much you're able to save for retirement depends entirely on your unique financial situation. But if you're able to start saving early, you will likely be in a better situation when you leave the workforce. Your money will have had more time to grow.
Here are three hypothetical examples of people who put the same amount of money in their retirement accounts but had different results based on when they started saving. Each put in an initial amount of $10,000 and then saved $10,000 per year with an average annual return of 4%.
- Maria started saving at age 25 and saved consistently for 40 years. Her savings at age 65 was $1,036,275.
- Miguel started saving at age 35 and saved consistently for 30 years. His savings at age 65 was $615,717.
- Delia started saving at age 45 and saved consistently for 20 years. Her savings at age 65 was $331,603.
This is the power of compound interest: The earlier you start saving, the more time your money has to grow, with your investment gains earning additional interest year after year. Taking several years off from saving for retirement could cost you hundreds of thousands of dollars of investment growth.
Although there is not one single account or method or portfolio that's "the best" way to save for retirement, the best tactic is starting early. Connect with a