Starting early with investing for retirement is so important to secure your future self. This means that saving for retirement should be a component of your overall financial portfolio and wealth-building strategy. By starting early on, you put yourself in a position to build a substantial nest egg that the future you will be grateful for. So, let’s discuss how to save for retirement in your 20s!

Why saving for retirement early matters

Saving for retirement early is essential as it can you help you create a solid financial base. This ensures that you’ll have sufficient savings for a comfortable retirement, even if career interruptions happen along the way.

Early savings also means that you are creating financial independence for yourself, lowering your reliance on social benefits and reducing financial strain in retirement.

Unfortunately, 56% of workers feel that they don’t have enough money for retirement, which is why it’s important to get started saving immediately.

But don’t worry, retirement saving isn’t as complicated as it seems! Here, you’ll find answers for everything from “How much should I contribute to my 401k in my 20s?” to “What are my options for saving?”

There are many retirement accounts to choose from when figuring out how to save for retirement in your 20s.

First, of course, you need to pick the right account that aligns with your financial situation and goals. Let’s discuss them below!

1. The 401(k) Plan

A 401(k) is an employer-sponsored retirement account into which you can contribute part of your pre-tax income. Many employers who offer the 401(k) plan will offer a match up to a certain percentage.

For example, a common matching contribution plan matches 50% for annual contributions up to 6%. If you make $100,000 and contribute 6% (or $6,000) to the plan, your employer will contribute an additional $3,000.

The great thing about the 401(k) plan is that you get to save the maximum amount of your income before taxes. But keep in mind that when you retire, your funds will be taxed at whatever your tax bracket is at that time. So, when you calculate retirement, planning for taxes is a must!

In addition to the traditional 401(k), many employers offer a ROTH 401(k) to their employees. Funds contributed to a ROTH account go in post-tax. Post-tax means your savings come out tax-free in retirement.

There are a few other types of employer-sponsored plans as well: 403(b) and 457(b) plans. These plan types are almost identical to the 401(k) plan. They are offered to people who work as educators, in government, or in non-profit organizations.

A personal 401(k) story

A while back, I posted a picture on Instagram of an old 401(k) statement. I started this 401(k) account with a zero balance.

Over a 4-year timeframe, I saved $81,490, which included my 401(k) match. Shortly after I shared that post, someone left this particular comment:

“401(k)s are for chumps. Two-thirds of that money will be gone in taxes, (and) fees that you don’t know about, and that they are legally allowed not to tell you about.

You will be taxed at the rate at which you retire, which will be more than you are today. Inflation will cut that by 2% every year.

It’s a big game and you are falling for it. Why would you put your money in a 401(k) when the banks just print more money?”

I’ll be honest and say that yes, I agree with a portion of their comments, but this person is not right about everything with 401ks. Which brings us to the pros and cons.

Pros and cons of a 401(k)

There are a few cons to a 401(k). Some 401(k)s can be expensive, have hidden fees, and be very limited in terms of where you can invest.

Additionally, 401(k) contributions are before tax. That means when you start to withdraw it, you will be paying tax at whatever your future tax rate is. Future tax rates are hard to predict, but they could very likely be higher than the present day.

However, even though there are a couple of drawbacks of a 401(k), the advantages far outweigh them when planning how to save for retirement in your 20s.

401(k)s are a great way to gain investing experience

Before being exposed to a 401k, many people have never really had the opportunity to invest in the stock market. A 401(k) provides that opportunity and allows it to happen painlessly through automatic deductions from your paycheck.

There is a great opportunity for pre-tax contribution growth

The growth of your pre-tax contributions may far outweigh any taxes or fees you incur when it’s time to withdraw from the account. However, this is not a guarantee.

In addition, the growth from your employer’s 401k matching may be able to take care of some or all of those taxes and management fees you incur.

Retirement is not a specific date; it’s a period of time that lasts for several years

Retirement can last upwards of 20+ years. That means when you retire, you won’t be withdrawing all your money at the same time. Your money still has more time to potentially keep growing.

Your money doesn’t need to stay in your 401(k) forever

Most people do not stay at their jobs from when they first graduate college until they retire. A classic example is me! I switched jobs four times over an eleven-year period before I started working for myself.

When you leave a job, you can roll over your 401(k) money into an individual account. You are not stuck there forever.

2. Traditional IRA

This is a type of retirement account that you can set up individually, independent of an employer.

In addition, this account type is tax-deferred. That means you will have to pay taxes come retirement (age 59 1/2), according to the IRS, when you start to withdraw your money.

Pros and cons of a traditional IRA

The biggest benefit of a traditional account is deferring taxes till retirement. You won’t pay taxes on funds when you put them into the account. As most people have a lower tax bracket after retirement, this means you’ll ultimately pay less in taxes when you withdraw the money later.

Additionally, a traditional account gives you much more flexibility in investing than employer-sponsored plans. Generally, you can invest in almost endless investment options, such as stocks, mutual funds, or bonds.

IRA contribution limits, however, are much lower than 401(k) limits. And if you take out money before you are eligible (age 59 1/2), you will be subject to income tax and a 10% penalty.

3. Roth IRA

This account type is similar to a traditional account but has some key differences.

First, your contributions are made post-tax, which means there is no deferred tax benefit.

In addition, the earnings on your funds will not be taxed come retirement age. You can make withdrawals on your contributions before you are eligible without any tax penalties, according to Charles Schwab.

Pros and cons of a Roth IRA

While a traditional IRA gives you potential tax savings when you contribute funds, a Roth helps you save on taxes in retirement. Money that you put into a Roth goes in post-tax, meaning you’ll pay taxes before depositing it.

However, you get to take your money out of the account tax-free in retirement.

Like a traditional account, Roth accounts also give you the chance to invest according to your risk tolerance.

However, Roths also have lower contribution limits than 401(k) accounts.

In addition, Roth accounts have income limits, so you may not qualify for a Roth if you make too much money.

Traditional or Roth IRA? Which is best?

They are both great ways to grow your retirement funds. But to choose between the two, you have to determine what works best based on what you think your future tax bracket will be.

For example, if you think your future tax bracket will be lower than what you currently pay now, then a traditional account might be best for you since you don’t pay taxes until later.

However, if you think your tax bracket will be higher than what you pay now, then a Roth might be best for you since you would have already paid taxes on your contributions.

Many people have both types of accounts because you can have multiple IRA accounts. Ultimately, they are able to save more by leveraging the benefits of these plans over time.

4. The self-directed IRA

A self-directed IRA is a type of individual retirement account that is governed by the same IRS rules as traditional and Roth accounts.

However, unlike the other types, a self-directed account can unlock access to alternative investments, for example, real estate.

Pros and cons of a self-directed IRA

There are pros and cons to a self-directed IRA, as explained by NerdWallet. The main benefits of a self-directed account include:

• Ability to invest in a range of alternative investments
• Potential for higher returns through diversification

However, self-directed accounts also come with disadvantages, such as:

• Fees may be higher for self-directed accounts
• May have a higher risk of scams or fraud due to less regulation
• Some alternative investments have low liquidity, making it difficult to withdraw funds

5. The Solo 401(k)

This plan is specific to those who are self-employed but have no full-time employees. Essentially, a solo 401(k) lets self-employed people create a 401(k) plan for their business. It can be a great option if you’re self-employed and trying to figure out how to save for retirement in your 20s.

Pros and cons of solo 401(k)

The advantages of a Solo(k) include:

• Many benefits of a traditional 401(k) that self-employed people otherwise wouldn’t get access to
• Business owners can contribute both as an employee and employer, maximizing contributions
• Spouses who get an income from the business can also contribute to the plan
• Higher contribution limits than other common options for the self-employed.

The downsides of a solo 401(k) include:

• Only available for self-employed people
• Added administrative duties for the business owner, such as filing tax forms
• Contribution limits are tied to income, so if your income fluctuates, your contributions could be affected

6. The SEP-IRA (AKA Simplified Employee Pension)

The Simplified Employee Pension allows the self employed and business owners to contribute up to 25% of employee’s earnings to IRAs for their employees up to a certain amount, tax-deferred.

It’s based on employer contributions only, and each eligible employee (if you have them) must receive the same contribution percentage from you as the employer.

Pros and cons of the SEP-IRA

The main benefits of an SEP include:

• Easy to set up and maintain as opposed to a 401(k) plan
• Relatively high contribution limits
• Contributions can be flexible based on the profit of the business
• There are no ongoing tax filing requirements for a SEP plan, the U.S. Department of Labor notes.

The cons of a SEP include:

• No employee contributions
• Employers must contribute to all eligible employees
• There are no catch-up contributions for older employees
• No ROTH option is available for a SEP

Expert tip: Understand your risk tolerance

Your time horizon is the amount of time you will hold an investment. Generally, an investment fund with a later date can take on higher risk than one with a nearer date.

It’s important to decide how risk averse you want to be throughout the years. And if you choose to, it’s okay to make changes if you want to. Knowing your risk tolerance can help you plan for the long term future.

How to save for retirement in your 20s when you’re just starting out

Now that you are familiar with the different types of retirement accounts, it’s time to get started with retirement planning in your 20s!

But what if you’re just starting out and don’t earn much? Whenever the topic of saving for retirement comes up, I am often met with statements similar to the following:

“I don’t earn enough to save for retirement.”

“I’m waiting to get a better job before I start saving.”

“I’ll play catch up when I earn extra income.”

While entering the workforce can be exciting—you’re finally out on your own!—it can also be overwhelming. And if you’ve got an entry-level salary, it can be tempting to skip saving for retirement.

However, there are plenty of ways to save for retirement while dealing with an income that’s lower than you plan to make in the long run.

1. How to start saving for retirement with the right investments

The first step to saving for retirement is finding the right accounts and simply getting started. Many jobs offer employer-sponsored retirement accounts like a 401(k). You can also save for retirement through non-employer accounts like an individual retirement account.

The investments you choose will generally depend on your personal risk tolerance.

However, most financial experts agree that you can be more aggressive with your investments in your 20s because you’ll have more time for market corrections. That means it could be worthwhile to invest in riskier vessels, such as individual stocks, over lower-risk investments, like investing with index funds.

Still, it’s a good idea to diversify your accounts as well—meaning you shouldn’t put all of your savings into one type of investment.

Although you might be earning a starting salary, you can start by contributing as little as 1% of your salary to your savings. Then, make 1% increments for each raise you receive.

Even though it’s a small amount—you probably won’t notice much of a difference in your paycheck— you’ll be saving a substantial amount of money over the years.

2. Get the free money from your employer

What types of retirement options does your employer offer? When you take a job, your human resources department typically provides information on plan options. Many employers offer a 401(k) or 403(b) plan for employees.

Be sure to ask your employer about potential retirement options to see what they offer.

If your employer offers a 401(k) or 403(b) savings match, take it. So many people do not take advantage of their employer-sponsored match.

That’s a big mistake because you essentially get free money! If you are just getting started with saving for retirement, you can set an initial goal to contribute just enough money to get the match.

3. Leverage other options

If you don’t have access to a 401(k) plan through your employer, then consider 401(k) alternatives. They include setting up a traditional and/or Roth IRA through your bank or via a brokerage firm.

The saving maximums are lower than a 401(k) or 403(b), but you can still save a lot of money over time.

In addition, if you’re learning how to save for retirement in your 20s, you’ll likely also need to learn how to save for other expenses.

Starting an emergency fund stored in a savings account is an important aspect of a healthy financial plan as well. It helps you cover the unexpected costs that could come up in life—from a broken-down car to sudden medical bills.

4. Automate your savings

After you’ve calculated your retirement lifestyle needs, you should make saving easier by automating your finances. How?

Have funds automatically taken from your paycheck directly into your account. 401(k) and 403(b) deposits are usually automatically pulled from your paycheck.

However, if, for some reason, your deposits are not automated, make a payroll request to make it happen.

Automatic transfers take the stress out of saving. And you’ll never forget to make a transfer again! Plus, you won’t get the chance to overthink whether or not you should make the transfer.

Have an inconsistent income? Just not ready to automate? Then, set reminders on your phone around each pay period, reminding you to make those transfers to your retirement accounts!

Putting off retirement contributions until you make more money? Not a great idea when learning how to save for retirement in your 20s.

Doing so basically means that you could have to work longer than you expected in your old age and/or have to rely on government assistance to survive.

By putting it off, you lose valuable time to take advantage of the power of compounding— the key to growing your money over time. So, if you’re wondering what to do with savings, start with what you can save now, no matter how small it might be.

How much should I contribute to my 401(k) in my 20s?

A key consideration to make is to determine how much you need to save before retiring from work.

The easiest way to calculate retirement numbers is to use calculators. Here are a few of our favorite calculators to get you started:

• Bankrate calculator
• Vanguard calculator
• Smart Asset calculator

Here’s what happens when you take money out of your retirement account

I’ve seen so many instances where people think of their retirement as their emergency cash or as savings for their short-term goals.

They feel they can leverage the money for minor emergencies, non-emergencies, and other financial obligations or goals they have.

But is this okay? My thoughts? It really isn’t a good idea unless it’s a dire emergency.

Withdrawing or loaning money from your retirement fund can have adverse effects on your wealth-building efforts for several reasons.

You will lose the potential longer term gains/earnings you would get if your money remained invested and was working for you. You will also lose out on earning compounding interest when you take money out of your accounts.

Additionally, if you withdraw your money before your eligible retirement age, you may be liable to pay income taxes as well as an additional penalty (10%) on the total amount withdrawn.

What does this look like in actual numbers?

Withdrawing money from retirement

Let’s say that right now; you are considering taking $1,000 out of your retirement accounts. Let’s also assume that the average return on your investment for the next year is ~8%.

At the end of that year, you’d have $1,080 in your account. Another year into the future, based on annual compounding with a return of 8%, you’d have more than $1,160 in 2 years from an original investment of $1,000.

Impact of an early withdrawal

If you decide to take this $1,000 out early, you’d have to pay the following (assuming a 30% tax rate):

1. Early withdrawal penalty – 10% = $100
2. Federal & state tax withholding = $300

The balance you would receive would only be $600.00

Taking a loan from your retirement savings

If you decide to take out a loan, depending on the timeframe of your loans, your $1,000 will miss out on the potential earnings and compounding. As with any loan, you’ll have to pay interest on the balance.

And like many people who borrow from their retirement accounts, you might have to reduce or stop your retirement contributions altogether to be able to make the loan repayments. So, the lost opportunity is even greater.

However, if you left that money alone for 10 years, the potential future value of your $1,000 could be $2,159. A scenario like this assumes an average return of 8% over that 10 years (based on the historical performance of the stock market over time). Since this is an average return, it would be despite spikes and dips in the stock market.

$600 vs. $2159. The difference is major.

And this is only based on $1,000.

If it was based on $10,000, it would be a difference of $6,000 vs. $21,589.

Yup, let that sink in.

How to avoid withdrawing money early

It’s important to avoid dipping into your savings. Here are a couple of tips to help you build a better budget for emergencies and other expenses.

Build up your emergency savings

To start, it’s important to focus on building a solid emergency fund. Your goal should be 3 to 6 months, but more is better, such as a 12-month emergency fund. That way, if you need some extra cash due to an unexpected occurrence, you can leverage your emergency savings instead of your retirement money.

Don’t have an emergency fund in place yet? Set an initial goal to get to $1,000 or more ASAP. Then, after paying off any high-interest debt—like credit card debt—ramp up your emergency savings to 3 to 6 months of basic living expenses.

Start saving for your short to mid-term goals

Next, create savings for your short to mid-term goals. It’s basically the money you need to have access to in less than 5 years, like buying a house, taking a trip, or buying a car.

Building these saving goals into your monthly expenses list will help ensure you are allocating funds toward them each paycheck. Over time, you’ll be surprised at the progress you make.

Should I roll over my old 401k to my new employer’s plan?

Yes, when it comes to what to do with your old 401k, you can roll it over from one employer to another if permitted by your new employer.

But it’s important to keep in mind that, in many instances, employer-sponsored plans can be limited in terms of the options you can invest in.

If you are moving jobs, it’s better to move your retirement funds into your own account with a brokerage firm like Betterment, Vanguard, or Fidelity. There, you have access to the entire stock market and potentially much lower fees. I’m a huge fan of index funds because I know exactly what I’m paying in fees.

How much should you be saving for retirement in your 20s?

The easiest way to determine how much to save for retirement at this age is to simply save what you can.

Many people at this age are in the early stages of their career—and adult life. So, you might not have as much money to put toward retirement as you will when you establish yourself in the world.

Hopefully, you’ll be able to at least build an emergency fund and meet your employer’s 401(k) match if you have one.

However, if you have a lot of high-interest debt, such as from credit cards, you should focus on learning how to stop paying credit card debt by paying it off.

Additionally, start saving some money for retirement.

How do I start putting money away for retirement?

The first place to start is to look at savings options from your employer. A 401(k), for example, is an employer-sponsored account that generally automatically contributes money to your account from your paycheck. All you need to do is sign a few forms through your human resources department.

If you don’t have access to an employer-sponsored account, you can look into individual retirement account options. And you may choose to open an IRA in addition to your workplace 401(k).

To open an account, you’ll have to reach out to a bank, brokerage firm, or financial advisor.

How much should I contribute to my 401k in my 20s?

I suggest starting with a retirement calculator to get a general idea of what you might need to meet your lifestyle in retirement. Then, you can break down how much you need to contribute to reach that goal.

Remember, retirement isn’t a short time period. Most people in the U.S. retire in their 60s, according to Madison Trust Company. And from there, you may be in retirement for 20 years or much longer.

The unknowns make it difficult to know how much you should contribute to your 401(k).

However, it’s worth noting that the longer your money is invested, the more time it has to grow. So, contribute what you can and take advantage of things like employer matches.

Articles related to preparing for retirement

If you want to learn even more about how to start saving for retirement, read these posts now!

• Retirement Savings: Everything You Need to Know
• Roth vs traditional 401k: Is The Roth Better?
• What is the Difference Between A 401k And IRA?
• How To Save For Retirement In Your 40s And 50s: 11 Key Tips

Retirement planning in your 20s: Start saving now!

Don’t ever let ANYONE make you feel stupid for making smart money decisions. Do your research, determine your investment objectives, have a plan that you adjust as necessary, and stay the course when it comes to pursuing your financial goals.

If I didn’t know anything and was just starting out with my 401(k), people complaining about high fees and limited investment options might have stopped me from investing in the account. Based on their misguided advice, I could very well have invested nothing, gotten no free match, and lost out on the chance to build additional wealth by investing in my 401(k).

Don’t let that happen to you! Save early—even if it’s not much—so you’re better prepared for retirement. If you start building wealth in your 20s, you’ll be in a great place financially when you retire.

The post How To Save For Retirement In Your 20s appeared first on Clever Girl Finance.

Saving money is an important task at any age, but as you hit your 40s, the need to save for retirement grows. While savers in their 40s and 50s typically have a decade or two left to save for retirement given the traditional age of 65, emphasizing saving now can set you up for a dream-worthy retirement. So, let’s explore how to save for retirement in your 40s and 50s. 

11 Tips on how to save for retirement in your 40s and 50s

If you want to save for retirement in your 40s, you aren’t alone. Many mid-career workers start to put the spotlight on saving for retirement. Below are some strategies to pursue as you start saving for retirement. 

1. Pay off high interest debt

Before you start saving in earnest, evaluate your financial situation. According to Credit Karma, people ages 43 to 58 carry over $60,000 in debt, higher than any other age group.

If you have high-interest debt, it’s best to create a plan to pay it off as soon as possible. Not only can a big debt burden prevent you from saving for retirement, but it can also cost you thousands in interest payments. 

2. Make funding tax-advantaged accounts a priority

Tax-advantaged accounts are specifically designed to help savers build their retirement nest egg. Some common tax-advantaged retirement savings solutions include your 401(k), 403(b), and SIMPLE 401(k) plan. (Find out more about the 403b vs 401k.)

When you contribute to your tax-advantaged retirement account like a 401(k), you’ll contribute pre-tax dollars. Once in the account, your contributions will grow tax-free. When you are ready to withdraw funds in retirement, you’ll pay taxes on the funds.

Also, the IRS sets limits on how much you are able to save in tax-advantaged accounts each year. 

If you can contribute money to a 401(k) or similar option, consider making funding this account a priority. That’s especially true if your employer offers matching contributions, which can accelerate your retirement savings goals. 

3. Focus on your spending

In a perfect world, you could save for retirement without any spending cuts. But that’s usually not possible. When it comes to saving for retirement, most of us have to make some tough choices. 

Below are some options to consider.

Child’s education costs

Start by looking at your other big savings goals. Many parents who are saving for retirement might also want to pay for their child’s college education. But the reality is that you may need to prioritize saving for your own financial future. 

If you are behind on saving for retirement, you might want to do some catch up savings before you pay for your child’s college tuition. Although it might be difficult to say, it’s better to be honest with yourself and your child as soon as you decide.

Annual spending

You should also consider your annual spending choices.

For example, you might have to prioritize saving for retirement over a luxury vacation budget. Or opt to save more instead of purchasing a more expensive home. 

A honest look at your budget can help you determine where you can potentially cut back to contribute more to your retirement savings. While it’s difficult to pass up spending at the moment, it’s important to plan for the long-term.

Be honest with yourself about your spending and your retirement goals. Work to strike a balance that best suits your current situation without ignoring the future. 

5. Save in an IRA

An Individual Retirement Arrangement (IRA) is a type of account designed for retirement savers, and it’s a great way to learn how to save for retirement in your 40s. While there are several types of IRAs, the traditional and Roth IRAs are the most common. 

A traditional IRA is a tax-advantaged option through which your contributions are tax deductible.

In contrast, the contributions you make to a Roth IRA aren’t tax deductible, but qualified distributions are tax-free. 

Whether or not you have access to a 401(k), an IRA is a valuable savings tool. Consider funding this account to the limit if you can. Keep in mind you can have both a traditional IRA and a ROTH IRA if you qualify based on the income restrictions.

6. Consider a taxable brokerage account

A taxable brokerage account offers another place to stash your retirement savings. Essentially, this account is a designated place for you to invest funds post-taxes.

For example, you might open a taxable brokerage account through a platform like Vanguard to build an investment portfolio.

While the funds you contribute to a taxable brokerage account come from post-tax funds, these accounts don’t come with the same restrictions as tax-advantaged retirement accounts. With that, you can pull funds out of these accounts on an as-needed basis, regardless of your age. 

In general, it’s useful to invest through a taxable brokerage account after you hit your contribution limits for other types of accounts. 

Keep in mind that when you pull funds out of these account you may have a capital gains tax obligation, so be sure to consult with a tax professional if necessary.

7. Keep an eye on asset allocation

Not all investments are created equally. As you build a portfolio for retirement, it’s important to strike the right balance of risk for your situation. 

Of course, diversifying your portfolio is ideal, and it’s a big part of how to save for retirement in your 40s and 50s. But for many investors in their 40s and 50s, it makes sense to invest more heavily in stocks on the path to retirement.

In addition to stocks and bonds, other assets can make a useful addition to your portfolio. 

Not sure how to invest for retirement at age 40? A straightforward investment portfolio might be the right solution. Check out our guide to the 3 fund portfolio. 

8. Track your progress

Regardless of how much you need to save, you might not see too much progress initially. That’s because the power of compounding needs time to take hold. But don’t give up hope, and learn, “How does compound interest work?”. 

As you move through the process, make time to track your progress along the way. You could do this with a simple spreadsheet or a straightforward money-planning app like Empower.

Consider setting a time to track your progress toward retirement savings goals regularly.

Personally, I choose to check in on my financial progress twice each year and use a simple spreadsheet. But you might choose to check in monthly or annually with a streamlined app to see where you stand. Find a strategy that works for you.

9. Make sure you have the right insurance

As you prepare for retirement, it’s important to confirm you have the right insurance policies in effect.

For example, as you age, you might consider buying long-term care insurance. This insurance can help cover the costs of paid assistance as you age. 

On the other hand, it might be time to cancel other types of insurance.

For example, you might choose to end your term life insurance policy if you no longer have dependents. (Read about term vs whole life insurance.)

Without anyone relying on your income, you could eliminate that premium and redirect the funds toward your retirement savings. Knowing what insurance you need is an essential part of how to save for retirement in your 40s and 50s.

10. Determine how long you want to work

Building a retirement nest egg is a worthwhile goal.

But for many, it can take longer than expected to hit their retirement savings goals. If you are struggling to meet your savings goals for retirement, consider the possibility of working longer. 

Choosing to work longer as a professional goal can give you the breathing room you need to save more money for your golden years. Working longer may also be a good strategy when wondering how to save for retirement in your 50s.

11. Build a flexible side hustle

A side hustle is my favorite financial tool, and it can help with how to save for retirement in your 40s and 50s. You can use a side hustle to build your income right now, which can help you save more for retirement. But a flexible side hustle also gives you more options as you age. 

Those with a flexible side hustle might choose to drop their full-time job in retirement but continue on with their side business. With a side hustle, this means all of your income all of your earned income doesn’t have to be eliminated.

Instead, you’d be able to continue with a more flexible income stream to support some of your costs in retirement. 

Want to build a successful side hustle? Read Bola Sokunbi’s book, The Side Hustle Guide. 

Expert tip: Leverage catch up contributions and celebrate your wins as you save

According to the IRS, if you’re age 50 or older, you’re eligible to make catch-up contributions to your retirement savings accounts e.g. your IRA, 401(k), 403(b) etc, raising your contribution limit. So be sure to determine what the latest catch up contribution limits are on the IRS website.

That said, knowing how to save for retirement in your 40s and 50s is a massive financial goal. Make sure to celebrate your progress as you save for retirement.

You can even treat yourself (within budget) as you hit big savings milestones. Remember to enjoy the process and look back to where you started and where you are now with your savings goals to see how much progress you’ve made!

How much to save when saving for retirement at 40+

As you save for retirement, it’s a good idea to determine how much you’ll need for a comfortable retirement. Below are some strategies to help you determine how much to save. 

Look at the overall picture

Start by envisioning the type of retirement you want to have. If you dream of traveling the world, you’ll need a lot more money than if you are content to spend time in an affordable house. The reality is that you’ll need to save more if you want a more comfortable retirement. 

In general, it’s better to overestimate your retirement expenses. While it’s true that some of your costs might go down, like lower food costs if your children leave the nest or more affordable housing costs if you downsize in a low-cost-of-living area, other parts of your life might get more expensive.

For example, medical costs might be higher as you age, which is something to keep in mind for how to save for retirement in your 50s, as well.

Use reliable calculators

You can find a suite of retirement calculators online, and they can help you know how to invest for retirement at age 40.

Take some time to play with the numbers to see how the changes you make now can have a big impact on your financial future. 

Here are a few good retirement calculators to choose from:

• Vanguard retirement calculator: This option makes your retirement feel more like a story than just numbers.
• Nerdwallet calculator: A useful calculator that uses graphs so you can see how your money will grow.
• Bankrate calculator: This calculator details the entire process, including rates of return, income increases, and more.

Catch-up contribution details

The IRS has limits for the amount you can save in different types of retirement accounts. But when you hit a certain age, you can make additional catch-up contributions.

Below is a closer look at your contribution options.

401(k)

As of 2024, savers can contribute up to $23,000 to their 401(k), according to the IRS. If you are at least 50 years old, you can contribute an extra $7,500.

Contributing more to your retirement accounts can set you up for a more stable financial future. 

IRAs

As of 2024, savers with an IRA can contribute up to $7,000 per year, but if you are at least 50, you can contribute an additional $1,000 per year, according to the IRS.

Although you won’t be able to start saving more until 50, you could start to prepare your budget for the increased contributions. Consider where you would pull the funds from to maximize your contribution opportunities. 

Is it too late to start saving for retirement at 40?

It’s never too late to start saving for retirement at 40. While starting earlier is generally a good idea, diligent planning, strategic investments, and knowing how to build discipline with saving can still make a huge difference in building a secure retirement fund.

Don’t get discouraged before you start. Instead, start saving for retirement now and learn how to invest for retirement at age 40+.

How much should a 40 year old have saved for retirement?

The amount you should have saved for retirement varies based on your unique situation.

However, some experts recommend saving between two to three times your income for retirement by age 40.

For example, if you earn $100,000 per year, then it’s a good idea to have between $200,000 and $300,000 saved for retirement in your 40s.  

How much should a 50 year old save for retirement?

The exact amount you have for retirement as a 50-year-old should vary based on your financial situation.

However, many experts recommend that 50-year-olds should have at least 3-6 times their salary saved.

For example, if you earn $50,000 per year, then it’s a good idea to have around $150,000-$300,000 saved for retirement. 

If you want to learn how to save for retirement in your 50s, the biggest difference is that you’ll have a more compressed timeline than a 40-year-old. That means you might need a more aggressive spending and investing strategy.

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Start saving for your retirement today!

Saving for retirement is a good idea at any age. If you are just learning how to save for retirement in your 40s and 50s, building a decent nest egg is entirely possible. Start by estimating your retirement spending needs and plan to build the nest egg you need. 

Remember that it’s never too late to learn how to start investing or how to save money. Make your retirement plan, be diligent with following it, and you will do well financially!

The post How To Save For Retirement In Your 40s And 50s: 11 Key Tips appeared first on Clever Girl Finance.

Did you know you can only contribute a certain amount to a 401k per year? The biggest benefit of maxing out your 401k is the chance to save more money for retirement. If you are already making some contributions, you might start to wonder: should I max out my 401k? Well, keep reading.

The 2024 limit for a 401k is $23,000 for people under 50, according to the IRS, and contributing the full amount is known as “maxing out” your 401k, which might be a good choice for you. But how do you know for sure?

As with most things, the answer depends. Those who are financially stable, have good monthly cash flow, and have access to a 401k with low fees might want to consider maxing their account.

However, locking money up in a 401k generally means you can’t access your savings (without penalties) until you’re near retirement age.

Knowing the pros and cons of maxing out your 401k can help you make an informed decision on whether or not it’s time to up your 401k contributions. Let’s dive in and look at why you would — or wouldn’t — want to max out a 401k.

Should I max out my 401k? 4 Reasons you should

A 401k is one of the most common types of employer-sponsored retirement plans.

Deciding to max out a 401k is a personal decision, but there are reasons you might want to consider it. Maxing out your 401k could be a smart financial choice if:

• Your plan has low fees and plenty of investment options
• You’re looking to lower your taxable income for the year
• You want to get rid of the temptation of using retirement savings early

Let’s take a closer look at why you might want to max out your 401k.

1. Your 401k plan has low fees and great investment options

Your 401k probably has a handful of fees attached to it. In general, 401k fees consist of administration fees and investment fees.

The plan’s service provider charges administration fees to help cover the cost of hosting and managing the plan itself. This might include expenses like record keeping, accounting, and legal services. Investment fees, on the other hand, cover the cost of managing investments and investment-related services.

If you happen to be on a 401k plan with low plan fees, you might want to take advantage of it. With lower fees, you’ll get more out of your money by investing in the plan.

In turn, the more you invest in the plan, the more money you can build for retirement.

For example, you’re trying to decide whether you should max out your 401k or put that money into an individual retirement account (IRA) and other brokerage account. The fees on your 401k average out to 1% of your total balance per year, but the fees for the other accounts are around 3% per year.

In this case, it makes more sense to put your money in the account with lower fees.

2. You can lower your taxable income

One of the biggest benefits of a traditional 401k is the ability to lower your taxable income for the year. When you contribute to a traditional 401k, the money is generally taken from your paycheck and automatically added to your 401k account.

This process happens before your employer calculates taxes on your earnings. Thus, you don’t pay taxes on your traditional contributions.

When tax time rolls around, your year-end earnings statement doesn’t show those contributions as part of your taxable income. The lower your taxable income, the more likely you’ll lower your tax liability.

Let’s say you make $100,000 per year and usually pay taxes on the full amount. Maxing out your 401k would reduce about 20% of your annual taxable income, which could help lower how much you owe in taxes.

If you’re looking for an easy way to significantly reduce your taxable income, maxing out your 401k could be a great tax strategy.

Be sure to talk with your tax advisor about your specific situation to make sure maxing out your 401k for tax benefits makes the most sense for your financial situation, as well as to understand the difference between a Roth vs traditional 401k.

3. You can lock in your retirement savings

Except in certain situations, you can’t withdraw money from your 401k without a penalty fine before age 59 ½. When you contribute money to your 401k, you’re essentially locking it up in the account until you retire.

Making it harder to access your money, however, can be a big benefit if you’re still learning how to build discipline with finances. The money in your 401k can grow without giving you the temptation to withdraw funds early. Maxing out your 401k further helps you build these hard-to-access retirement savings.

4. You’ll be able to take advantage of any 401k match

Employer 401k matching is a contribution to your retirement plan made by your employer. A 401k match means your employer will put money into your retirement account based on what you’re contributing on your own. Usually, a 401k is a percentage match up to a certain percentage of your salary and it is essentially free money!

For instance, your employer might offer a 50% 401k contribution match up to 5% of your annual income. If you make $100,000 and contribute $5,000 to your 401k, your employer will contribute an additional $2,500. If you only contribute 4%, or $4,000, to your 401k, your employer would only match $2,000.

Keep in mind that, maximizing your employer match isn’t the same as maxing out your 401k. Maximizing employer contributions means contributing the full percentage of your employer’s match offer.

For example, if your employer offers to match up to 6% of your salary, you could maximize this benefit by contributing the full 6%.

Expert tip

When you’re wondering, “Should I max out my 401k?” this means contributing the full amount allowed by the IRS. Maxing out a 401k might not be financially feasible for everyone, but you can still reap the benefits by taking advantage of your employer match if you have access to one.

After all, you’re essentially getting free, tax-deferred money. Even if you can’t afford to fully max your 401k to the IRS limits, setting a goal to get the full amount of your employer match is a smart financial move.

Questions to help you determine if you should max out your 401k

Maxing out your 401k can be one of the smart tips for retirement planning. The more you save over the years, the more financial freedom you give yourself in retirement.

In addition, having a larger balance in your 401k makes it easier to build wealth through things like interest earnings.

On the other hand, contributing over $20,000 of your annual salary to a retirement account might not be possible. Asking yourself key questions can help you make an informed choice on whether it’s a good idea to max out your 401k. Some questions include:

• Do you make enough money to contribute the full amount?
• Have you paid off high-interest or high-risk debt, such as credit cards or personal loans?
• Do you have significant non-retirement savings, such as an emergency fund?
• Does your 401k have reasonable investment fees?
• Does your 401k plan have multiple investment options for your level of risk and estimated retirement year?
• Are you looking for ways to lower your taxable income this year?
• Do you not trust your financial discipline and want to put your retirement savings where they’re not easily accessed?

If you answer “yes” to most or all of these questions, maxing out your 401k could be a good retirement planning strategy for you.

On the other hand, if you answer “no” to most of the questions, you may want to focus on other financial tasks first, such as getting out of high-interest debt or building an emergency fund.

Note: Even if you cannot max out your retirement savings, you can still contribute to it. For example, based on your answers to the questions, you may determine you can only contribute 5% or 10% right now and that’s ok!

What to do before maxing out your 401k

There are a few things to consider before maxing out your 401k. By checking off the items in this list first, you’ll set yourself up for financial success when you max out your retirement plan.

Pay off high-interest or high-risk debt

Carrying debt and trying to max out your 401k account can quickly throw off your long-term financial goal setting. By trying to both max your retirement savings and pay the minimum on your debt, you’re splitting your finances. This can lead to not being able to pay off more than the minimum on your debt.

If you have debt with high interest, such as credit card debt, you might not be able to keep up with your debt payments or reduce credit card debt. When you can’t pay off more than the minimum on your debt, the interest charges keep adding up. You might have to carry that debt — and interest — into retirement, negating the benefit of maxing out your 401k over the years.

Focusing instead on paying off debt before retiring lets you take care of one of the biggest drains on your finances, your debt. And once you’re out of debt, you’ll have more disposable money to put toward your 401k contributions.

For example, you might decide to contribute just enough to your 401k to get your employer’s match while you focus on paying off debt. If no match exists, you might instead decide to contribute 1% to 5% to take advantage of some tax deferred savings while you focus on your debt repayment.

Build an emergency fund

Having access to emergency cash is one of the most important financial tools you can give yourself. Emergency funds are liquid cash accounts that give you fast access to your money when you need it most.

For example, your car breaks down, and you need several thousand dollars in repairs. Or, you suddenly lose your job and need to cover rent, utilities, and other necessary expenses until you find another job.

Ideally, you’d carry around 3 to 6 months’ worth of living expenses in your emergency fund before putting too much money into other savings, including trying to max out your 401k. You can — and should! —still try to contribute to your retirement fund, but the bulk of your savings should first go toward emergency savings.

You may also want to build some non-retirement savings before maxing out a 401k. As the money in a 401k is basically inaccessible without a penalty, having funds in a non-retirement account can help you cover large purchases or expenses until retirement.

Additionally, non-retirement savings, such as a high-yield savings account or brokerage account, gives you the flexibility to access cash both before and in retirement.

Consider your cash flow

Cash flow is how much money moves into and out of your bank account each month. The goal is to have a positive cash flow — meaning more money is coming into your account than going out.

When it comes to retirement planning, cash flow plays an important role in how much you can save. Even two people with the same income could have vastly different cash flows based on their monthly expenses.

For instance, say two women both make $5,000 per month.

The first woman has only $3,000 in expenses, leaving her with $2,000 to put towards savings and retirement. The second woman needs $4,500 to cover her monthly expenses and has $500 to put toward savings.

The first woman has a larger cash flow and will likely find it easier to max out a 401k than the second.

Should I max out my 401k based on my income and cash flow?

Your income and cash flow can be good indicators of whether it’s a good idea to max out your 401k.

Let’s say one woman has an annual income of $40,000. She isn’t carrying debt and keeps her expenses low at around $15,000 per year.

However, maxing out her 401k would require her to contribute over half of her salary to her retirement account. Even living on a bare bones budget, it would be difficult for this woman to put around $20,000 into a single retirement account.

A different woman, however, makes a six-figure salary of $150,000 and spends $100,000 per year on expenses. After maxing out her 401k and paying expenses, this woman still has around $30,000 to put toward other savings.

While the second woman has significantly more expenses than the first, her income and cash flow make maxing out her 401k possible.

Like the women in the example above, you can use your income and cash flow to decide if you should max out your 401k. The lower your income, the less likely it’ll be in your budget to max out your 401k (but you can still contribute something to it).

If you have a higher income, you’ll also need to consider your monthly expenses to determine if you have enough cash to max out your retirement plan. To do this, you can list your monthly income and expenses to see how much money you have to put into savings each month.

Ideally, you’ll have enough money left over to invest both in non-retirement accounts and your 401k rather than just investing all of it to max out your 401k.

What is the downside of maxing out a 401k?

There are a few downsides to maxing out your 401k, such as:

• Tying up your cash savings
• Potentially high plan fees
• Loss of match funds if you start wondering, “Should I quit my job?” and then you decide to do so

Less access to cash

The most obvious downside to maxing out your 401k is losing easy access to your money. Money in retirement savings is often non-liquid, meaning you can’t withdraw it with ease.

In addition, you may have to pay penalties on the money you take out.

Unless you have ample non-retirement savings, maxing out your 401k could lead to cash flow issues. These issues could be minor, such as not being able to save money as quickly as you wanted for a down payment on a new car. Or these cash flow issues could put you in a serious situation, such as not having the money to pay your mortgage or rent.

Potential for high fees

Not all 401k plans are created equal, and some plans have high fees that can eat into your savings. If your plan has a large administrative fee or charges fees on many different aspects of your investments, such as placing an investment order, you may want to focus on other retirement saving accounts.

Additionally, your 401k plan is overall managed by your employer and the plan administrator, giving you less control over your investment and savings. You’ll generally get more investment options, lower fees, and more control over your money with other types of accounts, such as an IRA or other self-directed account.

Could lose match benefits if not vested

Employer contributions to your 401k don’t automatically belong to you.

Generally, employees must stay at the company for a certain amount of time before vesting in their accounts. In retirement terms, “vesting” refers to the ownership of the money in the account.

Any money you contribute to your account on your own is always 100% vested from the start, meaning you own this money.

However, your employer match funds may not be yours — at least not at first.

Most 401k plans have a vesting schedule. The longer you stay at the company, the more of this money you own or become vested in. If you quit your job before being fully vested, you’ll forfeit any unvested money.

Say you vest 20% each year you’re with a company. Your vesting schedule would look like this:

• 1 Year: 20%
• 2 Years: 40%
• 3 Years: 60%
• 4 Years: 80%
• 5 Years: 100%

After five years of service, you’re fully vested. If you leave the company, you’ll take all of your employer contributions with you.

However, if you quit after only three years, you’ll only own 60% of employer contributions to your account.

As you consider whether or not to max out your 401k or employer match, think about whether you plan to stay with the company. If you plan to leave before being vested in your account, you may want to focus on other ways to build retirement savings.

At what age should I start maxing out my 401k?

Your age is only one small factor in when to start maxing out your 401k. Your income and expenses, current savings, and debt play a much larger role in whether maxing out your 401k is a good idea.

For example, one person makes $100,000 annually but has no debt and over a year’s worth of non-retirement savings. Their coworker makes $200,000 but spends over half of their income on high-interest debt payments and has no emergency fund.

Despite making less money, the first person may be in a better position to max out their 401k. Their ages may not play much of a role in the decision.

The exception to this is employees over age 50. At age 50, the IRS lets you make “catch-up” contributions to retirement accounts. If it works for your financial situation, maxing out your 401k with the general limit and catch-up contribution limit could boost your retirement savings significantly just before you retire.

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Decide if you should max out your 401k to increase your retirement savings!

Now you know the answer to, “Should I max out my 401k?” Saving for retirement is a great step to securing your financial future.

Before maxing out your 401k, however, it’s a good idea to consider your current financial obligations. You may want to start with financial wellness tips like creating a debt reduction strategy and building emergency savings, then you can plan to save for retirement and max out your 401k.

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