How to Retire Well

Many people rely on their employer’s 401(k) plan to save for retirement. But what are other retirement savings options?

I like to think of retirement as a gift to your future self from your current self.

Retirement is part of the employment process and is the ultimate goal. People commonly talk about how they can’t wait to retire, or what they would like to do once they don’t have to work anymore. But as an HR professional, I’ve noticed many people are walking through the dark when it comes to understanding how to prepare for it or what they’re doing. This is too important of a topic not to know how to save, how retirement accounts work, or how much you currently have in your retirement accounts, so let’s jump in on all things retirement!

In this post, I will cover the different retirement accounts available, how those accounts enable you to pile up way more money than a traditional savings account, when you should start working on your retirement plan, and more!

Before we get too far along, I want to point out that I am not a financial advisor. The information collected in this post comes from resources such as the IRS’ website, as well as Forbes and NerdWallet. I you have specific concerns or questions about your retirement accounts, you will need to contact your retirement account administrator or your financial planner.

Who should save for retirement and when…

It’s never too early to start saving for your retirement.

Anyone can start saving for retirement. I’m serious…anyone. Did you know that parents can actually open up a retirement account for their kids? While not all parents may be in a financial situation to do this, if you are, it’s a great gift to your child and will pretty much ensure that your kid will retire as a millionaire. The only thing I would caution here is that before you do this, you need to make sure your own retirement is a priority.

My husband and I have talked about doing this for our kids, but we haven’t gone through with it yet, and I don’t know if we actually will. We’ve opened up another type of investment account for them that they can use to pay for college, to start their own business, or really whatever they want once they’re adults. While I would like to start retirement accounts for them, I’m more focused on our own so that we don’t have to work into our 70’s or 80’s (if we don’t want to).

If you’re like me (and probably most people) and didn’t have a retirement account opened for you when you were kid, then the best time to start saving is now. Today. No matter your age. The earlier the better. The younger you are when you start saving, the more you’ll have over time because of this magical unicorn called compound interest. And I mean you’ll have way more.

The magical unicorn of retirement: compound interest…

As Forbes explains, compound interest is interest earned on interest.

So, let’s say you invest $5,000 in your retirement account and in the first year, you earn 5% annual interest, which gives you $5,250. Assuming you don’t add any more money to your account, the next year you earn another 5% making your account balance $5,562.50. It wasn’t another 5% of the initial $5,000 deposit, because that would have only given you $5,500 at the end of the second year. Compound interest (in this example, the interest earned on the $250 of interest from the first year) gave you an additional $62.50 for doing absolutely nothing.

Now, at first glance, this might not seem like a big deal. I mean, an extra $62.50 is nice, but how is that going to amass enough money to survive off of when you’re older? Well, retirement savings doesn’t generally start two years before someone wants to stop working. Time is your friend, so the more time you can give yourself and your savings, the more money that will be earned through compound interest.

Let’s take our example and blow it out. Let’s say you made that initial deposit of $5,000 when you were 22 years old and each year, the account produces a 5% return. When you’re 65 (43 years later), having made no other deposits into that account, you would have $40,748 saved. You turned $5,000 into $40,748 solely through compound interest. Remember – you did nothing else. You didn’t add any more money after your $5,000 deposit. So, $35,748 of that total is compound interest! Isn’t that wild?

Now, $40,748 is obviously not enough to retire on. So, I would highly encourage you to sock away money into your account whenever you can. Even if it’s not consistent or doesn’t look like much, with the power of compound interest, that money will be worth more than it seems.

Compound interest and an employer match can grow your nest egg exponentially.

The combined forces of compound interest and an employer match…

This is the same reason why I stress the importance of getting your employer’s retirement match (if they offer one). It’s free money that will continue to grow because of…you guessed it – compound interest! Even if you can only afford to contribute $5 per pay; it’s worth it in general, but especially if your employer will match it.

Let’s say your employer will match your $5 per pay contribution and you’re paid twice a month. That means the amount of money going into your account is doubled, so instead of just $10 per month from your contribution, it’s really $20 per month because of the money your employer is matching.

Now, let’s take that $20 per month and look at it over 43 years at a 5% annual return. After 43 years, you would have $35,098 in your account just from your $5 per pay contribution because you took advantage of your employer’s match program.

Most people spend more than $5 from each paycheck on fast food, coffee, home décor, books, movies, etc. This is not a judgment – I just point this out for perspective. When we’re filling out the forms to have money taken from our paycheck and put towards retirement, it can feel heavy and like our money is slipping through our fingers. But when we’re hungry and tired, we’ll swing by a fast-food restaurant without giving it much thought because it’s only $3 here and there. But if you do that once per week, that’s more money than the $5 per pay in our example!

Now, back to the magic of compound interest…

I’m going to take that same example we walked through earlier, but I’m going to tweak it a little bit. You have your initial $5,000 deposit that you made when you were 22 years old. Let’s say that instead of not investing any more money, you added $100 per month consistently until you were 65 at the same 5% annual interest rate return. Again, because of the magical unicorn that is compound interest, instead of just having almost $41,000 at 65 years old, you now have $216,238! Only $51,600 of that is the money you actually put into the account. That means that $164,638 of that is compound interest!

And these numbers are assuming a 5% rate of return, which is the lower end of the possible interest rates. Resources like Forbes, NerdWallet, and SoFi say that the typical rate of return is anywhere from 5 – 9.5%. Let’s say, using the same example above with you contributing $100 per month after your first $5,000 investment at age 22, that your account performs down the middle at an annual return rate of 7%. By age 65, you would have $398,476! That’s almost $400,000!

Pulse check…

I’m sharing this information with you to help you understand the major impact that small amounts of money can have on your retirement over time. Even though it may not seem worth it, the examples show that it clearly is. You just have to give it time.

I’m sure, though, that there are some readers feeling a little discouraged or worried right now. Maybe you don’t know how much you have saved for retirement, or maybe you do and you’re realizing it’s not enough.

I’m not trying to scare you, and I don’t want you to walk away from this post feeling awful about your future. I’m going to go over what you should do if you don’t know where you stand on retirement or if you know you don’t currently have enough in a little bit. First, I’m going to cover the different types of retirement accounts, but if your anxiety is skyrocketing right now, I want you to skip the types of accounts portion (for right now) and scroll down to what you need to do.

Types of Retirement Accounts

Which retirement accounts do you have?

There are quite a few options when it comes to choosing a retirement savings account, and you may have one or multiple of these. They all have their advantages and disadvantages, and they all have different rules implemented by the IRS. It’s important for you to know the rules of the accounts that you own.

Traditional IRA and Roth IRA

According to NerdWallet and Forbes, a traditional IRA is a retirement plan account opened by an individual and not affiliated with their employer. It allows for more investment options than employment-based retirement accounts, which is a good thing since a key to a healthy portfolio is investment diversity (or as the old saying goes “don’t put all your eggs in one basket), and you can deduct your contributions from your taxable income, thus allowing present you to save money on taxes. Your ability to deduct your contributions, however, is dependent on if you or your spouse have an employment-based retirement account and already benefit from a reduced taxable income from that account, so you’ll want to do your research to see what limitations may apply to you.

A downside is that you aren’t able to contribute as much money annually to an IRA as you are to an employment-based account. The cap for an IRA for 2023 is $6,500 per year, whereas you can put as much as $22,500 into a 401(k) for anyone 49 and younger, or $30,000 for anyone 50 and over.

A Roth IRA is similar to a traditional IRA, but instead of paying taxes later, you would pay the taxes on the money now. This isn’t necessarily a bad thing, but if you’re in need of the tax break right now, the traditional IRA may be the way to go.

So, why would someone rather pay the taxes now and opt for the Roth IRA? Well, for starters you know what the tax rate on that money is right now. You don’t know what it’ll be when you reach retirement (and it’s seriously doubtful that it would ever go down). Because you’re paying taxes upfront before compound interest has a chance to show up, you avoid paying taxes on that money! Also, accounting for inflation, even if the tax rate doesn’t increase, dollar-amount wise you would end up paying more in taxes in the future than you would today. This same principle applies to a Roth 401(k) versus a traditional 401(k).

Traditional 401(k) and Roth 401(k)

Per the IRS, a traditional 401(k) is a retirement plan option offered through employers to employees that has a higher contribution limit than a traditional IRA. Your contributions lower your taxable income, so you’d be able to save money on taxes right now (but as mentioned with the traditional IRA, you will have to pay taxes on that money when you use it for retirement), and you don’t have to make a certain amount of money to contribute.

The annual employee contribution cap is $22,500 for people 49 and under, and $30,000 for people 50 and over (these amounts do not include employer contributions).

The Roth 401(k) is similar to the traditional 401(k) except for the taxation part. This brings up an important point. If you participate in your employer’s 401(k) match program and you open up a Roth 401(k), you will actually have both a traditional 401(k) as well as the Roth 401(k) you chose. The reason is that employer contributions legally have to go into a pre-tax account, so they can’t be deposited into your Roth account. So when you retire, while you wouldn’t have to pay taxes on the money in your Roth account (because you already paid them), you would have to pay taxes at that point on your employer’s contribution.

403(b) and Roth 403(b) (Tax Sheltered Annuity Plan)

The IRS explains that a 403(b) is the equivalent of a 401(k) for employers that fall under the following categories: public schools, colleges, universities, churches, or Section 501(c)(3) non-profits. The contribution limits for 403(b) plans are the same as 401(k) plans.

The Roth 403(b) account is the post-tax version of the 403(b), and the same parameters apply as they do between a 401(k) versus a Roth 401(k).

457(b) and Roth 457(b)

A 457(b), as described by Forbes, is a pre-tax deferred compensation plan for state and local governments that have some parallels to the 401(k), although not as many similarities as the 401(k) and 403(b) plans have.

A similarity is the employee contribution limits; however, it’s not common for employers to make contributions to these accounts.

Some differences are that you have fewer investment options for the 457(b), you can make additional catch-up contributions three years prior to retiring, administrative fees are typically higher than those of 401(k) plans, and you can withdraw money from this account earlier than you can from a 401(k).

The Roth 457(b) is the post-tax version of the 457(b) plan.

As I mentioned earlier, it’s entirely possible for you to have more than one type of retirement savings account, as well as more than one of the same type of account. Let’s say you’ve worked for four different employers, each employer offered a 401(k) program, and you participated in each retirement program. If you never rolled over your previous 401(k) accounts into your current 401(k) or an IRA, then you have four 401(k) accounts.

This leads to another step you’ll want to take as you prepare for your retirement years. If you have multiple of the same type of account, you may want to look into rolling over those accounts – either into your current employer’s program or into an IRA. When your money is in one or two places, it’s easier for you to keep track of, to know where your retirement savings stands, and it’s harder for you to lose or forget about money than it is if you have several of the same types of accounts administered by different financial companies.

What to do if you don’t know how much you have saved for retirement…

It’s good practice for everyone, regardless of age, to have a sense of where their retirement savings stands – how much, how many accounts, what type of accounts, and the tax implications of each. This is where rolling over your money from previous employers into one account that I just mentioned above is also a crucial step.

The younger you are, the less necessary it is for you to check your retirement savings, but you should still take a peek every now and again. First off, with identity theft and fraud being things that we all have to worry about, it’s good to check your accounts to make sure someone else hasn’t gotten their hands on your money.

The older you get, the more frequently you should check in.

If you have a financial advisor, you should probably check in with them as well to make sure they’re watching your accounts and to get their advice on your savings goals. I’m in my mid-30s and I typically check my accounts once a quarter and touch base with my financial advisor once or twice a year, depending on what’s going on in my life and what my goals are.

If you don’t have a financial advisor, you may want to check your accounts and the performance of your investments more often because no one else is doing it for you.

Once you’ve accounted for all of your retirement savings accounts and the amount in each, as well as the tax implications (pre-tax versus post-tax), add up that money and figure out how much you would have at retirement age. So, if you currently have $200,000 in savings, and let’s say you’re hoping to retire in 10 years, figure out how much that money would be worth in 10 years and that will give you a good indication of where you stand.

There are several free retirement calculators online, such as NerdWallet, Forbes, and Bankrate. I used NerdWallet’s calculator for the examples I gave earlier. If you have a financial advisor, they may also have one available to you. Not only will these calculators tell you how much you will have by a certain age given your current savings, but they’ll also allow you to run different scenarios of how much you would have to save per month or year to reach your goal.

When crunching these numbers, my advice is to err on the lower side of the return rate (5 – 6%), just to be safe. You’ll likely receive a higher return than that, but it’s better to end up with more money than you thought rather than less money.

Take control of your future and figure out if you’re on track for retiring when you want to.

What to do if you are nearing retirement age but don’t have enough…

If you were hoping to retire soon, but you’ve realized after using a retirement calculator that you won’t have enough unless you’re somehow able to set aside a lot of money in the next few years, there are some things to keep in mind and to do to get the maximum optimal outcome for your situation.

First, take a deep breath and know that you will get through this. Your retirement might not be as cushy as you thought, or full of travel to exotic places, but it’s also very possible that it could turn out better than you’re thinking right now. Anxiety brings up the worst-case scenarios, but that’s typically not what happens.

Second, know that you are not alone. Many people are in the same situation. In fact, so much so, that the IRS allows people who are 50 years old or more to make catch-up contributions.

According to the IRS’s website, the allowed catch-up amount for 2023 is $7,500. So, you’re allowed to put in $7,500 more per year than people who are 49 or younger, for a total allowed annual contribution amount of $30,000. You might not have this kind of money to invest, but if you’re severely behind on your retirement savings, look at your current income and expenses, and see where you can save money to put away for retirement, which is my next suggestion.

I don’t know anyone who likes to take a hard look at their expenses and their spending habits. It’s uncomfortable and often makes people think “where is all this money going”. It costs a lot to live. And I want to make clear that I’m not suggesting you cut down on things you need like food or medication. And I’m not even suggesting that you stop getting your morning latte from the coffee shop before you go to work. Listen, if that latte is the only part of your day that you enjoy, and it helps you get through the next 10 hours, I want you to keep it. But I also want you to look at where you can reduce spending.

If you prefer to buy organic vegetables from a trendy, high-priced grocery store, maybe consider buying your organic vegetables from a regular or even discount grocery store. If you get carry-out twice a week, try getting it once per week and putting the saved money into your 401(k). If you see something at the store or online that you want, before buying it, take a few days to think about if you really want it. If after a few days, you still want it, go ahead and get it. But if not, put that money into your savings.

Analyze your expenses to see if they make sense for your retirement savings.

If your situation is direr than that, then you may want to look at your most expensive bills – like your rent/mortgage, car payment/car lease, and evaluate if you can still afford them. And I’m talking from experience here, so please don’t think this is coming from a place of judgment.

When my husband and I were first married, our income was unexpectedly cut short and our budget was tight. We brought in enough to pay our bills, but there was no wiggle room. Before we lost part of our income, we were living below our means. But when our income was lowered, we were living paycheck to paycheck. So, we decided to downsize to a 1-bedroom apartment in a different part of town. It was still a safe area and the apartment we moved to was well cared for but it was older and outdated. While I was sad to leave our first home together, the peace of mind I felt with lower rent and, therefore, more money in our bank account (and our ability to still save for retirement), was well worth it.

So, take a look at those. Obviously, when it comes to your mortgage and selling your house, that’s a huge decision that you would need to go over carefully. And you would need to make sure that if you were to sell it, you would actually make some money on it rather than losing money.

Given the current housing market, even if you rent, you would need to do your research to see if there is a more affordable option out there for you that would be worth the expense of moving. And regardless if you own or rent, if you decide to move in order to boost your retirement savings, make sure you move to a safe area. You don’t need to live in the nicest area, but wherever you go, you should feel comfortable and safe in your new home.

If you own your car and it’s in decent condition, you probably won’t want to sell it given how expensive even used cars can be, but if you have an extra car that you own but don’t really use, that would be a great option to sell and put the money into your retirement account! If you can get at least $1,000 out of it, if not more, then that would boost your savings quite a bit (because, remember, compound interest). Not to mention the money you would save on car insurance that you could then also contribute to your retirement. This advice applies to people who own their car in full – meaning, they don’t have a car payment.

If you “own” your car but you have a car payment, that means you have a car loan. And if you have a car loan, you will want to make sure that whatever you sell the car for is enough to cover the remaining amount of your loan as well as leave you with some extra to put towards retirement.

If you lease a car, look at if there’s a more affordable option. I’m all for car safety, so I don’t advise switching from a safe and reliable car to an unsafe and unreliable one. If you leased a modest car and it’s safe and reliable, then this may not be the area to save money on. But if you went high-end with a luxury car or even a supped-up mainstream brand then you’re paying for aesthetics, not just safety and reliability. If this is you and you’re low on your retirement savings, my suggestion would be to look at how much a comparable mainstream brand would save you. There are many cars that are safe and reliable that don’t cost as much as luxury cars or are more affordable without all the flashy bells and whistles.

And if you’re on the fence about downgrading, look at it this way – is that luxury car worth you having to work for another 10 – 20 years, or not being able to retire at all? Because the money you would be able to put in your retirement account is going towards a lease. Keep in mind that if that money were in your retirement account, it would be earning you even more money with compound interest, whereas the money you pay for a lease is going to the dealership.

If you feel in over your head with retirement planning, meeting with a financial advisor may be a good option.

Another strategy is meeting with a financial advisor. If you already have a financial advisor, then schedule an appointment to talk with them. If you don’t currently have one, then consider getting one. A financial advisor will be able to take a good look at where you’re at and give you an action plan for what you’ll need to do in order to improve your retirement outlook.

Everyone’s situation is different. Everyone has a different vision for their retirement. So, what “retiring well” means is specific to each person.

Whether you have decades more of work ahead of you, or you’re hoping to retire in a few years, make sure your savings amount is aligned with your goals.