There are two aspects to saving for retirement – DOING IT, and DOING IT CONSISTENTLY. The rest is gravy.

TL;DR: Your target savings rate for retirement is 15% of your pretax salary (including your employer’s match, if you have one). Keep your life simple by utilizing your employer’s retirement plan (contribute as much as required to get the maximum match from your employer). If your and your employer’s contributions don’t get you to 15%, open an individual retirement account (IRA) – either Roth or traditional – and contribute the difference to that (IRA contribution limits for 2023 are $6,500 or $7,500 if you’re over 50). To do future-you a favor, rollover sponsored plans from past employers into your IRA. If you had a sponsored Roth plan before, you’ll roll that into a Roth IRA; if your past employer sponsored a pre-tax plan, you’ll likely roll into a traditional IRA. Contact your brokerage or investment firm for instructions on how to do this.

PL;RIA (perfect length; read it all):

Assuming you start when you’re young (pre-35-ish), you should aim to save 15% of your gross (pre-tax) annual salary for retirement. The later in life you start saving, the higher this percentage will be.

For me, anything that requires consistency and discipline is best set on autopilot. So as soon as I start a new job, I sign up to participate in my employer’s sponsored retirement plan, especially if there’s a match, and I contribute as much as is needed to receive the full match. (What’s a match? It’s how an employer incentivizes you to save for retirement. Your employer will usually match a portion of each dollar you contribute to the retirement plan they sponsor, up to a certain percentage of your total salary. For example, a previous employer of mine with a generous plan matched 50% of my contributions, up to 3%. So if I were making $100K pretax, and I put away $6K, they would match my contribution by giving $3K, or 50% of the 6% I contributed. But they also offered a 7% bonus if you utilized the whole match. So by putting away $6K of my own money, my employer gave me an additional $10K in the form of contributions to my retirement plan. The main benefit of matches are that they’re FREE MONEY. If you do the math, by contributing to my employer-sponsored retirement plan, I earned myself an additional $10K on top of my $100K salary. Secondarily, employer matches make it easier to get to that 15% retirement savings target, which can seem high when you’re just starting.) Beyond that, I set an automatic transfer to contribute to an IRA (individual retirement account) each month. For example, the 2023 contribution limit to an individual IRA (either Roth or traditional) is $6,500 total ($7,500 if you’re over 50), but the maximum contribution to a 401(k) in 2023 is $22,500. Stick with the $100,000 salary example – it’s not possible to save 15% of your salary if you only use IRAs. You have to create a holistic approach to saving for retirement if you want to do it in a tax-smart way.

Regarding IRAs: these are basic account types that can be opened at any brokerage, and there are two main kinds: traditional IRAs and Roth IRAs. The distinction has to do with when the money is taxed. With a traditional IRA, you contribute to the account pre-tax, but the money is taxed as income when you use it in retirement. A Roth is the opposite – you pay income taxes now and contribute after-tax dollars to the account, and then you can pull your money out tax-free in retirement. Generally speaking, I’m pro-Roth in your earning years. Especially if you’re getting started saving early – that money has a LOT of time to grow, and it will be great to not owe taxes when you pull it out.

WHAT TO INVEST IN:

To utilize great slogans, I’m a Keep It Simple, Stupid (KISS, US Navy) or Set It and Forget It (Ronco Rotisserie) kind of girl. We have a 90/10 split, which means we have 90% in equities (stocks) and 10% in fixed income (bonds, treasuries, etc). The equities portion is in an S&P 500 index fund, and the fixed income is in a global total market bond fund. This is what works for me. I’m sure I could chase an extra 2% return a little harder, but my fees are close to nothing, and we lost money like everyone else in 2022, so I’m good with where I am. I’m a staunch believer in index funds (aka passive funds), but I’ll do another post going more into the different types of funds available. I also recommend Elements of Investing by Charlie Ellis and Burton Malkiel.

*BUT WHAT IF…

• I have an employer-sponsored pension? These are great, but are increasingly rare. While they do offer guaranteed payments for life (and potentially for your spouse’s life), benefits often don’t transfer to children or other family members, making these difficult to contribute to intergenerational wealth. If you want to get serious, and you have some good bucks tied up in a pension, it may be worth researching how to get it out. Often, you can do a (potentially taxable) lump-sum withdrawal. While that tax bill will hurt, and you may lose a portion of the pension as a stipulation, it may be worth it if you’re wanting to leave something to your children or other non-spouse heirs.
• I’m self-employed? SEP-IRAs (simplified employee pension plans) were created as simplified retirement plan options. They allow employers to contribute to IRAs on behalf of their employees. If you’re self-employed, this is likely the way to go. The contribution is made by the business and not the individual, but contribution limits can be as high as $66,000 (2023).
• I have old retirement accounts with past employers? ROLL THEM OVER! You can open an IRA (or two – a traditional and a Roth IRA) at any financial institution (Schwab, Fidelity, Vanguard, etc) and roll the funds in those past accounts all into one place. The paperwork for this is likely online if you use a large broker, but I have found it easy to just call the firm and ask what I need to do to complete a rollover. They’ll walk you through it and simplify the process. Not only is your life simpler with fewer accounts, but you’ll likely save significantly on account fees and enjoy more investment selection inside your account.
• I have an LTIP, ESOP, or some other kind of complex retirement compensation plan? I suggest working with an advisor. The tax implications of these, and the fine print, can best be left to a specialist.