Retirement savings guide: Fundamentals for employees

There’s no question that the landscape and definition of retirement are changing. Today, people consider retirement in terms of financial independence rather than your status in the workforce. According to a recent Human Interest survey, most Americans believe retirement is now a slow transition away from full-time work rather than a complete stop from working. Further data also shows that Americans today define retirement as a time to be free to do whatever they want.

But regardless of how you plan to spend your retirement, it’s generally recommended that the earlier you start saving (whether through a traditional 401(k), IRA, brokerage account, or a combination of them), the more likely you’ll have some flexibility. 

Below, you’ll learn how to plan for your retirement, how to work toward reaching your goals, the basics of investing in your retirement account, and other factors you may need to consider.

How much do I need to save for retirement?

Your age, current savings, and target retirement date are all variables that can affect your retirement savings strategy and how much you need to save. We believe that both younger and older individuals must prioritize saving for retirement. And individuals closer to retirement age must take advantage of available retirement savings options. 

If you have access to a 401(k) account, a good option may be to maximize the amount you can contribute each year. According to Investopedia, the historical return rate of a 401(k) is between 3% and 8%, which means that saving over just one or two decades can potentially generate a sizeable amount of retirement savings. Individuals 50 years or older can also benefit from catch-up contributions, which allow individuals with a qualified 401(k) retirement plan to contribute an additional $7,500 into their 401(k) account in 2023.

For younger individuals, there is more flexibility on how aggressively they may want to save for retirement. Yet some younger people may need to take on more risk when saving for retirement. According to U.S. News & World Report, over 40% of people between 18 and 31 have their money in a savings account rather than choosing to invest their money, which is the most significant percentage compared to previous generations. While a 401(k) is generally considered a part of a balanced retirement saving approach, younger people should consider the merits of building a balanced investment portfolio to help hedge against stock market volatility. 

How much money you need to save for retirement depends on when you want to retire and how you envision your retirement lifestyle. The average American typically retires between 60 and 70 years old and spends between 20 and 30 years in retirement. For reference, the average life expectancy for Americans is 77 years). For some individuals who plan to retire early, it may make more sense to save as much pre-tax income as possible. Those who do not anticipate high retirement expenses (such as healthcare, travel, and living care) or do not foresee retirement until they’re much older may not need to save as much. 

Now that we’ve considered some of the factors involved in retirement savings, here’s how to get a general projection of how much to save for retirement.

Two common retirement saving calculation formulas are the Rule of 300 and the 4% rule:

• The Rule of 300 multiplies your current income by 300 to estimate your retirement needs. For example, if you currently spend $4,000 a month, you’ll multiply that amount by 300, which means you’ll likely need $1,200,000 when you retire. 

• The 4% rule calculates how much you’ll roughly spend on monthly expenses during your first year of retirement. To use the 4% rule, you’ll want to multiply the current balance on your investment portfolio and divide it by 12. 

After determining how much to save for retirement (factoring in inflation), you can start calculating how much you need to put away in your 401(k) each year to help you get to that amount. Ronnie Cox, Investment Director at Human Interest Advisors, recommends contributing 10% to 15% to your account. "Depending on your situation, however," he says, "that may mean starting at a lower rate, like 7%, and gradually increasing each year through automatic increases."

What are the different types of accounts for retirement?

Part of financial planning for retirement is to save regularly, and one of the best ways to do this is to open a retirement account. However, you have a few options when deciding what “type” of retirement account you want to use. Some of the most common retirement account types are: 

• 401(k): The 401(k) is an employer-sponsored retirement plan that allows employees to contribute a percentage of their salaries into their retirement account. Contributions to a 401(k) are made with pre-tax money, which can reduce your taxable income for the year. 

• Roth 401(k): The Roth 401(k) is similar to a 401(k), except contributions are made with after-tax money. This allows individuals to make withdrawals from their Roth account tax-free during retirement if certain requirements are met. 

• Traditional/Roth IRA: If you do not have access to a 401(k) plan through your employer, you may want to consider opening an IRA, otherwise known as an individual retirement account. A traditional IRA is not an employer-sponsored plan but offers some of the same tax advantages of a 401(k) plan.

Choosing between these options will depend on your retirement goals and personal circumstances. A 401(k) may be the best option if you expect to be in a lower tax bracket during retirement, while a Roth account might be better if you expect to be in a much higher tax bracket. 

How to get the most out of your retirement account

If you have access to a 401(k), we recommend taking advantage of its benefits. Here are some tips to help get the most out of your 401(k) account: 

• Maximize your employer match: If your employer offers an employer match, they may also contribute to your 401(k) plan based on how much you contribute. 

• Consider increasing contributions annually: Your earning power will likely increase as you age. With each salary increase, consider increasing your contribution rate (i.e., the percentage of your income you contribute to your 401(k) account). The maximum contribution limit amount is $22,500 (for 2023).

• Consider catch-up contributions: If you’re 50 years or older, you can make a catch-up contribution, which is the ability to contribute more money to your retirement account over the maximum limit set by law. For 2023, the catch-up amount for eligible 401(k) participants is $7,500. 

• Wait for vesting: Your employer may have a vesting schedule that details how long you must stay at your place of employment to access the full employer contribution. Continuing employment until fully vested will increase your retirement benefits.

• Take advantage of tax credits: A 401(k) plan can also offer a few tax advantages for participants. Workers who make below a certain income may be eligible for the Saver’s Credit, a special tax credit applied to annual income tax returns for eligible participants who make first-time contributions to their retirement account. 

A 401(k) can also lower your taxable income, which can reduce the amount of income taxes you pay. This may mean that the more you contribute to your 401(k), the less you’ll currently have to pay in income taxes, which can work to the advantage of those in a higher income tax bracket. 

Investing for retirement with a 401(k)

After you’ve set up a retirement account, the next step to planning for retirement is to decide how you want to invest your money. Your choices for investing your money into retirement can depend on how actively you wish to manage your investment portfolio and your risk tolerance. 

Risk tolerance is your ability to withstand the market's uncertainties in exchange for the potential to receive greater returns. But whether you have a high or low-risk tolerance, it’s generally believed that proper diversification—or spreading your investments among different asset classes—can be vital to helping you create a strong investment portfolio. 

Once you have a general sense of how much risk you can tolerate, you’ll want to consider building your investment portfolio. According to advice from Peter Lynch, manager of the Magellan Fund at Fidelity, it’s wise to understand each potential investment thoroughly. Lynch advises investors to read financial statements like balance sheets and income statements, listen to earning calls, and examine annual filings with the SEC for each investment.  

After you’ve built an investment portfolio, over time, the performance of your portfolio might knock your asset allocation out of balance from where you want it to be. Rebalancing your portfolio (i.e., updating your investments to return your portfolio to its target mix) can help prevent certain assets from being overly concentrated and reduce the risk associated with asset allocation drift. 

If you’re less inclined to balance your portfolio manually, you may want to consider automatic rebalancing. Automatic rebalancing allows an investment company or financial advisor to rebalance your portfolio on your behalf. The potential benefits of automatic rebalancing can include: 

• Risk reduction

• Less manual work

• Less trading costs

What else to consider when planning retirement?

In addition to regularly contributing to your retirement account and managing your investments, there are a few other considerations when planning for retirement. 

1. Social Security 

Social Security is a federal program that provides monthly retirement benefits to qualified individuals. To qualify for these benefits, you must be 62 years old and have contributed to the system for at least 10 years. According to the Social Security Administration, you can delay your Social Security benefits. Social Security retirement benefits are increased by a certain percentage each month you delay your benefits after 62 years of age. The benefit increases stop when you are 70 years old. 

It’s important to note that Social Security alone may not be enough to cover your retirement cost of living expenses. As of May 2023, the average monthly benefit for retired workers is $1,836.06 or around $22,032.72 annually, which may be significantly less than what most people need for retirement.

Ultimately, Social Security can be a good way to supplement income for your retirement. To estimate how much you'll receive from Social Security, you can average your indexed monthly earnings during your 35 highest earning years.

2. Healthcare 

A 2022 report by HealthView Services Financial shows that lifetime retirement healthcare costs are expected to increase exponentially should inflation continue to grow over the next several years. A healthy, married 55-year-old may receive up to $267,000 in additional retirement healthcare costs. That’s why it’s critical to factor in healthcare expenses before retirement, considering that Medicare premiums may increase over time. 

Get ahead of retirement planning with Human Interest

Planning for retirement is critical, especially as Americans expect more flexibility during this phase of life. Whether you are new to building a nest egg for retirement or are closer to retirement age, it’s not too late to open a retirement savings account and maximize your contributions (and employer match) to maximize your retirement savings. At Human Interest, we provide affordable 401(k) plans for small to medium-sized businesses and offer free information on preparing for retirement. Sign up for our newsletter below to learn more. 

Glossary of terms

• Asset Allocation: The distribution of assets across various asset classes, such as stocks and bonds, often tailored to meet an investor’s objectives while considering risk tolerance and investment horizon.

• Rebalancing: The process of moving money from one type of investment to another to maintain a desired asset allocation.

• Volatility: A statistical measure of the dispersion, or variability, of returns for a given security or portfolio. Volatility is often measured using standard deviation.

Past performance does not guarantee future results. 

The investment approaches discussed in this article do not assure a positive return or a positive investment experience. There are numerous ways of approaching investing, and not all are appropriate for every individual. Diversification does not ensure a profit or protect against loss.