Remember the 3 A’s for retirement saving: amount, account, and asset mix.
Key takeaways
- Amount: Aim to save at least 15% of pre-tax income each year toward retirement.
- Account: Take advantage of 401(k)s, 403(b)s, HSAs, and IRAs for tax-deferred or tax-free growth potential.
- Asset mix: Investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.
No one needs to tell you that you need to save for your future—hopefully, you’re already doing it. After all, no matter your age and how far away retirement is, you want to be able to enjoy retirement
“It’s important to focus on 3 main things during your working years:
- the amount you save,
- the accounts you save in, and
- your asset mix,”
says Ken Hevert, Fidelity senior vice president of retirement. “Of the 3, of course, the first is the most important, as no account or asset mix can make up for not saving enough.”
1. Amount: How much and how long
We suggest starting as early as possible and consider saving at least 15% of pre-tax income each year toward retirement to help ensure enough in savings to maintain your current lifestyle in retirement.
The good news: That 15% savings rate includes any matching or profit sharing contributions from your employer to your 401(k) or other workplace savings account, like a 403(b) or governmental 457(b) plan. An employer match can make saving 15% easier.
Of course, the longer you wait to start saving, the more important it is to take advantage of every opportunity to contribute the maximum to your 401(k)—which may be more than 15% of income.
In 2022, you can contribute up to $20,500 pre-tax to your 401(k). If you’re at least age 50, you can add a catch-up contribution of $6,500 pre-tax.
In 2022, the annual contribution limit for IRAs, including Roth and traditional IRAs, is $6,000. If you’re age 50 or older, you can contribute an additional $1,000 annually.
Health savings accounts (HSAs) are another type of tax-advantaged account. To open an HSA, you usually need to be enrolled in an HSA-eligible high deductible health plan (HDHP).
The 2022 IRS contribution limits for health savings accounts (HSAs) are $3,650 for individual coverage and $7,300 for family coverage.
If you’re 55 or older during the tax year, you may be able to make a catch-up contribution, up to $1,000 per year. Your spouse, if age 55 or older, could also make a catch-up contribution, but will need to open their own HSA.
Even if you can’t contribute 15% of your income right now, try to contribute enough to get the entire employer match in a workplace account, which is effectively “free” money, and then try to step up your savings as soon as you can.
2. Account: Where you save
Be sure to make the most of retirement savings accounts like 401(k)s, 403(b)s, and IRAs. If you have an high deductible health plan (HDHP), consider taking advantage of health savings accounts (HSAs), which can offer one of the most effective means of saving for qualified medical expenses now and in retirement. Depending on the type of account, your contributions can grow tax-deferred or tax-free.
With a traditional 401(k) or IRA, your contributions are pre-tax, which means that they generally reduce your taxable income and, in turn, lower your tax bill in the year you make them. Your contributions won’t avoid taxes entirely; you’ll pay income taxes on any money you withdraw from your traditional 401(k) or IRA in retirement.
A Roth 401(k) or IRA works the opposite way. Contributions are made after-tax, with money that has already been taxed, and you generally don’t have to pay taxes when you withdraw from your Roth 401(k) or Roth IRA.
So how does a person determine which type of 401(k) or IRA to contribute to: a traditional or Roth account? There are several things to consider, but for many, the answer comes down to a simple question: Am I better off paying taxes now or later? For those who expect their tax rate in retirement to be higher than their current rate, tax-free withdrawals from a Roth 401(k) or IRA might be a better choice. On the other hand, for those who expect their tax rate to go down in retirement, a traditional 401(k) or traditional IRA may make more sense.
For those who can, it may make sense to contribute to both a traditional and a Roth account. That can provide the flexibility of taxable and tax-free options when it comes time to take withdrawals in retirement, which can help manage taxes. Those who aren’t sure of their future tax picture could choose to make both types of contributions.
It’s important to note that if you get an employer match or profit-sharing contribution from your employer, those contributions are always to a traditional 401(k), even if you are making only Roth 401(k) contributions. So you may already be contributing to both types of accounts.
Alternative saving options to consider:
If you’re self-employed or a small-business owner, then small-business retirement plans like a self-employed 401(k) or SIMPLE or SEP IRA allow you to set aside a certain percentage of your income.
You may be able to contribute to an IRA even if you aren’t working. As long as one spouse works, the non-working spouse can have a spousal IRA and contribute to their own traditional IRA or Roth IRA. You must file a joint federal income tax return. Spousal IRAs are also eligible for catch-up contributions.
If you have an HSA-eligible health plan, money contributed to an HSA is tax-deductible.2 And withdrawals for qualified medical expenses—now or in the future—are tax-free (that includes the money contributed as well as any earnings).
The cost of health care in retirement will likely continue to increase, so it can be a good idea to prepare specifically for those expenses.
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement.
Saving in an HSA can reduce the amount you need because contributions, earnings, and withdrawals are tax-free when used to pay for qualified medical expenses.
If you have an HSA, consider contributing money above and beyond the amount you think you’ll need for the current year’s health care expenses. If you’re able to invest some of it for the future, you may have some of your future health care expenses covered.
3. Asset mix: How you invest
Stocks have historically outperformed bonds and cash over the long term. So when investing for a goal like retirement that is years away, it can make sense to have more invested in stocks and stock mutual funds. But higher volatility also comes with investing in stocks, so you need to be comfortable with the risks.
We believe that an appropriate mix of investments should be based on your time horizon, financial situation, and tolerance for risk. As a general rule, investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.
Take a look at our 4 investment mixes3 (see chart) and how they performed historically over a long period of time. As the chart illustrates, the conservative mix has historically provided much less growth than a mix with more stocks, but less volatility too. Having a significant exposure to stocks that’s appropriate for your investing time frame may help grow savings.
Choose the amount of stocks you are comfortable with
Data source: Fidelity Investments and Morningstar Inc, 2020 (1926-2019). Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or implied performance of any investment option. See below for detailed information.
Think ahead
When retirement is years away and you have many other financial demands, it may be hard to focus on the future, but saving for retirement with the 3 A’s in mind can help.
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