Planning for retirement is among the most important financial decisions that most people make in their lives. But it's often not easy to know how to start and what are the best strategies. Ashley Weeks, Wealth Strategist at TD Bank, sheds light on the importance of saving for retirement and reminds customers that it's never too late to start.
For decades now, the number of people with private-sector pensions has dwindled, and, for many, Social Security benefits are often insufficient to cover monthly expenses for those in their golden years. People are increasingly relying on personal savings for retirement, making it more important than ever to ramp up what you are putting aside for when your working life ends. The good news is time is your friend when it comes to investing. If you're in your 40s or 50s, you still have time in the workforce and, therefore, time to save.
Consider the Rule of 72, a simplified formula that calculates how long it'll take for an investment to double in value. If you earn roughly 7% annual growth, your money will double about every 10 years. This type of yield typically requires a growth focus, but the point is that compound growth―especially inside a tax-advantaged account like a 401(k) or IRA―is a powerful thing and it's never too late to start saving for retirement.
How much should you save and how much will you need?
When it comes to saving for retirement, a good rule of thumb is to save 15% of your pre-tax income. This can be tough for younger workers trying to get on their feet, buy a home, etc., but as you grow in your career, you can strive to put more money toward retirement.
You might also wonder how much money you'll need down the road. Generally, in retirement, people spend about 80% of what they spend now annually. So, for example, if your yearly living expenses tally around $50,000, you should plan on needing about $40,000 annually in retirement. It's also important to consider lifestyle inflation, which is often overlooked and can lead to underestimating what you'll need.
When you retire will also impact how much money you need to save. Obviously, the younger you retire, the more savings you'll need. Working longer not only gives you more time to save and benefit from compound growth but is also incentivized by the government. While you can start drawing Social Security benefits at age 62, the amount you can earn goes up each year until you hit age 70. The difference is not insignificant, and while there's nothing wrong with taking less money early, you'll want to be aware of your options and weigh them accordingly.
How to optimize retirement savings
When it comes to saving for retirement, it can really help to automate, automate, automate. Set up to have contributions automatically deducted from your paycheck so you never even see the money. While people have good intentions to invest money on their own, factors such as decision fatigue, the temptation to use the money in other ways and inaction often get in the way.
It's also important to take advantage of employer matching contributions if your employer offers them. If so, try to at least contribute the amount necessary to benefit from the match. Your company's contribution is essentially free money that you don't want to pass up.
Finally, tax-advantaged retirement accounts are a smart way to optimize savings. Traditional 401(k), 403(b), and traditional IRA plans are examples of tax-deferred accounts, funded with pre-tax dollars. That means you'll pay taxes on withdrawals from those accounts in retirement. A Roth IRA is an account to which you contribute after-tax dollars. Withdrawals are tax and penalty free after age 59½, provided you have held the account for at least 5 years. Some employers also offer Roth 401(k) plans, allowing you to contribute after-tax dollars from your paycheck, meaning you'll pay no tax on withdrawals in retirement. All options are worth exploring to determine which account type or mix is right for your circumstances. Also of note, for 2025, the IRS has made updates to maximum yearly contributions:
Employer 401k or 403(b) plans, maximum contributions, beginning 2025:
Put your oxygen mask on first
Life is expensive. Houses. Cars. Children. Education. Medical bills. There’s a lot of ways to spend your money. And save it. Your best asset is your ability to earn income. Take advantage of these years and prioritize your financial security while you can. Look at the big picture and consider adjustments you can make today to save money for tomorrow. Think about ways your life will change that might impact retirement, such as downsizing, taking on a part-time job or investing in a rental property.
Do your homework and get smart about your future. And be discerning in terms of how and where you get your information. Following the advice of an amateur financial whiz on social media is doubtfully the way to go. The IRS website is great place to start to learn more about tax-advantaged retirement plan options. Bottomline, you’ve got one life, make retirement savings a priority to enjoy the fruits of your labor and live it to its fullest.
For more on personal finance topics
If you have more questions about personal finance topics that matter to you, visit the Learning Center on TD Bank’s website. You can find out more information about TD Bank's services at td.com
We hope you found this helpful. This article is for informational purposes only and is based on information available as of December 2024 and is subject to change. This content is not intended to be used or acted upon with respect to any client's specific circumstances.
For specific advice about your unique circumstances, consider talking with your qualified professionals.
TD Bank, TD Wealth® and their employees do not provide legal, tax or accounting advice.
TD Wealth® Disclosures
TD Wealth® is a brand of TD Bank N.A., (TD Bank). Banking, investment management and trust services are available through TD Bank.
Securities and investment advisory products are available through TD Private Client Wealth LLC, a U.S. Securities and Exchange Commission registered investment adviser and broker-dealer and member FINRA/SIPC (TDPCW). TD Bank and TDPCW are affiliates.
The information contained herein is current as of January 2025. The views expressed are those of the guest author and are subject to change based on tax and other laws. The information provided here is for educational purposes only.
The planning and investment strategies discussed herein are not intended to provide professional, investment or any other type of advice or recommendation, or to create a fiduciary relationship. You should not make any retirement or investment decisions in reliance on this material, which is intended to provide only brief comments on the topics addressed and is based on information that is likely to change without notice. TD Wealth® is not responsible for any loss sustained by any person who relies on this article.
The planning and investment strategies discussed herein are not a solicitation to invest in any specific investment product or vehicle. Keep in mind that investing involves risk including the risk of loss of the entire investment.
Federal and state tax rules and requirements are subject to frequent change. TD Wealth® does not provide legal, tax or accounting advice to its clients. Consult with your personal attorney, independent tax advisor and accountant/CPA for a complete analysis of the legal and tax implications applicable to your particular situation.
No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. All rights reserved. All trademarks are the property of their respective owners. The TD logo and other trade-marks are the property of The Toronto-Dominion Bank or a wholly-owned subsidiary, in Canada and/or other countries.
©2024, TD Bank, N.A.
Want to learn more about Money matters?