Is there one right way to save for retirement?

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Hanna Horvath, CFP®

Hanna Horvath, CFP®

Managing Editor & Certified Financial Planner™

Hanna Horvath, CFP®, is a certified financial planner and former managing editor at Policygenius. Her work has also been featured in NBC News, Business Insider, Inc. Magazine, CNBC, Best Company, and HerMoney.

Updated  | 5 min read

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Most of us share the same financial goal of retirement, and many Americans are woefully unprepared. A 2019 survey from GOBankingRates found that 64% of Americans are expected to retire with less than $10,000 in savings.

Most people don’t (or can’t) work forever and everyone has a different idea of what they want their golden years to look like. If you’re looking for ways to boost your savings, is there one right way to reach your retirement goals? Here’s what experts say.

The most common ways to save

The most common way to save for retirement is with an employer-sponsored retirement account. While we won’t get into all the different types of these accounts (you can learn more here), most workers today use a 401(k). There are benefits to these plans, namely long-term tax savings and potential employer matching, but some experts believe that 401(k)s are fee-heavy, have limited investment options and don’t adequately prepare workers for retirement.

Other conventional ways to save for retirement include traditional individual retirement accounts and Roth IRAs. Traditional IRAs typically have more investment options and contributions can sometimes be tax-deductible. Roth IRAs allow you to grow post-tax dollars and withdraw them later tax-free. But both have limits: You can only contribute $6,000 to a Roth IRA or IRA in 2021 ($7,000 if you’re 50 and up), compared to $19,000 for 401(k)s ($26,000 if you’re 50 and up).

“While employer plans have their limitations, they are still the best place to start when it comes to saving for retirement, especially if you have an employer match,” said Kelly DiGonzini, director of financial planning at Beacon Pointe. “Though I like the idea of having some money in pre-tax and post-tax accounts. Diversification is the key here.”

Investing your nest egg in the stock market

Some savers are investing their retirement savings outside their employer, in a taxable brokerage account. Investing through one of these accounts can mean lower fees, a wider selection of investments and potentially higher yields. But there are risks.

“Active management takes a fair amount of knowledge so it could work for some who have the skills and knowledge to create their own portfolio and monitor it over time,” said John Scott, director of retirement savings at The Pew Charitable Trusts. “The trouble is that we are biased as humans and may, even with good knowledge, not make good decisions with a long-term investment horizon.”

Actively managing your retirement funds is riskier and more time consuming. You also won’t get the tax deferral and employer match benefits 401(k)s have, said Scott. Most experts recommend starting with your employer match and investing extra funds in a brokerage account.

If you do want to go solo, the key is shift your portfolio to more conservative investments as you grow older and closer to retirement, said Scott. This will protect your investments from losing too much value too close to retirement and allow you to recover if you experienced large losses. Also, pay attention to fees. Zero-cost index funds are a smart option — they track a broader diversified market and have minimal fees because they’re passively managed.

What about annuities?

An annuity is an investment savings product offered by insurance companies. The money grown inside an annuity is tax-deferred, like a retirement plan, meaning you won’t pay taxes on the growth until you withdraw it. The real draw to annuities is fixed income for the rest of your life. But they’re often complicated, and can carry high fees. We have a primer on annuities if you’re thinking of investing in one.

Living in your retirement savings

For some Americans, their home is their retirement plan. Some savers simply sell their home when they’re ready to retire and downsize, using the profits to fund their retirement, said DiGonzini. While real estate can be a good investment, it’s not smart to keep your nest egg in one basket. Your home’s value is based on many factors, including your neighborhood and the real estate landscape at large. Unexpected changes to the housing market could lower your home’s selling price, putting your potential retirement plans in jeopardy. (Here’s why you can retire without ever buying a house).

Some savers plan to take out a reverse mortgage or a home equity line of credit to fund their retirement. A reverse mortgage allows homeowners 62 and older to borrow against the value of their home, in a lump sum or regular payments. The drawback is that a reverse mortgage is a loan, and there’s the potential for defaulting and losing your home altogether. HELOCs are similar, but generally have variable interest rates and added fees, which makes it more difficult to budget. They’re typically only used for home improvements or debt repayments, and most experts wouldn’t recommend using a HELOC for retirement income, said Scott.

Is FIRE the right way to approach saving?

A popular retirement trend of the past few decades involves saving large portions of your income (as much as 70% in some cases) for years until you have enough to stop working and life off your savings. Followers of the FIRE movement, short for Financial Independence, Retire Early, will invest their money in low-cost index funds until they stop working and then withdraw small amounts each year.

FIRE takes a lot of financial sacrifice and isn’t for everyone, and also bears inherent risk. There’s the danger you may not save enough or an unexpected emergency derails your financial plan. If there’s a sudden financial downturn you may lose a portion of your nest egg and won’t have decades to build it back up, said Cathy DeWitt, retirement planning and annuity expert at DeWitt & Dunn. It can be additionally hard to rejoin the workforce after years of not working.

“If you have to end up going back to work, you may not have the right skill set and have to work at a lower pay grade, typically in what would have been your highest earning years,” DeWitt said.

Find out if FIRE can prepare you for retirement.

Get started

Unfortunately, there’s no one right way to financially prepare for retirement — but the most important thing is that you start. Even if you don’t have much to begin with. Scott offers some general tips to save for retirement.

  • Start early and stay with it. Consistency is key, Scott explains. Giving a small amount to retirement is better than nothing at all. If your employer offers a retirement plan, take advantage of it.

  • Automate savings. Most accounts allow you to automate your contributions, either directly from your paycheck or automatic deposits from your bank account. This can help you stay on track with contributions.

  • Be ready for the unexpected. While there are ways to calculate how much you’ll need in retirement, remember that costly expenses (like medical emergencies) can come up.

If you’re behind on retirement savings, here are some ways to catch up.

Image: Leo Patrizi (Getty)