How to build your net worth by saving for retirement

Putting money aside for retirement is one of those things you know you should do, but doesn’t always seem urgent — especially when you’re just starting your career. Starting to save for retirement early can give you a huge leg up on your financial goals, though.

That’s why budget coach Saprina Allen said the question of how to start saving for retirement comes up frequently on her TikTok account, where she shares her experiences with personal finance as a corporate recruiter and single mom with a son in college. Many of her followers know they want to start building their retirement accounts — but don’t know how to get started.

“Time is the best thing that you have on your side when it comes to saving for retirement,” Allen said. And getting started is easier than many young people think. Here’s how to start thinking about building your net worth through retirement savings.

Before you start researching the pros and cons of different retirement savings accounts, Allen recommended spending some time thinking about what you want from retirement. “For myself, I think 50 is the age I’d like to retire. Do I mean that at 50 I’m going to be able to stop working? No, but I imagine that 50-year-old me is going to be able to create content full-time, and do some other things that maybe are passion projects, but not have to work full-time,” she said.

Understanding what your retirement lifestyle will look like will help you figure out the costs you can expect to shoulder in retirement. For example, “if you want to be taking cruises all the time and living a really luxurious lifestyle, you might need a little bit more put away for retirement,” Allen said. Even if you plan to live relatively simply after you stop working full-time, you’ll still need to use your savings to pay for basic costs such as housing, insurance, and transportation. Assessing your current overhead costs for those line items can help you estimate how much you’ll need to budget for those in retirement, Allen said.

Though some people recommend the 10-percent rule — saving just 10 percent of your income for retirement — many experts say it’s not enough. Instead of settling on a specific sum to save, Allen thinks about retirement decade by decade. “My plan is at the age of 50, I can leave my corporate job,” she said. “Then, do I have enough assets that I could work part-time for the next decade? And at the end of those 10 years, if I need to get a job then, I’ll cross that bridge.”

Once you’ve decided how much of your income you hope to save for retirement each paycheck or month, Allen recommended looking into employer-sponsored retirement plans like 401(k)s. This type of retirement plan is incredibly common: According to the U.S. Bureau of Labor Statistics, 63 percent of civilian employees had access to defined-contribution plans (a category that includes 401(k)s) in 2023).

Plus, as many as 98 percent of companies that offer 401(k)s offer to match at least a portion of employees’ contributions — something Allen said can really help boost your savings. “I only participate in my 401K up to my company’s match,” she said. “It’s free money that you’re leaving on the table.” Most 401(k) accounts offer a selection of mutual funds where you can invest your contributions, ranging from high- to low-risk as well as funds targeted to your anticipated retirement date.

There are limits on how much you can contribute to a 401(k) each year, though, and 401(k) savings aren’t as easy to access as some other types of retirement savings plans. Until age 59 ½, you can’t withdraw money from a 401(k) without facing tax penalties — and you have to begin taking the minimum required distributions from a 401(k) once you turn 73 or 75, depending on the year you were born. Although there are a few exceptions to these rules, the additional regulations on 401(k)s make them less flexible on the whole than other retirement savings accounts.

The money you put into a 401(k) comes directly out of your paycheck, which not only means it’s easy to automate, but also reduces your taxable income. Because 401(k) contributions are pre-tax, you will have to eventually pay taxes on it when you withdraw the money in retirement. In the meantime, though, contributions you make to a 401(k) are not considered part of your taxable income, which lowers your tax burden while you’re still employed.

However, 401(k)s aren’t the only retirement saving option: individual retirement accounts (IRAs) are another popular choice. Unlike 401(k)s, IRAs are typically not facilitated by your employer, so you can open one at any time as long as you meet the requirements (more on that later). There are two types of IRAs: traditional and Roth. As long as you have taxable compensation, you can contribute to a traditional IRA, but you must fall below a specific income threshold to contribute to a Roth IRA.

Traditional and Roth IRAs also have different tax implications. You can deduct the contributions you make to a traditional IRA from your taxes for that year as long as you meet certain qualifications, which means you’ll pay taxes on that money when you withdraw it in retirement. In a Roth IRA, however, your contributions are considered post-tax — so you won’t pay taxes on your savings or any earnings on those savings later on. As Allen said, “Little Old Lady Saprina can access that money and not have to worry about the tax implications on it.”

It’s also important to consider that the contribution limits are much lower for IRAs than 401(k)s: $6,500 for people under 50 and $7,500 for people over 50. You can also invest in a much larger range of securities through IRAs, giving you more flexibility than a 401(k). However, it’s also a bit easier to withdraw your money from an IRA before retirement if you need to. “What I love about the Roth is if you’re somebody who has maybe more of a scarcity mindset, you always can access your Roth funds with not as much red tape or penalties as 401(k),” Allen said. Personally, Allen has chosen to invest in a combination of pre- and post-tax retirement savings plans, but she also recommended working with a tax professional to create the right plan for your financial needs.

Though 401(k)s and IRAs are some of the most popular retirement savings accounts, they aren’t the only ways you can save for retirement. If you have a high-deductible health insurance plan, you might have a health savings account (HSA): a tax-advantaged savings plan designed to help you pay for out-of-pocket medical expenses. Allen has recently started using her HSA as an investment vehicle because of those tax benefits.

Here’s how it works: First, you could contribute tax-deductible money into your HSA, either from payroll deductions or your own funds. Then, rather than withdrawing money every time you have a medical expense, you could invest a portion of your HSA balance and allow it to grow over time. Any earnings on those investments are also tax-free. The balance of an HSA rolls over from year to year, and there are no requirements on when you must start withdrawing money.

Of course, this strategy does require paying for your current medical costs out of pocket. “If you’re somebody who has a lot of health expenses, an HSA as an investment vehicle might not be the best option, but if you can afford to pay your health expenses out of pocket, then that’s another tax-advantaged account that you can put away for your old lady self,” Allen said.

There is also no time limit on when you can request a reimbursement from your HSA, so you can save your medical receipts for years until you decide you need a reimbursement. Once you retire, you can of course use the funds in your HSA for qualified medical expenses — but after age 65, the 20 percent penalty for using HSA funds for another purpose goes away.

No matter what retirement savings strategy you choose, Allen recommends talking openly with your friends, family, and basically anyone who will listen about it. “My number one rule for money is I talk about it all the time with everybody,” she said. Secret’s Money Moves platform includes downloadable workbooks and easy-to-understand resources you can use to start taking control of your financial well-being as well. Find friends and family you can share these tips and tools with so you can encourage one another throughout your individual journeys.

Keeping your personal financial goals and ideas to yourself only contributes to the culture of shame and secrecy around money — and that’s not helping anyone. “We live in a society where enough is never enough and there’s always somebody making more, but there’s always somebody who wishes they were in your shoes,” she said. Creating a culture of openness around finances helps talking about money become more normal — and helps us all succeed.

This content is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. There are risks associated with investing in securities and other investment vehicles.