Best Ways to Save for Retirement in Your 30s

Saving the right amount for retirement is crucial but putting your dollars in the right accounts could get you there even faster.

In your 30s, retirement feels forever away. Future days filled with sunshine, travel, grandkids and charitable work. But to have that awesome ability to do what you want, when you want to, you have to start saving now. And the smarter you save, the faster you’ll get there. Below are key details for how retirement savings can be maximized.

• Retirement Date and Amount
• Employer Retirement Plans
• Traditional IRA
• Roth IRA
• Taxable Accounts
• Other Saving Ideas
• Retirement Date and Amount

First, let’s define a term that can be confusing. Retirement can be different for everyone but what is simply means is the ability to be financially independent. Doing what you’d like without money being a factor.

Now before you start saving you must decide when you want to retire or at what age. Do you want to retire early (like 55) or at a normal age (65) or even later (after 70).

Next you need to decide how much you’d want each month to live on. Do you need $7,000 a month or $10,000 or some other number to be comfortable? If you have no idea (because seriously, it feels forever away) a helpful rule of thumb to use is 80% of what you are living on now is a good place to start. So, if you are living on $10,000 a month now, plan for $8,000 a month for your retirement.

After you decide when to retire and how much you want to live on, then you can use a simple retirement calculator to see how much you need to save to reach that goal on time. Retirement calculators are not perfect but that give you a sense of how much you need to be saving along the way to be on track.

Now we can talk about the best ways to put those savings to work.

Employer Retirement Plans

The first retirement savings vehicle to use is your employer’s plan, which is technically called a qualified employer-sponsored savings plan but you may know it as a 401k or 403b. One of benefits of a retirement plan at work is that your employer may choose to match what you put into it each year. Sometimes your employer may also add money into your retirement account in the form of a profit share.

Another benefit of your employer’s retirement plan is that you can save money into it from a payroll deduction automatically and you get to choose if you want your contribution to be pre-tax or post-tax (also called Roth).

Some employers have additional retirement accounts available to employees in the form of deferred compensation plans. These are often called 457 or 401a plans and are usually available for highly compensated employees (those that make over $120,000 a year). These plans typically let you save twice the normal annual contribution amount for retirement, which can be a huge benefit.

Tips to Know:

Match: The money that an employer put into an employees retirement account. This will always be pre-tax because they can’t pay your income taxes for you

Employee Contributions: the money that you put into the account and can be pre or post tax and is always 100% vested (which means you keep what you put in)

Vested: who owns the money in the account. Your employers’ contributions can sometimes have a vesting period which just means that you have to keep working there for a period of time to keep their match after you leave.

After-Tax: sometimes your employer retirement account will allow you to save even more than the usual annual contribution limit. This is always an after-tax contribution and you want to make sure that these are converted to a Roth to avoid capital gains when you withdraw it in retirement.

Rollovers: If you leave your job, you have 4 options with your retirement account and each of these can be relatively simple to complete

1. You can simply leave it at your old employer but you won’t be able to add any new money to it
2. You can roll it over to your new employers retirement account as long as they allow that
3. You can cash it out but beware, you will pay both income taxes on this amount and a 10% early withdrawal penalty
4. You can roll it to an IRA but be sure that your IRA has the same tax treatment as your 401k. You want like accounts to match so your Roth 401k will go to your Roth IRA

Individual Retirement Accounts

Traditional IRA

A traditional individual retirement account is a tax-deductible investment account designed for retirement savings. Unlike in an employer-sponsored savings plan, you actually own your IRA account and get to choose how it’s invested. Because of the tax breaks the IRS provides in this account, there are specific restrictions on withdrawing your money.

For example, you must wait until after you are 59½ to start taking money out or you may pay an early withdrawal penalty of 10%. Also, you must start taking money out when you turn72 to meet the required minimum distribution set by the IRS. The reason this rule exists is because you haven’t paid taxes yet on that money and the IRS wants it.

Tips to Know:

For 2022, contribution limits for traditional IRAs are $6,000 per individual or $12,000 for a married couple ($6,000 each).

You can take money as a withdrawal from your traditional IRA at any point but if you do so before 59 ½, the amount will be included in your taxable income and you’ll pay a 10% penalty on that amount.

High earners who are eligible for qualified retirement plans have limits for the amount of IRA contributions they can deduct so be sure to check with your accountant or read the IRS rules very carefully before you use one

Roth IRA

For individuals and married couples who fall below certain adjusted gross income thresholds, Roth IRAs can be a great account. The primary difference between a Roth IRA and a traditional IRA is when you are taxed.

Traditional IRAs allow you to deduct your contributions from your taxable income, but then your future withdrawals (both what you put in and all the growth) will be taxed at ordinary income rates. The opposite is true for a Roth IRA. With a Roth IRA, your contributions are after-tax, so after your money is in the Roth IRA, it will grow tax free and come out tax free as long as you use it correctly.

Roth IRAs also allow you to take money out before 59 ½ for certain situations like your first down payment on a house or for your kid’s college expenses. Also, after the Roth IRA has been open and funded for 5 years, you are allowed to withdraw your basis with no questions asked.

Tips to Know:

• Contribution limits for Roth IRAs are $6,000 per individual and $12,000 for a married couple.
• There is no required distribution age or amount for a Roth IRA, it can stay in as long as you’d like
• Contributions can also be made after age 70½ as long as you have earned income

Taxable accounts and other options

Once you have maximized your tax efficient retirement account options, there are a few other ways you can start to save money for your retirement. You definitely have to be more strategic from a tax perspective with these accounts because they don’t have the same tax benefits as specific retirement accounts. The one big advantage of not being a retirement account though is accessing your money before 59 ½ often comes without a penalty or strings attached.

Individual or Joint Investment Account

These accounts have ultimate flexibility. You can invest in whatever you would like, you can put in as much as you want, you can take out money whenever you want, and you can use the funds in this account for any purpose.

The downside of all that flexibility is there are no tax benefits on this account. You will be using money to start or fund this account with dollars that were already taxed, you will be taxed each year on the account as profits are reinvested (even if you don’t take it out) and you’ll be taxed again on the money that comes out with capital gains.

It’s important to invest these accounts in a tax sensitive way because they have so much tax drag along the way. For example, if you are using fixed income as a portion of your investments, then it’s smart to use municipal bonds that aren’t taxed at the federal level.

One other benefit of these accounts is they allow you to use a strategy called tax loss harvesting. This allows you to turn your investment losses into a tax benefit. You can write off up to $3,000 a year in investment losses against your ordinary income, which can be a great benefit of this account.

Other ways

Besides retirement accounts or investment accounts there are a few other unique ways to save for retirement that may or may not be the right fit for you.

HSA– An HSA is a Health Savings Account that allows you to save up to $3,650 or $7,300 if married a year pre-tax. This account can also be invested and will grow tax-free and the entire balance will come out tax-free as long as the funds are used for qualified medical expenses. This account can also be used after 59 ½ for other retirement expenses (not medically related) but you would pay taxes on any of the gains if you did so.

Real Estate– A real estate investment property can be a smart part of a retirement strategy both now and in retirement. The reason it’s so valuable now is because you can set your mortgage schedule to have the property paid off by retirement so that you get to keep the full rent checks as retirement income. You also get to depreciate the house over 27.5 years which will lower the taxes you pay on the rental income while you’re still paying off the property allowing you to pay it off faster. Rental income in retirement can act like a bond or a consistent source of monthly income which can help cover some of your retirement expenses.

Pensions/Deferred Compensation/Deferred Annuities – Pensions used to be the primary retirement income plan but now only a few employers offer them. What can be a replacement or provide a similar benefit are deferred compensation plans, where employers allow you to save some of your income above the normal 401k amounts with the purpose of using it once you are retired. Another way this can be done if your employer doesn’t provide this is by using a deferred annuity. A deferred annuity allows you to grow your money tax deferred and you are able to turn on a guaranteed income stream when you start retirement.

Summary

Retirement can feel forever away but the sooner you start saving the faster you’ll have options. How you save for retirement is important but saving the right amount is the key. No matter how smart you save, consistently saving the right amount over time is the surest way to reach your retirement goal on time and with full confidence.

Disclaimer: This post is for informational purposes only and is never to be taken as advice or a recommendation. Talk to a tax or legal professional to determine how this information best applies to your personal situation.