4 Steps That Can Help You Start Saving for a Successful Retirement

Not everyone shares the same vision for retirement, which means retirement investment strategies will vary based on an individual’s unique needs and financial situation. Thinking about how you might want to spend your time in your later years can help inform your retirement investment goals and motivate you to start saving toward them. Following these four steps can help you develop your own personal savings strategy.

Before you start setting aside money for retirement, it is important to understand the savings tools you have at your disposal. There are a handful of accounts that are specifically tailored to retirement savings, such as workplace accounts known as 401(k)s, as well as individual retirement accounts (IRAs). There are tax benefits on contributions to these accounts, and any growth in the account is tax-deferred. Account holders are only taxed on their withdrawals in retirement.

Each of these account types also has versions called Roth accounts—Roth 401(k)s and Roth IRAs—which allow contributions to be made with after-tax money. The benefit of a Roth account is that future withdrawals are tax-free—generally, if the Roth account has been in place for more than five years and the account holder is age 59½ or older. This potential for long-term, tax-free growth makes Roth accounts particularly valuable savings tools for younger investors. Of course, specific rules govern the various account types, including how much you can contribute in a given year, who can contribute, and when the money can be withdrawn without penalty.

For many people, personal savings provide a major source of funding for retirement expenses. As a result, one of the most important steps in investing for retirement is simply to start saving what you can, as soon as you can. This is particularly true for workers saving in a 401(k) that offers a matching contribution from an employer as part of their salary and benefits package.

Ideally, investors should try to set aside 15% of their total salary, including any company match. But if saving that much isn’t possible at the moment, start by saving what you can and gradually increase that savings rate over time. This will likely require taking a close look at your household budget to find opportunities to make room for this new savings priority. You can also fund these savings increases through raises in your salary or any bonuses. If you are saving in a 401(k), you may be able to sign up for a feature in which your contributions automatically increase by one percentage point each year. Starting to save as early and as much as possible can make a big difference in your ability to achieve your retirement vision. (See “Saving Early Makes a Difference.”)

Consider the hypothetical investor who starts saving 6% annually and steadily increases that amount to 15% of their income. They will reach age 65 with more than 12 times their ending salary set aside in their retirement savings account. By comparison, the worker who starts saving at age 40 and contributes 15% right away will likely end up with just seven times their ending salary. T. Rowe Price analysis suggests that investors need to have 11 times their ending salary saved by the time they retire in order to maintain their lifestyle in retirement.

To help you stay on track toward the goal of investing for retirement, compare your current savings with the savings benchmark according to your age. (See “Savings Benchmarks by Age—As a Multiple of Income.”) For instance, if you have three times your household’s current income set aside in your retirement accounts by age 45, then you are considered to be on track. If your savings are less than that target, you might need to look for ways to boost your savings rate.

Retirement represents the largest long-term goal for most investors. Even investors on the cusp of retirement have a longer time horizon than they might think, as their savings will need to support them through a retirement that could last three decades or more. As a result, investors should carefully consider their asset allocations. In general, all investors should maintain exposure to the long-term growth potential of stocks in their retirement portfolios. Bonds are also an important component of any portfolio, since they can help balance out the higher volatility of stock investments. As you approach and enter retirement, the balance of stocks, bonds, and other asset classes in your investment portfolio will likely need to shift.

As an investor approaches retirement, their allocation to stocks should decrease. In turn, the portfolio’s allocation to less volatile investments, such as bonds and short-term holdings, should increase. (See “Asset Allocation for Retirement Investing.”)

Investing in mutual funds or exchange-traded funds (ETFs) can also simplify the process of properly diversifying your portfolio. Mutual funds and ETFs offer built-in diversification potential as they are already invested in anywhere from dozens to hundreds of investments, and each dollar you invest in a fund is automatically diversified across the fund’s holdings. (See “Stay Diversified Through Mutual Funds”.)

Over time, a portfolio must be periodically rebalanced back to its target asset allocation as well as gradually adjusted to properly align with the changing time horizon. Maintaining a balanced portfolio that is in line with your risk tolerance requires time and effort. Fortunately, you can choose to do it yourself or, to simplify your investment process, through the use of asset allocation funds and target date funds.

If you choose to manage your own portfolio, it’s important to be aware that your asset allocation will inevitably change due to differing performance of the underlying asset classes. For instance, strong gains in the stock market and weak performance in the bond market could leave your portfolio overweight to stocks and underweight to bonds. This imbalance could leave your portfolio exposed to more risk, especially in the case of a stock market decline. You’ll need to rebalance periodically to bring your portfolio back into alignment.

Rebalancing generally involves either trimming overweight holdings and reinvesting in underweight securities or targeting underperforming areas with any new investment contributions. In addition to locking in gains, rebalancing can help you take advantage of lower prices in asset classes that could be poised for a cyclical rebound. This rebalancing process is often most noticeable at the asset allocation level but is also important to manage at the level of sectors, regions, and market capitalization to maintain proper diversification.

Diversification cannot assure a profit or protect against loss in a declining market. It can, however, help buffer your portfolio against steep declines and volatility that might occur in a small segment of the market.

There are many sub-asset class categories to consider when targeting diversification, including:

To benefit as much as possible from diversification, you should seek exposure in your portfolio to a spectrum of options. (See “Diversification Within Asset Classes.”) For instance, broad exposure to an array of sectors limits the possibility that a downturn in any one industry might reduce the long-term growth potential of your portfolio. Meanwhile, owning stocks in a wide variety of companies can help shield against business risk—the possibility that a company will have lower-than-expected profits or a loss. It’s also important to consider diversification on a global scale, since not all regions respond to economic conditions in the same way. The same is true for different sizes of companies. Small-cap companies are generally more volatile than their large-cap counterparts, but they also typically offer greater potential for growth. Adding exposure to a full range of small-, mid-, and large-cap companies can help you ensure that your portfolio is poised to benefit from growth no matter which sector may be outperforming.

Diversification is also important within bonds. For instance, there are diversification benefits to having exposure to a variety of bond types, including corporate, high yield, and international bonds. In 2022, the global bond market totaled more than $133 trillion,¹ of which over half were bonds issued in countries other than the United States. Exposing your portfolio to various bond types can also help buffer the impacts of interest rate hikes that may impact one country and not another.

With both stocks and bonds, it can be challenging for individual investors to find the time and resources necessary to assemble and monitor a truly diversified portfolio. Mutual funds and ETFs can provide a simpler route to diversification, with the benefit of professional management and oversight.

The same benefits of diversification apply to a household’s investments. Spouses and partners should review their investments together to ensure adequate diversification across the entire household and not just within an individual portfolio.

Investors looking to simplify the process of saving for retirement have many tools at their disposal. For instance, rather than maintaining their asset allocation target themselves, they can invest directly in a category of mutual funds that do so automatically. Asset allocation funds are a type of mutual fund that hold a mix of assets. Investors can select a fund that matches their target mix of stocks, bonds, and other asset types. Once invested, they can remain confident that the fund will maintain that target asset mix even as they make additional contributions.

One particular type of asset allocation fund will even shift the target mix over time based on an established time horizon. These funds are known as target date funds, and they are a popular way for investors to save for retirement without having to constantly monitor their asset allocation target over the years. Target date funds are usually managed to a specific target year and have an established glide path for how the asset mix will shift over time. You only need to select the fund with a path and target date close to the year you intend to retire, and the fund management team will take care of rebalancing for you.

Markets can be volatile, and it can be difficult to maintain your strategy when the balance in your retirement account declines. You can make it easier to stick with your strategy by choosing an asset allocation that balances downside protection with growth potential, according to your time horizon. The longer you have until retirement, the more opportunity your portfolio has to potentially recover from any short-term downturns. Both asset allocation and adequate diversification can help manage the volatility in your retirement portfolio. Whether you choose to do it yourself or seek simplicity through the use of asset allocation or target date funds, it is most important to stay invested and to keep saving. Time is on your side when it comes to investing for retirement, so the most important step you can take is getting started.

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