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How to save for retirement: Do these 3 things

Wondering how to invest for retirement? It's not hard. In general: Automate everything you can, and check in once in a while.

1. Put your savings on autopilot

If you're saving in a workplace plan, your contributions will likely be deducted from your paychecks.

You can automate your other retirement savings too. For example, set up automatic bank transfers to an IRA on a monthly or weekly basis. This has the added benefit of taking the money from your account before you have the chance to spend it!

Automatic transfers also ensure that you don't accidentally throw your savings plan off track. Forgetting a few contributions a year can have a huge impact on your retirement balance, because those contributions will miss out on compounding.

For example, if you planned to save $100 a month and missed two contributions every year until retirement, you could wipe almost $33,000 off your final account balance—way more than the $8,000 in missed contributions.

Automating your savings could mean you'll have more money for retirement

A bar chart showing that missing a couple contributions a year can result in a much lower balance at retirement.

This hypothetical illustration assumes an annual 6% return. The illustration doesn't represent any particular investment, nor does it account for inflation. The rate of return is not guaranteed. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals from a traditional IRA before age 59½ are subject to a 10% federal penalty tax unless an exception applies.

Step up your contributions

Look for other ways to automate your savings as well. For example, see whether your workplace plan offers "step up" contributions, which automatically increase your savings percentage once a year until you reach your target.

Since your salary will likely grow at the same time your contributions do, chances are that you won't even miss the money!

2. Resist the urge to tinker with your accounts

Because saving for retirement is so critical, you might think you should maintain a tight focus on your accounts and what they're doing.

But saving for retirement is more like a marathon than a sprint—it's going to take a while and it will occasionally be a little monotonous. The best thing you can do is settle into a good saving rhythm.

Here are some saving don'ts:

Don't look for shortcuts.

Once you've spent time determining the best asset mix for you, be careful not to veer off course.

Keep in mind that, at any given time, certain types of investments will do better than others. If you constantly change direction to take advantage, you could find yourself falling farther and farther behind.

Instead, stick with your plan and know that you'll get to the finish line in good time.

Don't pay too much attention to the markets.

Downturns in the market might feel like being caught outside in a storm. But if you flee for cover every time there's a little wind in your face, you'll miss out on the times when the wind is at your back.

Instead, force yourself to invest a consistent amount in the same mix of assets every week or month, no matter what's happening on Wall Street.

That way, you ensure you're buying more of an investment when its price has fallen and less of it when it's up. Buy low, sell high—sound familiar?

Don't get distracted.

At some point, other uses for your money will probably start to compete for your attention. But keep in mind that as far as financial goals go, experts agree that saving for retirement should be number one.

You might think there's no harm in putting your savings on hold for a little while, but remember that time is what makes your savings so powerful, and you'll never get that time back.

Obviously, it's also not a great idea to take money you've already saved for retirement and use it for something else. If you withdraw the money outright, you may have to pay income tax and penalties.

And even if you take a loan rather than a withdrawal, you'll hurt your retirement in the long run. The money you take as a loan won't be available to grow while it's out of your 401(k) plan. That means less money for you to retire on.

3. Check in on your accounts—occasionally

Of course, you don't want to be completely in the dark about where you are on your retirement journey. At least once or twice a year, take a look at your accounts and ask yourself these questions.

What's my current asset mix and how does it compare with my target?

When you open your retirement account, you'll decide how you want your money invested. In a diversified portfolio, the investments you choose won't have as much impact on your account balance as your overall asset mix will. And that asset mix can change without you lifting a finger!

For example, imagine you determined that 50% stocks/50% bonds was the best asset mix for you. If 4 years go by during which stocks return an average of 8% a year and bonds 2%, you'll find that your new asset mix is more like 56% stocks/44% bonds.

Two pie charts showing a portfolio becoming unbalanced because of market returns.
Two pie charts showing a portfolio becoming unbalanced because of market returns.

Why does this happen? The values of the stocks you own are rising faster than the values of the bonds, throwing your overall mix out of whack.

Check your portfolio at least once a year, and if your mix is off by at least 5 percentage points, consider rebalancing. There are a couple ways you can do this:

  • Exchange money from one type of asset to another. For example, you could exchange some money from your stock portfolio into your bond portfolio. This will immediately realign you with your target.
  • Use your contributions to buy more of one kind of asset. In the example above, you have too much in stocks and not enough in bonds. So you could direct all of your contributions to your bond investments until you're back in balance.

Am I comfortable with the amount of risk I'm taking?

You'll likely know the answer to this question even before you peek at your accounts. If market movements have made you a nervous wreck, you may want to rethink your asset mix and consider something more conservative.

On the other hand, if you've grown comfortable with the risk inherent with investing, you might think about whether your risk tolerance has become more aggressive.

Are my investments working as hard as they could be?

While choosing investments isn't as critical to your portfolio's performance as your asset mix, keep in mind that investment costs reduce your returns. The less you pay for your funds, the more you keep in your pocket—it's that simple.

When you're saving in an employer plan, you're restricted to choosing from the investments the plan offers. But if you've left a job and have an old 401(k) or 403(b) account sitting around, think about whether rolling it over to an IRA could be a good decision.

With an IRA, you can invest in any mutual fund, ETF, stock, or bond—giving you greater choice and a chance to lower your investment costs.

Am I saving enough to reach my goal?

If you're still decades from retirement, this can be a tough question to answer (although there are some guidelines you can follow).

But as you get years of investing under your belt, you can plug some numbers into a calculator and see where you are.

If the answer is "not even close," you'll have some work to do. Strong market performance can't make up for years of paltry contributions (and you can't count on getting a streak of high returns anyway).

Has my goal changed?

Several ingredients go into your retirement recipe—what age you plan to retire, how long you think you'll live, how much you think you'll need to spend, what other sources of income you'll have, whether you plan to leave money to anyone…

Your personal ingredients will probably change over time. Remember to think about the effects of these changes on your retirement goal.

Learn more about retirement accounts at Vanguard

We offer several types of accounts you can use to save for retirement. Figure out which one is right for you.

Open a retirement account

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The yearly, monthly, or weekly amounts you save in your account.

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IRA (individual retirement account)

A type of account created by the IRS that offers tax benefits when you use it to save for retirement.

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When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In this example, you'd earn over $1,600 in the 30th year.

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Automating your savings could mean you'll have more money for retirement

This chart shows that if you miss making contributions, you could lose a lot of money for your retirement. If you save $100 per month for 40 years, for a total investment of $48,000, it could grow to $196,857. But if you skip 2 of the $100 contributions a year for 40 years, for a total investment of $40,000, it could grow to only $164,058.

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Asset mix

The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments.

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The strategy of investing in multiple asset classes and among many securities in an attempt to lower overall investment risk.

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A complete view of all the money in your account—i.e., not specific investments.

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To move money in your account so that your overall portfolio aligns with the asset mix you selected, usually after market movements have caused it to change.

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Target-date fund

A mutual fund intended for retirement savers that automatically rebalances and adjusts its asset mix as investors get closer to retirement. For example, a 20-year-old might invest in a target-date fund for people planning to retire around 2060. Target-date funds are professionally managed and typically diversified across asset classes and market segments.

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A conservative portfolio is relatively safe from investment risk (although there's no guarantee it won't lose money). Because risk and reward are related, a conservative investor can also expect returns that are, on average and over time, lower than those of someone with a moderate or aggressive portfolio.

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Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.

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An aggressive portfolio is subject to a relatively high level of investment risk. Because risk and reward are related, an aggressive investor can also expect returns that are, on average and over time, higher than those of someone with a moderate or conservative portfolio.

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Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

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ETF (exchange-traded fund)

A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.

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The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.