How to Save for Retirement

Tom Gilmour is a senior director of Planning Experience Integration for Northwestern Mutual.

When you are starting out in your career, you might have questions about how to save for retirement. Building a strong nest egg is an important goal—especially since the most powerful wealth-building tool you have is time. The longer your money is invested, the more time it has to benefit from compound interest. The big question then becomes: How much money do I need to retire? And which accounts should I be using to save?

There are many different types of retirement accounts, and each one has its own benefits and drawbacks. Here’s a rundown of some of the best ways to start investing for retirement.

Retirement savings: Where to put your money

There isn’t one hard-and-fast way to save for retirement. The goal is to capitalize on your employer benefits and save in the most tax-efficient way possible. Here are some solutions to consider.

1. Maximize your employer match

Many companies incentivize participation in their retirement plan by matching employee contributions up to a certain amount—a great feature of a 401(k). While each employer sets its own formula, it’s common to see matches of 50 percent or even 100 percent of employee contributions, up to a certain percentage of salary—often around 6 percent. It’s a good idea to take advantage of this free money. Once you max out your employer match, you can consider saving for retirement in other ways.

2. Use tax-advantaged solutions to save

• Some types of accounts are designed specifically to save for retirement, offering tax advantages. With an employer-sponsored 401(k), you can specify the percentage of your pay that you want to contribute. These contributions will then happen through automatic payroll deductions. Many employers offer both traditional and Roth 401(k) options, each with different tax advantages: Traditional 401(k): Your contributions are tax-deductible, which will reduce your taxable income in your working years. Your money grows tax deferred. That means you won’t be taxed until you make withdrawals in retirement.
• Roth 401(k): Your contributions are made with after-tax dollars, meaning you don’t get a tax deduction today. Your money grows tax-free and qualified withdrawals in retirement are also tax free.

Here are some other important details to keep in mind:

• A 10 percent early withdrawal penalty typically applies to distributions taken before age 59½.
• Required minimum distributions (RMDs) begin at age 73 for individuals born between 1960 and 1964. For those born in 1965 or later, RMDs begin at age 75. This means you’ll have to begin withdrawing a certain amount of money each year.

Be sure to understand what investing options are available through your 401(k). You may have access to target-date funds, which automatically choose investments based on your expected retirement date. The closer you get to retirement, the more conservative your asset allocation will become.

Another tax-advantaged account you may consider is an individual retirement account (IRA). While your employer may offer an IRA, IRAs are typically accounts you open on your own. There are two main types of IRAs:

• Traditional IRAs: Contributions may be tax-deductible, and like a 401(k), your money will grow tax deferred. Early withdrawal penalties and RMD rules apply.
• Roth IRAs: You won’t get a tax deduction on the money you put in, but you can withdraw your contributions tax-free at any time. You’ll have to meet certain criteria to tap your investment earnings tax- and penalty-free.

Retirement plans for self-employed folks imay include a SEP or SIMPLE IRA or solo 401(k) to save for the future. Either way, these plans typically offer a wider variety of investment options than 401(k)s. You can use them to invest in mutual funds, exchange-traded funds (ETFs), bonds and more.

3. Max out your retirement plans

Tax-advantaged retirement accounts have contribution limits. If you’re able to, maxing out your contributions can help you get the most out of these plans—both from a tax perspective and in terms of employer matching. In many cases, it makes the most sense to contribute the maximum amount before funding taxable retirement accounts.

Here are the contribution limits for 2025:

• In 2025, you can contribute up to $23,500 to a 401(k). (And if you’re over 50, you’re eligible for additional catch-up contributions.)
• In 2025, you can contribute up to $7,000 across all your IRAs (or $8,000 if you’re 50 or older).

4. Make catch-up contributions if possible

If you’re eligible for catch-up contributions, they could put some extra muscle behind your retirement savings. That’s because they allow you to contribute above the annual threshold. Below are the catch-up contribution limits for 2025:>

• 401(k)s: $7,500 for folks who are 50 and older; $11,250 for 60- to 63-year-olds
• IRAs: $1,000 for those who are 50 and older
• Health savings accounts (HSAs): $1,000 for those who are 55 and older>

5. Use an HSA to your advantage

HSAs offer a simple way to save for certain health care expenses. They also offer a triple tax break:

1. Contributions are tax-deductible.
2. Your money grows tax-free.
3. You’ll enjoy tax-free withdrawals if the money is used to cover qualified medical expenses.

You’ll need to be enrolled in a high-deductible health plan to contribute to an HSA. Once you turn 65, you can use HSA funds for any reason, including retirement income. These withdrawals will count as taxable income.

You can use an HSA can take your retirement savings plan to the next level. The account essentially allows you to contribute several thousand dollars more toward your retirement every year tax-free, on top of what you might already be saving in a 401(k) and/or IRA. In 2025, you can contribute up to $4,300 if you’re enrolled in an individual health plan; $8,550 if you have family coverage. Those who are 55 and older can kick in an extra $1,000.

For your funding and withdrawal strategy, you’ll want to balance short-term savings for this year’s health costs with long-term savings for retirement. Consider splitting your HSA to tackle both goals: Keep enough cash in your HSA’s savings account to cover today’s medical bills and to cover your health plan’s annual out-of-pocket maximum; and invest the portion you'd like to dedicate toward saving for retirement.

6. Consider a cash-value life insurance policy

Outside of retirement accounts, a permanent life insurance policy can be a great asset in retirement. That’s because they accumulate a cash value that can serve as a flexible financial solution in retirement. Keep in mind that taking loans from the cash value of a life insurance policy can result in a reduction of your death benefit if you don’t repay the loan (or die before the loan is repaid).¹ Discuss the pros and cons of a life insurance loan with your financial advisor. Life insurance can also provide tax diversification during retirement, helping to reduce how much you owe to the IRS.

7. Look into brokerage accounts, annuities and other investment accounts

There are also ways to save for retirement that don’t provide any tax benefits. The upside is that you won’t have to worry about contribution limits, early withdrawal penalties or required minimum distributions. Some options include:

• Brokerage accounts: You can open a brokerage account and choose from a wide range of investments. Just be sure to diversify your portfolio, which can help mitigate investment risk. And keep in mind that you’ll be taxed on capital gains during the year they’re realized.
• Annuities: If you’re looking for a source of guaranteed retirement income, annuities can be a worthwhile option. You can get one from an insurance company, then receive steady income payments in return—often for the rest of your life.
• Certificates of deposit (CDs): With a CD, your money will be locked in the account until the term ends. At that point, you’ll get back your original investment, plus any interest you earned. Interest rates tend to be higher when compared to a traditional savings account, but early withdrawal penalties apply.
• High-yield savings accounts: This can be a great place to hold a small emergency fund in retirement. High-yield savings accounts provide easy access to your money, which can be helpful if you encounter a surprise expense like a home repair or medical bill. Your money can also earn a competitive interest rate.
• Bonds: Bonds are less volatile than stocks and can add some much-needed diversity to your portfolio. When you purchase a bond, you’re effectively loaning money to the issuer in exchange for regular interest payments. At the end of the bond’s term (its maturity), you’ll typically receive your initial investment back, While generally more stable than stocks, bonds can still carry risks, such as the credit worthiness of the issuer.

How to determine the right retirement savings strategy

The right savings strategy will depend on your personal situation. If you’re self-employed, for example, you might prioritize a solo 401(k). Generally speaking, it’s wise to max out tax-advantaged accounts first—especially if you can secure an employer match.

Being strategic about taxes is also important. Consider contributing to your retirement on both a pre- and post-tax basis, which you could do by simultaneously contributing to a 401(k) and Roth IRA. In retirement, you’ll then have a mix of tax-free and taxable income.

The right savings strategy will also depend on how you want your retirement to look. Your financial advisor can get to know you and what’s important to you to help build a comprehensive financial plan tailored to you. They’ll talk to you about growth and protection strategies to help you reach your short-and long-term goals—including retirement.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.