Welcome To Day 5 Of Our Personal Finance 101 Series |
| It doesn’t matter what stage of life you’re at: It’s never too early (or late) to start saving for retirement. For some young professionals, reading about needing millions of dollars to be able to retire comfortably can feel overwhelming or even impossible, which creates a barrier to getting started. But once you dip a toe into the investing pool and open your first retirement account, the uncertain clouds around your financial future will start to clear. |
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| How Much Do I Need To Retire? |
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That’s the question everyone asks their financial advisors, and unfortunately, it’s a tough (if not impossible) one to answer. There is not a baseline number that every American worker should aim for, because everyone has a different life path.
“The amount needed for retirement varies greatly depending on individual circumstances, such as lifestyle, location, taxes and healthcare costs,” says Ray Prospero, a partner advisor at AdvicePeriod in Riverside California. “While $4.3 million might seem high, it could be a reasonable amount for some individuals aiming for a comfortable retirement with ample savings to cover some luxury expenses, such as multiple vacations a year.
“However, many Americans can retire with less by carefully planning and managing their finances. It’s important to consider your personal goals when determining how much you’ll need to retire comfortably.”
Prospero didn’t pull that $4.3 million number out of thin air: A 2023 New York Life survey found that the average American worker believes that’s the amount they should aim for. However, a research report from Northwestern Mutual said that most people say they’ll need $1.27 million for a comfortable retirement.
“There are a few reasons these numbers can be misleading,” says Clint McCalla, senior wealth advisor at LourdMurray in San Diego. Those reasons come down to cost of living—both based on where you live and what generation you’re from. A prospective retiree in New York City is going to need more savings than a worker in Pittsburgh, and “Millennials will need to save much more … to achieve the same quality of life in retirement as Baby Boomers.”
Because of these seemingly high savings totals and cost of living variables, it’s a good idea to get started socking money away for retirement as soon as possible. But where should you start? We’ll offer up some basics on the different kinds of retirement accounts below. |
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| 401(k) vs. IRA: What’s the Difference? |
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So you want to get started saving for retirement … but which kind of account is right for you? Let’s take a quick look at the basic differences between a 401(k) and IRAs.
A 401(k) account is offered by your employer, and can feature benefits such as employer-matched contributions. When an employer offers a match of say, 2% or 3%, this can help boost your retirement savings even faster—as long as you are contributing the minimum amount to maximize the match.
Another thing to keep in mind with employer matches in 401(k) accounts is vesting. If you are 100% vested, that means you own all of the money in your account. However, many employers that offer a match will require a certain number of years of service before the worker can be 100% vested, which means if that employee were to leave the company before the required time, they would forfeit some or all of the money the employer matched. But all the money that you personally contribute to your 401(k) account belongs to you, no matter how long you stay with the company.
For those that work for a nonprofit organization or in the public sector—like teachers and librarians—your employer might offer a 403(b) instead. There are many similarities between 401(k) and 403(b) retirement plans, including employee matches. However, the differences are important.
If your company does not offer a 401(k) or 403(b) plan, it’s likely a good idea to look into opening an IRA, or Individual Retirement Account. The two main types of IRAs have different tax rules: Funds in a Traditional IRA are taxed when they are withdrawn, whereas in a Roth IRA taxes are taken out when the money is contributed, and the money accumulates tax-free.
IRAs and 401(k) accounts also have differing contribution limits for the year. In 2025, the maximum an investor can contribute to their IRA is $7,000, with a catch-up contribution limit of $8,000 once you reach the age of 50. A 401(k), on the other hand, has a contribution maximum of $23,500 per year, bumping up to $31,000 once you hit 50. These maximums are probably out of reach for the majority of working Americans, but the important takeaway is to start saving today if you haven’t already. Try to increase your retirement contribution a little more each year, and every bit makes a difference.
If you’re interested to see how your retirement savings can grow over the coming years, this calculator allows you to input factors such as current savings and expected retirement age, and will produce an estimated number for what your retirement accounts will look like in the years to come. And if you’re just starting out with saving for retirement, a handy compound interest calculator will help visualize what even small contributions are expected to yield in the future.
This newsletter should serve as a basic introduction to setting up your first retirement account. In tomorrow’s edition of Personal Finance 101, we’ll talk about investment accounts used for other purposes. |
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