How Do I Save For Retirement?
We go into step 6 of our 10 steps to financial freedom. We talk about using IRAs, HSAs, and figuring out your retirement number.
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Step 6 is Utilize Your HSA and IRA for Retirement.
It is now time to save for your future self.
The previous steps (except step 4) are about ensuring your current financial health is good. This step is the next step to ensure your future financial health is good.
Step 4 was the first step to saving for retirement by saving enough to get your employer matching contribution in your retirement plan.
Before we start saving in these accounts, we need to figure out how much we need.
You will need to determine your average expenses in retirement. The best place to start to answer this is your current budget.
It is likely that your current lifestyle will be a good indication of what your future lifestyle will be. Also, the closer you are to retirement, the more accurate you will be with this number. For example, a 20 year old will not know what life will be like for themselves in 30 years, but a 57 year old would have a better idea what life would be like in 3 years.
I reviewed my budget and have an accurate idea of my expenses, now what?
Now it is time to factor in changes that may occur at or during retirement. These changes could increase your budget or decrease your budget. Here are a list of things to consider:
Will your home be paid off? No mortgage payment.
Will you move to a new location? Different expenses to forecast
Will you have the same number of people in your home? Kids moving out or parents moving in.
What expenses will go away after working? Commuting costs, professional dues, etc.
What will be your healthcare expenses? Cost of your new insurance plan.
You should now have a goal number in front of you.
Time to figure out how you can save to provide that annual income for you in retirement.
The next thing you want to look at is any future pension or regular passive income you can expect. Not a lot of people will have a pension, but most of us will have regular social security income.
You will want to go to ssa.gov and figure out what your projected benefit will be. You will be able to find your projected benefit and review previous years.
Any regular income that you can expect in retirement can be subtracted from your annual goal number.
Time to figure out how much you need to save to achieve this goal.
The take the annual goal number and multiply that by 25. For example, you require $40,000 and multiply that by 25 you get $1,000,000. This is the number you need to have saved to provide for you in retirement.
There is a “complex” formula used to calculate how much you need to save. The simple way is to use a Time Value of Money Calculator like the one here: Finance Calculator. If you still have your calculator from high school, there is a function to do this calculation.
There are two ways you can solve this equation:
How long will it take to acheive my goal if I save X a year
How much will I need to save a year to achieve my goal in X years
For those that like algebra.
Here is the equation that most financial calculators use.
FV = PV × (1 + i)^n + PMT × [(1 + i)^n − 1] / i
FV - is your nest egg number.
PV - is your current savings
i - is your investment return (I like to use 8%)
n - is the number of years to achieve the goal
PMT - is how much you will save a year
Let’s run some examples.
We will use our example couple from the previous blog. They expect to need to cover $50,000 in expenses in retirement after factoring in social security. They have recently used their surplus income to put a down payment on a home. Now they will have the surplus income to save for step 6. In this case, there surplus income is $40,000.
In this case, they will need to save $50,000 × 25 = $1,250,000
When we put this into our equation we will come up with 16.278 years.
You can also solve with a timeframe in mind. Let’s assume they want to retire in 10 years, in this case, we can solve for PMT.
If they want to retire in 10 years, they will need to save $86,286.86 a year.
Once we have our annual savings goal, now we can start using the HSAs and IRAs mentioned at the very beginning.
The first account we want to look at is an HSA (Health Savings Account). This is an account that is connected to high-deductible health plans. For a family plan, the maximum is $8,750 a year (2026). If that is all you need to save to reach your retirement goal, then you can be done with step 6 and step 7. But likely, this is not enough.
The next account to utilize is an IRA (Traditional or Roth). The maximum contribution is $7,500 a year (2026). If you have a spouse, then both of you can contribute to an IRA, regardless of if both of you earned income. So this gives you a total of $15,000 for the household.
Once you have used up your HSA and IRA you have completed step 6.
You may still need to save more to achieve your retirement nest egg, but that will be answered in step 7.