The 3 A's of successful saving

3 A's—amount, account, and asset mix—are important when saving for retirement. Here's why.

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Key takeaways

  • Amount: Aim to save at least 15% of pretax income each year toward retirement.
  • Account: Take advantage of 401(k)s, 403(b)s, and IRAs for tax-deferred or tax-free growth potential.
  • Asset mix: Investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

No one needs to tell you that you need to save for your future—hopefully, you're already doing it. After all, no matter your age and how far away retirement is, you want to be able to enjoy retirement and do the things you want without having to worry about money.

It's important to focus on 3 main things during your working years: the amount you save, the accounts you save in, and your asset mix, says Ken Hevert, Fidelity senior vice president of retirement. Of the 3, of course, the first is the most important, as no account or asset mix can make up for not saving enough.

That's why it's important to keep our 3 A's of saving in mind:

1. Amount: How much and how long

We suggest starting early and consider saving at least 15% of pretax income each year toward retirement. Why? To help ensure enough in savings to maintain your current lifestyle in retirement.

The good news: That includes any matching contributions from your employer to your 401(k) or other workplace savings account, like a 403(b) or governmental 457(b) plan. An employer match can make saving 15% easier. For example, Elaine earns $50,000 a year and her employer match is 6%, which means her employer will match dollar for dollar, up to 6% of her contribution. To save 15% of her salary, or $7,500, she would need to contribute only 9%, or $4,500. Her employer would be contributing $3,000, or 6%, for her.

Of course, the longer you wait to start saving, the more important it is to take advantage of every opportunity to contribute the maximum to your 401(k)—which may be more than 15% of income. For instance, if you are age 50 or over, you can make extra catch-up contributions to a 401(k) or IRA—$6,000 more to a 401(k) and $1,000 to an IRA.

Even if you can't contribute 15% of your income right now, make sure to contribute enough to get the entire employer match in a workplace account, which is effectively free money, and then try to step up your savings as soon as you can.

2. Account: Where you save

Be sure to make the most of retirement savings accounts like 401(k)s, 403(b)s, and IRAs. Your contributions to these accounts can grow tax deferred or tax free.

With a traditional 401(k) or IRA your contributions are pretax, which means that they generally reduce your taxable income and, in turn, lower your tax bill in the year you make them. Your contributions won't avoid taxes entirely; you'll pay income taxes on any money you withdraw from your traditional 401(k) or IRA in retirement.

A Roth 401(k) or IRA works the opposite way. Contributions are made after tax, with money that has already been taxed, and you generally don't have to pay taxes when you withdraw from your Roth 401(k) or Roth IRA.1

So how does a person determine which type of 401(k) or IRA to contribute to—a traditional or Roth account? There are several things to consider, but for many, the answer comes down to a simple question: Am I better off paying taxes now or later? For those who expect their tax rate in retirement to be higher than their current rate, tax-free withdrawals from a Roth 401(k) or IRA might be a better choice. On the other hand, for those who expect their tax rate to go down in retirement, a traditional 401(k) or traditional IRA may make more sense.

For those who can, it may make sense to contribute to both a traditional and a Roth account. That can provide the flexibility of taxable and tax-free options when it comes time to take withdrawals in retirement, which can help manage taxes in retirement. Those who aren't sure of their future tax picture could choose to make both types of contributions.

It's important to note that if you get an employer match or profit-sharing contribution from your employer, those contributions are typically to a traditional 401(k)—even if you are making only Roth 401(k) contributions. So you may already be contributing to both types of accounts. Check with your employer to be sure.

Alternative saving options to consider:

  • If you're self-employed or a small-business owner, then small-business retirement plans like a self-employed 401(k) or SIMPLE or SEP IRA allow you to set aside a certain percentage of your income.
  • You may be able to contribute to an IRA even if you aren't working. As long as one spouse works, the non-working spouse can have a spousal IRA and contribute to his or her own traditional IRA or Roth IRA. You must file a joint federal income tax return. Spousal IRAs are also eligible for catch-up contributions.
  • For those eligible, consider taking advantage of health savings accounts (HSAs), which can offer the most effective means of saving for and paying for retirement health care expenses.

3. Asset mix: How you invest

Stocks have historically outperformed bonds and cash over the long term. So when investing for a goal like retirement that is years away, it can make sense to have more invested in stocks and stock mutual funds. But higher volatility also comes with investing in stocks, so you need to be comfortable with the risks.

We believe that an appropriate mix of investments should be based on your time horizon, financial situation, and tolerance for risk. As a general rule, investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

Take a look at our four investment mixes (see chart) and how they performed historically over a long period of time. As you can see, the conservative mix has historically provided much less growth than a mix with more stocks, but less volatility too. Having a significant, age-appropriate exposure to stocks, over time, may help grow savings.

Think ahead

When retirement is years away and you have many other financial demands, it may be hard to focus on the future, but saving for retirement with the 3 A's in mind can help.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.
1. A distribution from a Roth 401(k) is tax free and penalty free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, or death. A distribution from a Roth IRA is tax free and penalty free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, qualified first-time home purchase, disability.
2. Data source: Morningstar, Inc., 2017 (January 1926–December 2016). Past performance is no guarantee of future results. The asset class (index) returns reflect the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or future performance of any investment option. It is not possible to invest directly in a market index. Stocks are represented by the Standard & Poor's 500 Index (S&P 500® Index), bonds by the US Intermediate Government Bond Index, short-term investments by US Treasury bills, and inflation by the Consumer Price Index. Numbers are rounded for simplicity.
Stocks are represented by the Dow Jones Total Market Index from March 1987 to the latest calendar year. From 1926 to February 1987, stocks were represented by the Standard & Poor's 500® Index (S&P 500® Index). The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. Bonds are represented by the Barclays US Aggregate Bond Index from January 1976 to the latest calendar year. The Barclays US Aggregate Bond Index is a market value–weighted index of investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of 1 year or more. From 1926 to December 1975, bonds were represented by the US Intermediate Government Bond Index, which is an unmanaged index that includes the reinvestment of interest income. Short-term instruments are represented by US Treasury bills, which are backed by the full faith and credit of the US government.
Indexes are unmanaged. It is not possible to invest directly in an index.
Stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuation than stocks but provide lower potential long-term returns. US Treasury bills maintain a stable value (if held to maturity), but returns are generally only slightly above the inflation rate.
Foreign stocks are represented by the MSCI ACWI ex USA Index from December 2000 to the last calendar year. The MSCI ACWI ex USA Index captures large- and mid-cap representation across 22 of 23 developed-market (DM) countries (excluding the United States) and 23 emerging-market (EM) countries. From 1970 to November 2000, foreign stocks were represented by the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index. The MSCI® EAFE® Index is a market capitalization–weighted index that is designed to measure the investable equity market performance for global investors in developed markets, excluding the United States and Canada. Prior to 1970, foreign stocks were represented by the S&P 500® Index.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
Past performance is no guarantee of future results.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

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