The 3 A's of successful saving

Remember the 3 A's for retirement saving: Amount, Account, and Asset mix.

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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."

1. Amount: How much and how long

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

The good news: That 15% savings rate includes any matching or profit sharing 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 100%, up to 6% of pay, which means her employer will match her contributions dollar for dollar, up to 6% of her salary. 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. The most you can contribute to your 401(k) in 2018 is $18,500. If you are age 50 or over, you can make catch-up contributions of up to $6,000, bringing the limit up to $24,500.

The maximum IRA contribution in 2018 is $5,500—if you're over age 50, you can make catch-up contributions of up to $1,000.

Health savings accounts (HSAs) are another type of tax-advantaged account. In order to open an HSA, you generally need to be enrolled in an HSA-eligible high deductible health plan (HDHP). If only you are enrolled in the HDHP, you can contribute $3,450 to an HSA for 2018. The contribution limit for family coverage is $6,900. If you are age 55 or over, you can also make a $1,000 catch-up contribution.

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. If you have an HDHP, consider taking advantage of health savings accounts (HSAs), which can offer one of the most effective means of saving for qualified medical expenses now and in retirement. Your contributions to these accounts can grow tax-deferred or tax-free.

With a traditional 401(k) or IRA your contributions are pre-tax, 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. 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 always 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.

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 their own traditional IRA or Roth IRA. You must file a joint federal income tax return. Spousal IRAs are also eligible for catch-up contributions.
  • If you have an HSA-eligible health plan, money contributed to an HSA is tax-deductible.2 And withdrawals for qualified medical expenses—now or in the future—are tax-free (that includes the money contributed as well as any earnings).

The cost of health care in retirement continues to increase so it can be a good idea to prepare specifically for those expenses. Fidelity estimates a typical 65-year-old couple retiring today will need, on average, $280,000 saved (in a taxable account) to pay for out-of-pocket health care costs in retirement.3 Saving in an HSA can reduce the amount you need because contributions, earnings, and withdrawals are tax-free when used to pay for qualified medical expenses.

If you have an HSA, consider contributing money above and beyond the amount you think you'll need for the current year's health care expenses. If you're able to invest some of it for the future, you may have some of your future health care expenses covered.

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 4 investment mixes (see chart below) 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 exposure to stocks that’s appropriate for your investing time frame 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 five-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. Contributions to an HSA are federally tax-deductible and deductible in almost all states.
3. Estimate based on a hypothetical couple retiring in 2018, 65 years old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual expenses may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.
Indexes are unmanaged. It is not possible to invest directly in an index.
4. Data source: Strategic Advisers and Morningstar/Ibbotson Associates, 2018 (January 1926–December 2017). Hypothetical value of assets held in untaxed portfolios invested in US stocks, bonds, or short-term investments. Actual historical data were used to compute the growth of $100 invested in these portfolios for the period ending in December 2017. Stocks, bonds, and short-term investments are represented by total returns of the S&P 500® Index from 1/1926–1/1987; the Dow Jones Total Market from 2/1987–12/2017, the U.S. Intermediate-Term Government Bond Index from 1/1926–1/1976; Barclays Aggregate Bond Index from 2/1976–12/2017, and 30-day T-bills. Inflation is represented by the Consumer Price Index. Numbers are rounded for simplicity.
Stocks are represented by the Dow Jones Total Market Index from March 1987 to latest calendar year. From 1926 to February 1987, stocks are 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 U.S. 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 one year or more. From 1926 to December 1975, bonds are 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 U.S. Treasury bills, which are backed by the full faith and credit of the US government. 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 markets (DM) countries (excluding the US) and 23 emerging markets (EM) countries. From 1970 to November 2000, foreign stocks were represented by the Morgan Stanley Capital International Europe, Australasia, Far East 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 U.S. and Canada. Prior to 1970, foreign stocks are 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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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Take the next step: Prepare for retirement

We can help you create a retirement strategy that meets your needs. Use our tools, tips, and other services to set savings goals, create an income plan, and manage your portfolio.


Learn more about Fidelity retirement planning, or talk with your advisor.

Take the next step: Prepare for retirement

We can help you create a retirement strategy that meets your needs. Use our tools, tips, and other services to set savings goals, create an income plan, and manage your portfolio.


Learn more about Fidelity retirement planning, or talk with your advisor.

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