The three A’s of successful saving

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

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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 three main things during your working years: the amount you save, the accounts you save in, and your asset mix,” says John Sweeney, executive vice president of retirement and investing strategies at Fidelity. “Of the three, of course, the first is the most important, as no account or asset mix can compensate for inadequate savings.”

You’ve probably heard this before—much of your retirement income is your responsibility. Most companies don’t provide pensions, and Social Security likely won’t replace all the income you need in retirement. In fact, we ran the numbers, and typically around 45% of retirement income needs to come from savings.

That’s why it’s important to follow our three A’s of saving.

1. Amount: How much—and how long—you save is key.

We suggest starting early and aiming to save at least 15% of your income each year toward retirement. Why? To help ensure that you have 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 employee match can make saving 15% easier. For example, Elaine earns $50,000 a year and her employer match is 6%. To save 15% of her salary, or $7,500, she would need to contribute only 9%, or $4,500. That’s because her employer would be contributing $3,000, or 6%, for her.

Of course, the longer you wait to start, the more important it is to take advantage of every opportunity to contribute the maximum to your workplace retirement account—even if it is more than 15% of your income. For instance, if you’re age 50 or over, you can make extra catch-up contributions to a 401(k) or IRA.

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

Read Viewpoints: “How much should I save each year?

2. Account: Where you save matters.

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

With a traditional 401(k) or IRA your contributions are pretax—they generally reduce your taxable income and, in turn, lower your tax bill in the year you make them. But your money doesn’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 is exactly the opposite. 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 IRA.1

Should you contribute to a traditional or Roth account? For many people, the answer comes down to a simple question: Do you think you’ll be better off paying taxes now or later? If you expect your tax rate in retirement to be higher than your current rate, tax-free withdrawals from a Roth 401(k) or IRA might be better choice. On the other hand, if you expect your tax rate to go down in retirement, a traditional 401(k) or IRA may make more sense.

It also may make sense to contribute to both a traditional and a Roth account if you can. That can give you taxable and tax-free options when it comes time to take withdrawals in retirement, which can help you manage taxes in retirement. You might chose to make both types of contributions if you aren’t sure of your future tax picture. Read Viewpoints: “Traditional or Roth account—two tips for choosing.”

It’s important to note that if you get an employee 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.

If you're self-employed or a small-business owners,  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.

Also, you may be able to contribute to an IRA even if you aren’t working. If you or your spouse doesn’t work, he or she can have a spousal IRA. It allows non-wage-earning spouses to contribute to their own traditional IRA or Roth IRA, provided the other spouse is working and the couple files a joint federal income tax return. Spousal IRAs are also eligible for catch-up contributions.

And if you are eligible, take advantage of health savings accounts (HSAs), which can offer the most effective means of saving for retirement health care expenses.

Read Viewpoints: “Three healthy habits for health savings accounts.”

3. Asset mix: How you invest is critical.

Stocks have historically outperformed bonds and cash over the long term. So if you are investing for a goal like retirement that is years away, it can make sense to have more of your savings invested in stocks and stock mutual funds. But higher volatility—and changes in the value of your investments—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. But, as a general rule, investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

Take a look at four investment mixes (see chart) and how they would have performed 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. Having a significant, age-appropriate exposure to stocks may, over time, help increase your balance at retirement.

If you aren’t comfortable choosing stocks and stock mutual funds yourself, consider a target date fund or a managed account and let an investment professional manage your investment mix.

Read Viewpoints: “Three reasons to invest in stocks.”

Do it

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 three A’s in mind can help. Remember, you want to enjoy your retirement and not have to worry about money.

Learn more

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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, death, disability, qualified first-time home purchase.
2. Data source: Morningstar, Inc., 2016 (January 1926–December 2015). 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 U.S. Intermediate Government Bond Index, short-term investments by U.S. 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 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 U.S. equity performance. Bonds are represented by the Barclays U.S. Aggregate Bond Index from January 1976 to the latest calendar year. The Barclays U.S. 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 U.S. 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 U.S. 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. U.S. 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 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 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.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.

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. Your own account may earn more or less than these hypothetical scenarios.
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