Most financial planers recommend saving 10-15% of your annual pretax salary. The rate you save depends on how early you start your savings and where you want to be at retirement, so check out a tool like the fidelity tool I recently linked to in this blog for a general idea of what you need to be saving every month. If you are say 25 or younger, you might only have to save 10% to get you where you want to be, if you are getting a later start or maybe you are young with the goal of early retirement, you might want to save 15%-25%. Check out a calculator and see where you are.
The savings vehicle is an important aspect of retirement savings as there are a few tax favorable tools that the irs allows us to use. The 401k/traditional IRA/403b are all similar plans where you are able to save your pretax dollars with taxes being taken when you later withdraw the money in retirement. The idea here is that you will be living on less in retirement, so your tax rate will be lower. The 401k has an added benefit in that it often comes with a company match. This is a great incentive to save as the money would otherwise be left on the table. The next class of savings is post tax retirement savings. The RothIRA/Roth401k/HSA/ESA/529 are all types of savings where you contribute taxed dollars to an account that can later be used for it's intended purpose with no tax being assessed on withdraw. The Roth can be used for retirement and while it has income limits it is beneficial even when your tax rate isn't that high due to the ability to grow your investments and never be taxed on the gains. The Roth401k is the same as a Roth IRA, but it is part of a 401k offering by your employer. With the Roth410k, you can have a matching contribution from your employer, but this match goes into a regular 401k account. The ESA/529 are educational accounts that must be used for education expenses, but they are great ways to save for future college for your kids. The HSA is special in two ways, it is actually a pretax savings, that can be used on at anytime for health related expenses tax free (look up what qualifies) and after 65 funds can be used for anything, but are taxed like a 401k. So, all of this now explained I would recommend the following allocation. If you have a 401k with a match at work, contribute first to the this up to the match amount. It is free money! Next max the Roth IRA for yourself and your spouse and if you have the ability to contribute to an HSA, max it out as well. Now go back to your 401k or start your 403b/IRA if you don't have a 401k and max it out. With this I would stop the progression based on the percentage of your salary you want to save towards retirement. It is easy to get carried away here and not be saving towards more current needs, like a house, car replacement, etc. Also, if you want to retire early, remember that none of this money can be accessed without penalty until you are 59 1/2 at the earliest.
So, what should you look for in investments now that you are socking money away? Low cost index funds for one. They are cheap, as low as 1%, and they perform, at least they have performed. The get beat, but it is really hard to predict which ones will outperform. Look at morning stars record of predicting wining funds and you'll see that it is really hard. Stay away from insurance products which often times are sold based on commissions and heavily pushed by brokers and "advisers". It doesn't mean that these are bad products, but often times many of the benefits that they offer are already realized in the savings vehicle that you have chosen (roth/401k/traditional IRA). There are many places you can go to invest your funds though with a 401k you are usually limited by the plan. Vanguard and Fidelity are two, but there are plenty of others. Take your time and choose carefully because this will be a long term decision. I would recommend putting all of it in one place. There are benefits to this strategy in that when you hit different balance milestones they come with perks. For vanguard they are at 50,000, 500,000, 1 and 10 million (link). That said, you also don't really want to move your money much as there will be fees and possibly tax consequences involved if you aren't careful.
You can withdraw money from any of these special accounts at any time, but it is not advisable that you do so due to heavy penalties and taxes. With a 401k, withdrawals from your qualified plan are taxed as ordinary income and may be subject to a 10% Federal tax penalty if taken prior to age 59 1/2. If you left your employer in or after the year in which you turned 55, you may not be subject to the 10% early withdrawal penalty. The Roth is similar, but there is a loop hole, you can withdraw any contributions that are at least 5 years old. That said you can use the Roth to supplement a weak emergency fund if you choose, but if it were me, I'd keep the money there so that it can keep growing tax free. It should only be touched in an extreme emergency. One strategy that might work however, if you have an emergency fund in place and you don't have adequate ability to fully max your Roth in a given year, AND you have that much in 5 year old money in that Roth. You could contribute from the emergency fund with the intent that the money be earmarked for emergencies in the future. Any time you set up such a plan however, it is important to set firm boundaries so that you don't later catch yourself using these funds frivolously or going beyond what you had originally intended.
That is all I have for now. I wanted to give an overview of some ideas while I was thinking about it and in the future I'm sure some of this information will be fleshed out.
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