At a glance

  • Enroll in your employer’s retirement plan as soon as possible.
  • Make pre- or after-tax contributions to your employer plan, and invest in a fund that complements your goals, time frame, and risk tolerance.
  • Save at least enough to get your employer’s match (if one is offered), and don’t touch your retirement savings.

The first day of a new job often begins with finding answers to a few key questions: Where’s the coffee maker? What time is lunch? Which people have self-serve candy at their desks?

After you have the answers you need, get familiar with—and enroll in—your employer-sponsored retirement plan. This can be a 401(k), a 403(b), or another type of defined contribution plan, which is a plan that offers a lineup of investments that were selected by your employer. You decide what percentage of your pay you’d like to contribute to your account.

Enroll ASAP

When it comes to saving for retirement, the “time is money” cliché is golden. If your plan automatically enrolls new employees, resist the urge to opt out—instead, consider whether you can contribute more than the default.

”By enrolling in your employer’s plan as soon as you’re eligible, you’ll have more time to take advantage of the ‘power of compounding.’ That’s when your original investment generates earnings (in the form of dividends or capital gains); those earnings are then reinvested and, in turn, generate more earnings.

Jonathan Kahler
Jonathan Kahler

“The amount of time your money has to grow is the biggest factor in determining how profitable compounding can be,” said Jonathan Kahler, an investment analyst in Vanguard Investment Strategy Group.

Consider this example: Steve is 25 and wants to retire in 35 years, when he’s 60. If he starts saving now with an initial investment of $100 and makes weekly contributions of $50, he’ll have over $299,000 when he retires, assuming his account earns an average annual return of 6%.

If Steve waits until he’s 35 to start saving (all other factors being equal), he’ll have around $147,000 when he retires—over 50% less than if he’d started 10 years earlier.

Steve’s savings: What happens when he starts at age 25 versus age 35

This hypothetical illustration does not represent the return on any particular investment, and the rate is not guaranteed.

“Being a disciplined saver isn’t easy when you’re an entry-level employee—and it’s not always easy when you’re a tenured employee either. But it’s important to get into the habit of setting aside a percentage of your income and reinvesting your earnings as early in your career as possible,” said Kahler. “This will enable your money to reach its full potential, with relatively minimal effort on your part.”

Set your savings up for success

Choose how you’ll contribute

There are 2 ways to contribute to an employer-sponsored plan:

  1. You can make pre-tax contributions to a traditional 401(k). Most employer-sponsored plans offer this option.
  2. You can make after-tax contributions to a Roth 401(k) if this feature is available in your plan.

“While paying less in taxes now may sound attractive, after-tax Roth contributions may be the best option for investors who are just starting out,” said Kahler. “If you expect your income (and tax bracket) to grow throughout your career, paying taxes now rather than later may be a smart move.”

The 2 most common types of employer-plan contributions are outlined below.


Traditional 401(k)

Roth 401(k)


Pre-tax (contributions are deducted from your pay before your earnings are taxed)

After-tax (contributions are deducted from your pay after your earnings are taxed)

Investment earnings

Aren’t taxed until they’re withdrawn
Aren’t taxed

Withdrawals in retirement

Entire amount (contributions plus earnings) you withdraw is taxed as ordinary income
Aren’t taxed

Required minimum distributions (RMDs)

Account balance is subject to RMDs after you reach age 70½ (you may be able to delay your RMDs if you’re still working and participating in your plan); your withdrawal is taxed

Account balance is subject to RMDs after you reach age 70½ (you may be able to delay your RMDs if you’re still working and participating in your plan—or you can avoid them if you roll your Roth balance into a Roth IRA); your withdrawal is tax-free*

*As long as you’ve held the account 5 years and you’re age 59½ or older when you withdraw the money.

While your company may offer a Roth 401(k) option, its employer matching contributions are made as traditional 401(k) contributions.

“Say your employer matches 4% of your 401(k) contributions. Even if you’re contributing 8% of your annual salary to a Roth 401(k), your 4% employer match will be designated as a traditional pre-tax 401(k) contribution,” Kahler said. “So when you make withdrawals from your plan, you’ll owe taxes on those matching contributions and their earnings.”

Having both pre-tax and after-tax assets saved for retirement can be beneficial when it’s time to make withdrawals. It gives you “tax diversification,” which can provide you with greater control of how much taxes you pay in retirement.

Choose from your fund lineup

Most employer-sponsored plans offer a variety of mutual funds. So where do you start?

“Consider a target-date fund first. They’re designed to automatically shift to less aggressive investments as you get closer to your anticipated retirement date. Basically, these funds provide you with a diversified portfolio in a single fund,” Kahler said.

“If your plan doesn’t offer low-cost target-date funds or if you prefer to manage your own investments, choose low-cost investments that complement your goals, time horizon, and risk tolerance,” added Kahler.

For more information:
Planning to keep your 401(k)? Be careful when you reach RMD age.
Vanguard’s Investor questionnaire
Picking an asset mix

Save. Save more. (Repeat.)

Get paid in full

Job candidates strive to impress potential employers. But did you know employers are in a similar boat?

In addition to offering a competitive salary, employers aim to attract and retain talent by providing enticing benefits—from health care to on-site child care to retirement savings plans.

Although employers aren’t required to make contributions to the retirement plans they offer, many match their employees’ contributions up to a certain percentage.

“An employer match can really help you reach your retirement savings goal,” said Kahler. “We recommend saving between 12% and 15% of your pre-tax annual income, including any employer matching contributions, for retirement. So if your goal is to save 12% and your employer matches up to 4%, you only need to contribute 8% of your salary to reach your goal.”

Many employer plans offer automatic contribution increases, which means you can set your contribution percentage to gradually increase year after year. Some plans even allow you to save a percentage of your bonus pay.

Here are some things to consider regarding an employer match:

  • You may have to reach a certain service milestone before you can enroll in your employer plan or receive matching contributions. Talk with your plan administrator or your employer’s HR department for details about your plan.
  • You own 100% of the money you contribute from your paycheck, so if you leave your employer at any time, you can take all of your contributions with you.
  • It may take several years before you’re fully vested in your employer’s matching contributions. Before then, you may only be able to take a percentage of the match (or none at all) with you when you leave.

“Don’t let these rules deter you from enrolling in your employer’s plan as soon as you’re eligible,” cautioned Kahler. “The industry phrase for not saving enough to get your full employer match is ‘leaving free money on the table,’ but that’s not exactly true. It’s not free money—it’s money you’ve earned. Not taking full advantage of this benefit is like cashing only part of your paycheck.”

Look, don’t touch

Do your best to keep your hands off your retirement savings until you retire.

If you have a 401(k) from a previous employer, you have options.
Learn about 401(k) rollovers

If temptation starts to wear away your willpower, remember the top 3 reasons not to take an early withdrawal:

  • Taxes.
    • Traditional (pre-tax) retirement accounts: You’ll have to pay taxes on the entire amount you withdraw. And if you’re under age 59½, you’ll have to pay an extra 10% federal penalty tax.
    • Roth (after-tax) retirement accounts: If you’re under age 59½ and have held the account for less than 5 years, you’ll have to pay taxes and a 10% federal penalty tax on the earnings you withdraw.
  • Missed opportunity for growth.
    • Taking an early withdrawal lessens the amount of money you have in your account to potentially generate earnings, which can cost you over time. For example, say your account generates a 6% average annual return. If you withdraw $20,000 when you’re 35 years old, your final account balance 30 years later (when you’re 65) will be $115,000 less than what it would’ve been if you hadn’t withdrawn that money.
  • Inability to “make up” for a withdrawal.
    • The IRS sets annual contribution limits for employer-sponsored plans. Say you withdrawal $10,000 from your 401(k) in 2017 and want to “replace” that money—and make regular paycheck contributions—next year. Because the 2018 annual contribution limit (for investors under age 50) is $18,000, you’ll only be permitted to contribute an additional $8,000 for the year after replacing the $10,000 you withdrew.

For more information:
Investor questionnaire
Thinking of raiding your retirement savings?
Retirement plan contribution limits

All in a day’s work

You’ve done your research and are ready to get to work—at your job and on your finances. (But first, find that candy dish.)


All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.

Withdrawals from a Roth 401(k) are tax-free if you are age 59½ or older and have held the account for at least 5 years. If you take a withdrawal before reaching age 59½ or holding the account for at least 5 years, a portion of the withdrawal may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate 5-year period applies for each conversion and begins on the first day of the year in which the contribution is made.)

We recommend that you consult a tax or financial advisor about your individual situation.