Here Are the 4 Most Common Ways to Save for Retirement. Which Ones Should You Use?

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There are a variety of ways that Americans save for retirement. See the most popular options and find out which ones are worth using for your own nest egg. 

Saving for retirement is an important financial habit. Most people don’t want to work forever. Even for those who do, it’s still good to have money saved in case that’s not an option.

While saving for retirement is what’s most important, how you save also makes a big difference. The right type of retirement account could help you save more consistently, pay less in taxes, and end up with a much larger nest egg.

Recent research by The Motley Fool looked at the most common ways Americans save for retirement. If you’re trying to figure out how to save, here are the most popular methods, the percentage of non-retirees who use each one, and which ones to consider for your own use.

1. 401(k), 403(b), defined contribution pension: 55%

The most popular way to save for retirement is with a defined contribution pension. People normally do this with a 401(k) plan offered by their employer. A similar type of plan, a 403(b), is available to employees of public schools and some nonprofit organizations.

This is one of the best ways to build your retirement savings. If you have the option of setting up a 401(k) with your employer, you should. There are a few valuable benefits to 401(k)s:

They make saving easy and automatic. Decide how much you want to set aside for your 401(k) account, and contributions come directly out of your paycheck.They help you save on taxes. With a traditional 401(k), contributions are tax-deductible. Another option is a Roth 401(k), where contributions aren’t tax-deductible, but withdrawals are tax-free.Many employers match contributions up to a certain amount. A company match on a 401(k) helps you save more than you could on your own.

2. Savings not in retirement accounts: 52%

Over half of non-retirees save in non-retirement accounts. It makes sense why so many people save this way, as it’s somewhat of a default option. If you aren’t sure where to put your retirement fund, you can just leave it in your savings for the time being.

However, that doesn’t make it a good option. You don’t save anything on taxes, like you do with other retirement accounts. And if you have your money in a savings account, it won’t have nearly as much growth potential as it would if you invested it.

3. IRA: 36%

IRA is short for “individual retirement account.” It’s an account people can open themselves with most online stock brokers. You can then use it to invest, and you save on taxes. There are two types of IRAs:

Traditional IRAs let you deduct contributions on your income taxesRoth IRAs don’t, but they allow you to make tax-free withdrawals

Because of the tax savings these accounts offer, they’re another smart way to save for retirement. They work well in addition to a 401(k), so consider opening one even if you’re already saving for retirement through work.

4. Defined benefit pension: 32%

Nearly one-third of non-retirees use defined benefit pensions. This is a retirement plan offered by an employer. Upon retirement, the employee receives either fixed monthly payments or a lump-sum payment.

A defined benefit pension can be a good choice if your employer offers it. A pension with fixed monthly payments, in particular, gives you stability in the form of predictable income during retirement.

Other ways to save for retirement

The methods above are the ones used by a large portion of non-retirees. There were also 13% who had other retirement savings, as well as 10% who saved through a business or real estate.

Alternative options like these are fine to supplement your retirement savings, but they generally shouldn’t be your only form of saving. For most people, the safest approach is sticking to tried-and-true methods, such as 401(k)s and IRAs.

To recap, if your employer offers a 401(k) or defined benefit pension, start there. Make sure you contribute enough to max out any 401(k) match your employer offers. If you have money left over, invest it through an IRA or a Roth IRA. And if you reach the contribution limits on 401(k)s and IRAs, you can continue to invest through brokerage accounts.

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