How to Plan for Retirement

Whether you’re 25 or 55, the idea of retirement planning can feel overwhelming, especially if you haven’t started yet.

The good news is that creating a retirement plan isn’t as difficult as you may think. And while it’s best to start early, all’s not lost if you start late.

From how to start your retirement planning to finding extra ways to save, we’ve put together tips on how to plan for retirement to set the stage for a comfortable future.

What is retirement planning?

Retirement planning is the process of preparing for life after you stop working full-time, whether you’re self-employed or work for an employer.

When you plan for retirement, you need to think about what you want your later years to look like and how much you need to save to get there.

You’ll want to ask yourself a lot of questions first: How old do you want to be when you retire? What kind of lifestyle do you want? What needs do you expect to have? How much will it all cost?

Then you need to think about how to pay for it. You may be eligible for government benefits, but will they be enough? If you have a retirement investment account, how much will you have when the time comes? Can you contribute more? What other income might you have? Should you work longer to give yourself more time to save?

By taking the time to think through these questions now, you can create a plan that works for you.

When should you start planning for retirement?

It is always a good idea to set money aside for retirement, and it’s never too early — or too late — to begin. The earlier you start, the more time your money has to grow, even if your contributions are small at first.

Everyone’s financial journey looks different. Some people begin planning after they find a steady job or start managing their own budget. Others may wait until they feel more financially secure or have fewer expenses to manage. You don’t need to have it all figured out. There are ways to start saving when the time feels right — even if retirement is still years or even decades away.

5 Steps to plan for retirement

Once you’re ready to prepare for retirement, you can follow these steps to develop your plan and track your goals:

1. Choose a target age to retire

Your target retirement age could be different for various reasons, such as income, family or life events, but it’s important to choose one to help you understand how much you’ll need to save and for how long.

A big factor for many is Social Security income. Social Security is a government program that provides monthly payments to older adults.

While you can start collecting a portion of your Social Security benefits as early as age 62, you typically have to wait until your full retirement age to collect the total or maximum amount. Your full retirement age depends on the year you were born, but if you were born in 1960 or after, it’s 67. However, if you can wait until you’re 70, you may be eligible to collect the maximum amount.

You can use the retirement age calculator at SSA.gov to determine your retirement age and estimate what your benefits might be at different ages.¹

2. Decide how much you’ll need to save

The next thing to consider is how much money you’ll need to live comfortably when you retire. Like your target age, this number depends on various factors, including your income, expected living expenses and the cost of long-term care, if needed.

A good rule of thumb is to start off with around 80% of your pre-retirement income to maintain your current lifestyle. So, if you make $65,000 every year and want to live on 80% of your income retirement, you should budget for $52,000 each year to cover your monthly bills and other needs.²

But that’s just the beginning. Once you know how much you need each year, you’ll need to figure out how much you need the day you retire. One common method is the “4% rule,” where you make sure you have enough on hand that you can live off 4% of your savings every year.³ A financial advisor can help you make a plan that works for you.

Consider other sources of income

In addition to your retirement investments and benefits, consider any extra funds you might bring in after you retire, like:

• A part-time, gig or seasonal job
• A pension
• Inheritances
• Passive income
• Other investment income
• Proceeds from a home sale

Think about the lifestyle you want

Knowing how much you’ll need to retire also involves thinking about how you’ll spend your time when you’re no longer working.

Ask yourself these questions:

• Where would you want to live? Would you stay where you are, downsize or move closer to family? If you move, would your cost of living change? Would you have a mortgage, rent, or live with family? Would you need to pay for home maintenance? Would you need a car?
• How often would you travel and where? Would you travel internationally or explore your local surroundings? How would you travel? Would you buy an RV or a boat?
• What hobbies might you spend time doing? Is there something you already love, or would you pick up something new, like gardening, baking or pickleball, for example? How much would those pastimes cost?
• Would you need to support anyone else? Will your kids be in college when you retire? Are you raising grandchildren? Are you a caregiver for a disabled relative? What would you need for them?

Plan for healthcare expenses

You may be surprised by how many healthcare expenses you have when you retire. Medicare is available to most adults at age 65, but even with Medicare, you may have insurance premiums, copays and other out-of-pocket costs to pay.

It’s important to explore all your insurance options to get a better picture of how your healthcare might affect your budget. Medicare premiums, for example, are deducted automatically from your Social Security check, so you’ll need to budget accordingly.

The Medicare.gov website is a great place to learn more about different types of Medicare plans, as well as other government programs to help seniors pay healthcare costs.

3. Map out where your savings will go

There are several ways to save for retirement that go beyond a simple savings account — you can also invest. Investments carry more risk, because their value depends on market fluctuations, such as those associated with the stock market, and they’re not insured the way most bank accounts are. However,investments could grow more quickly.

One of the most common ways to invest is through an employer-sponsored retirement plan like a 401(k). A 401(k) plan lets you automatically contribute a portion of each paycheck to an investment account in your name. Some employers will match your contribution up to a certain percentage — usually around 3-5% — making it a great way to maximize your contributions.

There are many other types of retirement plans, however, including pensions and plans designed for small businesses and people who are self-employed. Your benefits administrator can explain the details of your plan to you, or you can go to IRS.gov to learn more.

Whether or not you have a retirement account through your job, you can still open a separate account of your own. Individual Retirement Arrangements (IRAs) and Roth IRAs are retirement accounts that allow anyone who earns money to invest for their future.⁴

There are other ways to invest your money as well. These include:

• Annuities, which are a type of insurance that offers regular payments for a set period of time
• Personal investments, like stocks or mutual funds
• Real estate

Just remember that while some investments are more stable than others, their value is never guaranteed. It’s a good idea to talk to a financial advisor to understand the risks and benefits of each option, as well as the tax implications.

4. Find extra ways to fuel your savings

When you build your budget for retirement , you might find that you need to save more.

Beefing up your contributions to your employer-sponsored retirement plan is one of the simplest ways to set aside extra money for your future. The more you can put in now, the more time it has to grow.

Another way to make sure you have more money in retirement is to avoid paying unnecessary taxes on your savings. For example, IRAs and Roth IRAs are taxed differently, so one may be better for your situation than the other. A financial advisor or tax professional can help you understand your options.

Finally, consider whether retiring later is an option. If you can wait until you’re 70, you may be eligible for the maximum Social Security benefit.⁵

5. Create an emergency fund

If you don’t already have one, building an emergency fund could help safeguard your retirement accounts. While you can withdraw funds from your 401(k) or IRA early, you’ll pay a hefty penalty, and then those funds won’t be able to grow over time. Establishing a separate emergency account for unexpected expenses like a car repair, medical bill or job loss can help you keep your retirement plans on track.

One rule of thumb is to save about three to six months’ worth of your living expenses.⁶ But you can start saving small amounts and work your way up until you have enough to cover your bills for an extended length of time.

6. Set an annual date to review your plan

Before you set your retirement plan in motion, pick an annual date to review your progress and decide whether you want to change anything.

For example, if you got a raise the previous year, you might want to raise your 401(k) contribution. Some employers let you do this automatically, so you don’t have to think about it.⁷

Another reason to review your retirement plan every year is to think about how aggressively — or cautiously — you want to invest in the coming year. If you’d like help reviewing or updating your retirement accounts, consider talking to a financial advisor.

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Plan now, relax later

Retirement planning is different for everyone, especially if you’re self-employed or don’t have plans available through work. The important thing to remember is to simply start planning, then put your plan into action. The sooner you do it, the more money you’ll have when it’s finally your time to kick back and sail into a comfortable retirement.

This article has been updated from previous postings from 2021-2022. Jessica Leshnoff and Kim Gallagher contributed.

Sources:

1,5. https://www.ssa.gov/benefits/calculators/
2. https://www.bankrate.com/retirement/how-much-to-save-for-retirement/
3. https://www.nerdwallet.com/article/investing/social-security/how-long-will-your-retirement-savings-last
4. https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans
6. https://www.nerdwallet.com/article/banking/emergency-fund-calculator
7. https://www.ebri.org/content/summary/new-research-study-finds-auto-enrollment--auto-escalation--auto-portability-can-substantially-reduce-likelihood-that-today-s-workers-will-run-short-of-money-in-retirement