Retirement planning matters more than most people realize, until it’s almost too late. The average American retires at 64, yet nearly half of workers have saved less than $100,000 for their golden years. That’s a problem.
Learning how to retirement planning works isn’t complicated, but it does require action. This guide breaks down the essential steps: setting goals, calculating savings targets, picking the right accounts, building an investment strategy, and keeping your plan on track. Whether someone is 25 or 55, the best time to start retirement planning is now.
Key Takeaways
- Start retirement planning now by setting clear goals, including your target retirement age, desired lifestyle, and estimated healthcare costs.
- Use the 25x Rule to calculate your savings target—multiply your expected annual retirement expenses by 25 for a concrete goal.
- Maximize tax-advantaged accounts like 401(k)s, IRAs, and HSAs, and always contribute enough to capture your employer’s full match.
- Build a diversified investment strategy using low-cost index funds, adjusting your stock-to-bond ratio based on age and risk tolerance.
- Review your retirement plan annually and rebalance your portfolio to keep your savings on track as life circumstances change.
Determine Your Retirement Goals and Timeline
Every solid retirement plan starts with two questions: When do you want to retire? And what kind of lifestyle do you want?
The answers shape everything else. Someone who wants to retire at 55 and travel the world needs a very different plan than someone aiming for 67 with a quiet life at home.
Here’s how to set realistic retirement goals:
- Pick a target age. Most people choose somewhere between 60 and 70. Earlier retirement means more years to fund.
- Estimate annual expenses. A common rule suggests retirees need 70-80% of their pre-retirement income. But this varies widely based on lifestyle choices.
- Factor in healthcare costs. Fidelity estimates a 65-year-old couple retiring today will need approximately $315,000 for healthcare expenses alone.
- Consider where you’ll live. Housing costs differ dramatically by location. Some retirees relocate to stretch their savings further.
Retirement planning becomes easier once these goals are clear. They give the numbers meaning and the savings a purpose.
Calculate How Much You Need to Save
Here’s the part that makes people nervous: the math.
But calculating retirement savings doesn’t require a finance degree. Several methods can help estimate a target number.
The 25x Rule
Multiply expected annual retirement expenses by 25. If someone plans to spend $50,000 per year in retirement, they’ll need roughly $1.25 million saved. This assumes a 4% annual withdrawal rate, which historically has allowed savings to last 30 years.
The Replacement Ratio Method
Financial planners often suggest aiming to replace 70-80% of pre-retirement income. Someone earning $80,000 annually would target $56,000-$64,000 per year in retirement income.
Online Calculators
Tools from Vanguard, Fidelity, and other providers can run personalized projections. They account for Social Security benefits, current savings, and expected returns.
The key is starting retirement planning with a specific number in mind. Vague goals produce vague results. A concrete target, say, $1 million by age 65, creates clarity and urgency.
Don’t forget to account for inflation. A dollar today won’t buy the same amount in 30 years. Most calculators build this in automatically.
Choose the Right Retirement Accounts
Not all retirement accounts work the same way. Picking the right ones can save thousands in taxes over time.
401(k) Plans
Employer-sponsored 401(k) plans remain the backbone of retirement planning for many Americans. In 2024, employees can contribute up to $23,000 ($30,500 if over 50). Many employers match contributions, that’s free money. Always contribute enough to capture the full match.
Traditional IRAs
Traditional IRAs offer tax-deductible contributions, meaning less taxable income today. Withdrawals in retirement get taxed as ordinary income. The 2024 contribution limit is $7,000 ($8,000 for those 50 and older).
Roth IRAs
Roth IRAs flip the tax benefit. Contributions come from after-tax dollars, but withdrawals in retirement are completely tax-free. This works well for people who expect higher tax rates later.
Health Savings Accounts (HSAs)
Though designed for healthcare, HSAs function as stealth retirement accounts. Contributions are tax-deductible, growth is tax-free, and withdrawals for medical expenses are tax-free. After 65, funds can be used for anything.
The best retirement planning strategy often combines multiple account types. This provides tax flexibility during retirement.
Build a Diversified Investment Strategy
Saving money is only half the equation. Investing it wisely is the other half.
Diversification spreads risk across different asset types. A diversified portfolio typically includes:
- Stocks – Higher growth potential, higher risk
- Bonds – Lower returns, more stability
- Real estate – Through REITs or property investments
- Cash equivalents – Money market funds, CDs
Asset Allocation by Age
A classic guideline subtracts age from 110 to determine stock allocation. A 30-year-old might hold 80% stocks and 20% bonds. A 60-year-old might flip that ratio.
This isn’t a hard rule. Risk tolerance and timeline matter too. Someone with a pension might take more investment risk. Someone who panics during market drops should stay conservative.
Low-Cost Index Funds
Most retirement planning experts recommend index funds over actively managed funds. They charge lower fees and often perform better over time. A simple three-fund portfolio, U.S. stocks, international stocks, and bonds, covers most bases.
Consistency beats timing. Regular contributions through dollar-cost averaging smooth out market volatility and remove the temptation to guess market movements.
Monitor and Adjust Your Plan Over Time
Retirement planning isn’t a set-it-and-forget-it activity. Life changes, and plans need to change with it.
Annual Check-Ins
Once a year, review these items:
- Are contributions on track?
- Has income changed? (Adjust savings rate accordingly)
- Does asset allocation still match goals?
- Are fees eating into returns?
Rebalancing
Market movements shift portfolio allocations over time. If stocks surge, a portfolio may become riskier than intended. Rebalancing, selling some winners and buying laggards, keeps risk levels appropriate.
Many 401(k) plans offer automatic rebalancing. Target-date funds handle this entirely on their own.
Life Event Triggers
Certain events should prompt a plan review:
- Marriage or divorce
- Birth of a child
- Job change or promotion
- Inheritance
- Health diagnosis
Retirement planning adapts to circumstances. Someone who receives an inheritance might retire earlier. Someone facing health issues might need to reassess healthcare cost estimates.
Flexibility keeps the plan relevant and realistic.
