Planning for retirement can feel overwhelming, but it doesn’t have to be complicated. The goal is to make sure you have enough money to keep your lifestyle comfortable when you stop working. Experts often say that you will need about 70% to 80% of your current income in retirement to maintain your lifestyle. However, this amount can change depending on what you want to do after you retire—if you want to travel a lot or take on expensive hobbies, you may need more.
In this article, we’ll break down the basics of saving for retirement, what experts suggest, and how you can plan step-by-step to reach your retirement goals.
Why Retirement Planning Is Important
Retirement planning helps you prepare for the future so you don’t run out of money after you stop working. The key is to estimate how much money you will need each year in retirement and then make a plan to save that amount over time.
Many financial advisors say you’ll need around 70% to 80% of your pre-retirement income during retirement. But this is just a guideline, not a rule. Some people may feel comfortable with less, while others want more. It depends on your lifestyle and plans.
Step 1: Figure Out How Much You’ll Need
Start by thinking about your future living expenses. How much do you spend now? How might that change after you retire? For example:
- Will you still have a mortgage or rent to pay?
- Will your health care costs go up?
- Do you plan to travel or pick up new hobbies?
- How long do you expect to live after retirement?
Keep in mind, predicting these numbers is not an exact science. Life can surprise us, and costs can rise faster than expected. But having an estimate helps you set a savings goal.
Step 2: Check Your Current Savings and Assets
Next, look at what you already have saved for retirement. This includes money in retirement accounts like 401(k)s or IRAs, plus other savings, investments, or property you own.
Russ Blahetka, a financial planner, compares this to planning a trip — it’s easier to plan when you know your starting point. If you’re unsure about how much you’ve saved or how to invest it, consider working with a financial advisor who can help.
Step 3: Start Saving Regularly
Once you know how much you’ll need, it’s time to save. A good rule of thumb is to try to save about 10% of your income each month. Don’t worry if you can’t save that much right away—starting small and increasing over time is fine.
Traditionally, retirement income comes from three main sources, often called the “three-legged stool”:
- Social Security payments.
- Employer-sponsored retirement plans, like a 401(k).
- Your own personal savings.
Your personal savings might be in different accounts, and the type you choose affects your taxes.
Understanding Retirement Accounts and Taxes
Some retirement accounts let you save money before paying taxes, such as a traditional IRA or 401(k). This lowers your taxable income now, but you will pay taxes when you withdraw the money in retirement. If your tax rate is lower after you retire, this can save you money.
Other accounts, like Roth IRAs, use after-tax money. You pay taxes now, but then you don’t have to pay taxes on withdrawals later. Having both types of accounts can help you manage taxes better in retirement.
How Much Should You Save Each Year?
The IRS sets limits on how much you can put into retirement accounts each year. For 2024:
- You can contribute up to $7,000 to an IRA if you are under 50, and $8,000 if you are 50 or older.
- You can put up to $23,000 into a 401(k), with an extra $7,500 allowed if you’re 50 or older.
These limits help you save more as you get closer to retirement.
Step 4: Differentiate Between Wants and Needs
Saving for retirement might require changing your spending habits. Look closely at your budget and separate your needs (things you must pay for) from your wants (things that are nice to have but not essential).
Mark Hebner, a financial expert, says that knowing the lifestyle you want in retirement can motivate you to save more today. Think about what kind of life you want and how much it will cost.
Step 5: Invest Your Savings
Saving money is good, but investing it can help your money grow faster. Compound interest—earning interest on your interest—can boost your savings over time.
Start investing early and be consistent. Set up automatic transfers from your paycheck or checking account to your retirement accounts so saving happens without you having to think about it.
The types of investments you choose depend on how much risk you’re willing to take. When you’re young, you can afford to take more risks, like investing in stocks. When retirement is near, safer investments like bonds or certificates of deposit are better.
How Much Money Should You Have Saved at Different Ages?
Here are some general savings goals, based on your age and salary, to help you stay on track:
- By age 30: Have saved about your annual salary.
- By age 40: Have saved three times your salary.
- By age 50: Have saved six times your salary.
- By age 60: Have saved eight times your salary.
- By age 67: Have saved ten times your salary.
These targets come from data provided by Fidelity Investments and are a helpful guide for most people.
How Much Do You Really Need to Retire?
Experts suggest that you should aim to have 10 to 12 times your annual income saved by the time you retire. For example, if you earn $70,000 a year, you should have between $700,000 and $840,000 saved.
Another way to calculate is by dividing your desired annual retirement income by 4%. So, if you want $70,000 a year in retirement, you need $1.75 million saved ($70,000 ÷ 0.04).
Popular Retirement Plans
The most common plans are:
- 401(k): Offered by employers, often with matching contributions.
- IRA (Individual Retirement Account): Available to anyone, comes in two types — traditional and Roth.
- 403(b) and 457 plans: Similar to 401(k)s but for certain types of workers.
Choosing the right plan depends on your job and personal situation.
Final Thoughts
Saving for retirement takes time, planning, and discipline. It’s not a one-size-fits-all process, but following these basic steps can put you on the right track:
- Estimate how much money you’ll need.
- Know where you stand now.
- Save regularly.
- Choose the right accounts and investments.
- Adjust your spending habits.
- Review your progress often.
If all this feels confusing, a qualified financial planner can help create a personalized plan.
Starting early and being consistent are the best ways to build a comfortable retirement fund, so you can enjoy your future with peace of mind.