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How to Plan for Retirement

Are you worried about how you're going to afford retirement? This article will teach you how to plan for retirement. With the right preparation, you can relax and enjoy life after work.
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Table of Contents

Table of Contents

Roadmap to the Future: Why is Retirement Such a Hot Topic
Video Transcript

Key Takeaways

  • Set savings goals based on pre-retirement income, aiming to save an amount equal to your salary by 30, three times by 40, six times by 50, and eight times by 60.
  • Start saving early to benefit from compound returns and reduce budget strain over time.
  • Explore strategies to build savings, allocate assets, increase tax-advantaged contributions, and plan income.
  • To maximize tax-advantaged contributions, familiarize yourself with retirement plans, such as employer-sponsored plans, IRAs, SIMPLE IRAs, and SEP IRAs.
  • Learn about different investments and account types to make informed decisions and create a solid strategy.

For many people, the topic of retirement is often somewhere in the back of their minds. When you're young, it's something you know you'll probably have to think about at some point. If you're older and nearing the end of your career, getting ready for retirement is a real priority.

Regardless of where you are in life, understanding how to plan for retirement is important. Focusing on your planning options and strategy now, even if retirement's decades into the future, can help ensure you have enough saved for living comfortably during your golden years.

Here's why retirement planning is important, how to begin doing so and some considerations for every stage of life.

Set Retirement Goals

Saving for retirement is usually a decades-long process. It can be hard to know how well you're doing. That's why it's important to set clear goals for yourself and monitor your progress along the way.

For example, it can be helpful to create savings targets based on your pre-retirement income. Common guidance suggests saving an amount equal to your yearly salary by the time you reach age 30, and three times your salary by age 40. The guideline further proposes savings of six times your salary by age 50 and eight times your annual income by 60. To reach those objectives, you may want to start saving roughly 15% of your income while still in your 20s.

While broad rules such as this may apply to a typical adult, they won't work for every individual. An early retirement or extensive travel plans, for instance, may require you to increase those amounts. Conversely, moving to a more affordable part of the country or having non-investment assets to draw from could help enable you to retire comfortably with a lower savings target. The key is to identify goals that apply to your unique situation and periodically measure your progress.

Start Preparing for Retirement Early

Reaching your retirement goals becomes considerably easier when you start saving at a young age. You're able to spread out your contributions over a longer period of time, putting less strain on your budget as you reach your later working years. If you are not ready to take a full retirement soon, you might be able to take a mini-retirement. 

By saving earlier, you also take advantage of compound returns. Any capital gains, interest or dividends you receive in an individual retirement account (IRA) or 401(k) help build your balance, creating a snowball effect. Make time your ally as you work to build your retirement resources.

Find the Retirement Strategy that Seems Right for You

What are some good ways to build your account balance and better allocate your assets? Often, making a couple of small changes to your money habits can dramatically improve your readiness.

Our list of retirement strategies includes several time-tested ways to help stay on track. Read on to learn more about budgeting, increasing your tax-advantaged contributions and developing an income plan once you leave the workforce.

Understand Your Retirement Plan Options

One of the best ways to get more out of your contributions is by choosing an investment vehicle that reduces the impact of taxes. Different retirement plans have pros and cons that are important to understand when saving for your later years.

If you're relatively new to retirement investing or recently started your own business, getting acquainted with these options will help you make better informed choices.

Employer-Sponsored Retirement Plans

If your employer offers a 401(k) or similar retirement plan, contributing through these accounts can offer important benefits. For example, many organizations provide matching funds that can help accelerate your account balance. Plus, you can generally make pretax contributions to traditional retirement plans, up to allowable limits.

IRAs

IRAs have perks of their own, including a greater number of investment options than many employer-based plans. These accounts have a separate contribution limit from workplace plans, so using both in tandem can help you maximize the amount of your tax-advantaged contributions.

Retirement Plans for Small Business Owners

The contribution limit for most IRAs is smaller than that of employer-sponsored plans. However, small business owners may be eligible to set up Savings Incentive Match Plan for Employees (SIMPLE) IRAs or Simplified Employee Pension (SEP) IRAs, which increase that cap. These two retirement planning tools have some important differences, however, so consider how each addresses your needs.

Select Your Retirement Investments

Often, the number of investment choices available to you can seem overwhelming. Depending on your retirement plan, you may also need to decide whether a traditional or Roth account provides the bigger tax benefit.

Having a basic understanding of different investment products and account types can make it easier to select from among them. Use our easy-to-follow guide as your first step toward a better informed investment strategy.

Know Important Retirement Milestones

Do you know when can you start receiving Social Security benefits or start withdrawing retirement funds without a penalty? Retirement planning involves various age-related milestones that are important to know. The more you understand about these key markers along your journey, the easier it is to create a strategy that makes sense for you.

   Align your retirement plan with important age-based milestones to stay on track. Start Your Free Plan  

Estimate Your Retirement Expenses

How do you know whether you'll have enough money for your planned retirement? To answer that important question, you may want to estimate what your costs may be when you leave your full-time job.

Whether you use a worksheet or an online tool such as our Retirement Cost of Living Calculator , there's no substitute for itemizing your various expenses. You may want to include the following important categories:

Housing

Housing is the largest single expense for those over age 65, according to the Bureau of Labor Statistics.1 However, you may be able to significantly reduce your housing expenses by downsizing or even renting out a portion of your residence. If you own your home, you might also consider paying down your mortgage before you reach retirement to make your future budget more sustainable.

Food

A typical older adult will spend $9,985 each year, according to government data.1 Your household may spend more or less than that, depending on where you shop and how often you dine out. To estimate your retirement food budget, look at the total amount you currently spend and make adjustments based on anticipated changes in your lifestyle.

Transportation

For many retirees, transportation costs can fall considerably since you no longer have a daily commute. That may not be the case, though, if you plan to spend much of your retirement visiting family and friends — especially if seeing them requires air travel.

Health Care

Medical expenses represent one of the biggest costs for older adults. That means having a reasonable projection of your health care expenditures is a vital part of any retirement plan. Among the factors you may want to consider are:

  • Your current health status
  • Your age at retirement
  • Whether you'll be eligible for Medicare when you retire
  • Your choice of Medicare plans

Are You Ready to Retire?

Retirement should begin when your finances allow you to live comfortably without needing to work. This means the opportunity to do the things you truly love, whether that's traveling the globe or simply tending your garden. But to make your dream retirement a reality, you have to make sure your assets last. 

For example, do you have a good idea of what your expenses may be? Or how much you can expect to get from Social Security? These are critical questions to ask yourself as you consider this important step

Retirement Terms to Know

Much of the time, retirement planning can feel like a maze of financial jargon. However, preparing yourself for life after full-time work needn't be confusing.

Our glossary helps explain some of the most common important — and often misunderstood — retirement terms to help you make sense of your choices. The more you understand these basic concepts, the less stressful it becomes to chart your future course.

Additional Retirement Planning Resources

Retirement planning shouldn't be confusing. That's why we offer an array of straightforward content to help steer you on your path.

From a checklist to help make sure you have all your bases covered to our planning guide specifically for women, these resources can give you added confidence that you'll be financially ready for the next stage in life:

Staying Focused on Your Golden Years

Between work, family and other obligations, life has a way of getting busy. But no matter how much you have on your plate today, taking the time to think about your future needs is also vital.

Focusing on your retirement strategy now, even if it's decades down the road, can help ensure you have enough saved to live comfortably during your golden years. If you could benefit from a helping hand, consider reaching out to a financial professional who can help you better understand your retirement plan options and develop stronger saving habits.

   Prepare for a fulfilling retirement by choosing the best plan and investments. Start Your Free Plan  

Frequently Asked Questions

At what age should I collect social security benefits?

For those born in 1960 or after, the normal retirement age for a full retirement benefit under Social Security is 67. While you can start collecting benefits as early as 62, you receive a reduced amount when you claim early.2 Conversely, your lifetime benefit increases when you delay your application, though the amount caps off at 70.

Choosing when to claim benefits comes down to a number of factors, such as whether you plan to continue working and if you may have other income coming in should you delay your application. You may also want to consider your overall health and expected lifespan.

As a general rule, the longer you live, the more beneficial it becomes to hold off on claiming your benefit. According to AARP, the age of 78 years and 8 months is the "breakeven point," when the benefit of waiting until normal retirement age surpasses that of someone who claims at age 62.3

How do I know whether I have enough money to retire?

Your target savings amount comes down to a number of factors unique to your situation. They include your retirement age, health, lifestyle and outside income sources.

Our Retirement Savings Calculator  can give you a rough idea of whether your current savings may be adequate based on your retirement goals and the amount of pre-retirement income you may need to replace. To determine that percentage, however, you may want to add up your projected expenses after leaving the workforce — from food and utilities to club memberships and health care.

For a more detailed assessment of how much you may need, consider reaching out to a financial professional. Based on your plans for retirement and income strategy, they can better identify the amount you may need in your savings and investment accounts to thrive in your later years.

How much will I spend in retirement?

Longstanding guidance says you'll likely spend about 70% to 80% of your pre-retirement income in retirement. After all, when you're out of the full-time workforce, your transportation costs tend to go down. Plus, you may not have to financially support your children to the degree you once did.

That guideline doesn't apply to every individual or couple, however. Your future spending largely depends on how you plan to spend your retirement years. Do you plan to join a country club and stay in the same home? Or do you intend to downsize and enjoy simpler pastimes? Those decisions can impact how much you may spend when you retire.

Keep in mind that health care costs can rise dramatically as you get older. A report by Milliman Retiree Health Cost Index concluded that an average 65-year-old couple may spend as much as $395,000 on their health care costs during retirement.4

Using online tools such as our Retirement Cost of Living Calculator  can help you keep track of the expenses you may face once you leave your career behind, from rent and income taxes to home improvements and insurance premiums.

Sources

  1. CONSUMER EXPENDITURES--2023. https://www.bls.gov/news.release/cesan.nr0.htm.
  2. Starting your retirement benefits early. https://www.ssa.gov/benefits/retirement/planner/agereduction.html.
  3. What is the Social Security break-even age? https://www.aarp.org/retirement/social-security/questions-answers/retirement-benefit-break-even-age.html.
  4. 2024 Milliman Retiree Health Cost Index. https://www.milliman.com/en/insight/retiree-health-cost-index-2024.

Other Topics

Retirement Planning Resources
How Much Do I Need to Retire
How to Save for Retirement
IRA Basics
401(K) Basics
Annuity Basics
Estate Planning
Retirement Income Planning
Living in Retirement
Aging and Senior Care
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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.