Retirement planning is about creating a roadmap to achieve specific financial goals by the time you retire. It involves identifying sources of income, estimating expenses, creating a savings program, and managing assets and risks.
In other words, you’re preparing for life after paid work ends — not just financially but in all aspects of life. Effective retirement planning allows people to maintain their desired lifestyle, cover medical expenses, and handle unforeseen emergencies without financial strain.
How retirement planning works
Retirement planning involves taking a comprehensive look at your current financial situation, projecting your future financial needs, and devising a strategy to meet those needs.
You can start by calculating the income required to support your post-work lifestyle. Then, open one or more retirement accounts and focus on saving as much as possible. To help your savings grow, invest in a diverse range of assets. You’ll want to regularly review your retirement strategy and make adjustments as needed to stay aligned with your goals.
Some ways you can plan for retirement include:
- Contributing to retirement savings accounts: Accounts like 401(k)s and IRAs provide tax advantages and the potential for employer-matching contributions.¹
- Investing in stocks and bonds: Diversifying investments can help manage risk and ensure the steady growth of retirement savings over time.
- Purchasing annuities: Annuities can provide a guaranteed income stream in retirement. You make a lump-sum payment – or series of payments – and receive regular payments once you retire.²
- Setting up pension plans: Although less common today, some employers still offer pension plans, which can provide a steady income in retirement.³,⁴
When choosing among the many retirement plan options, factor in things like inflation, tax implications, and potential healthcare needs.
How much should you save to retire?
Americans typically think they need around $1.46 million to retire comfortably, yet the average retirement account balance is only $88,400.⁵ Even if retirement planning in your 20s and 30s feels too early, the sooner you start, the better.
To decide on a savings goal, consider factors like your intended retirement age, lifestyle aspirations, and monthly savings capacity.
Estimate your annual living expenses, including lifestyle changes and health costs. Then, identify your income sources, such as Social Security, pensions, and investments. A general rule is to aim for about 80% of your pre-retirement income.⁶ This target may need adjustment based on personal plans, like maintaining a mortgage or extensive travel, which might require more savings.
Use our Savings Goal Calculator for a quick estimate.
Why retirement planning matters
Preparing for retirement is a critical component of personal finance. It ensures financial security in the later years of life and helps achieve financial independence – freedom to make life choices without worrying about the financial implications.
It empowers people to take control of their financial future and live their retirement years with dignity and independence.
It has also evolved over time. In the past, many relied solely on employer-provided pension plans or government social security benefits. However, with the shift towards defined contribution plans and the uncertain future of social security, the responsibility of planning for retirement has increasingly fallen on individuals.⁷
Steps to effective retirement planning
- Start early: The earlier you start saving for retirement, the more time your money has to grow through the power of compounding (your interest earns interest). By saving $200 per month starting at age 25 with an initial principal of $2,000 and 6% compounding interest, your total savings would grow to approximately $420,861.07 by age 65.
- Save consistently: Regular contributions to retirement accounts can accumulate significantly over time. Even small, regular contributions can grow substantially with consistent effort and time.
- Plan comprehensively: Consider all possible sources of income (including Social Security) and potential expenses during retirement. This includes understanding healthcare needs and costs, inflation, and tax implications. Based on the Fidelity Retiree Health Care Cost Estimate, an individual who is 65 years old in 2023 might require around $157,500 in savings (after tax) to cover healthcare expenses during retirement.⁸
With careful planning, retirement can be a fulfilling and secure phase of life. Start as soon as you can, save consistently, and plan comprehensively to enjoy financial security and independence in your later years.