Retirement Planning: A Complete Guide To Preparing For Retirement

Even if you love your job, you’ll likely want to ride off into the sunset of retirement at some point. But before you make the leap into that big life change, it’s important to lay the groundwork through retirement planning. Let’s explore everything you need to know about preparing for retirement.

What Is Retirement Planning?

Retirement planning starts by deciding how much income you’ll need to fund the retirement you envision. Once you have an idea of how much money you’ll need, retirement planning focuses on identifying how you will hit those income goals. Typically, this comes in the form of saving money, making investments, contributing to retirement accounts like an individual retirement account (IRA) and finding new income streams to fund your retirement.

You can start planning for retirement at any time in your life. But in general, experts recommend getting started as soon as possible.

What Is The Retirement Age?

Technically, you can start to receive Social Security benefits at age 62. However, signing up for Social Security benefits at 62 means you won’t get your “full” benefits. If you want to receive the full benefits, you’ll have to wait a bit longer.

The full benefit age is no longer 65. Instead, the age for full Social Security benefits has increased over time. People born after 1943 can access their full retirement benefits at age 66, and people born after 1960 can tap into their full benefits at 67.

The federal government chose to increase the age for full Social Security benefits due to longer life expectancies.

What Is Early Retirement?

While the standard retirement age might work for many, you’ll have to decide for yourself what age is right for your retirement. Depending on your situation, you might choose to pursue early retirement.

Essentially, early retirement involves leaving paid work before you hit age 65. Some make this a defining financial goal, like those in the FIRE Movement, who often aim to retire before 50.

How Much Money Do You Need To Retire?

A key part of retirement planning is determining how much money you need to retire. The reality is that there isn’t a golden retirement number that works for everyone. Instead, you’ll have to calculate on your own how much money you’ll likely need to retire.

Many experts recommend saving 25x your annual retirement expenses for a comfortable retirement. For example, if $40,000 per year will cover your retirement expenses, then you would need to save $1,000,000.

Expenses To Consider When Preparing For Retirement

When you transition into retirement, you might have different lifestyle expectations. If you plan on making changes to your lifestyle, this will have an impact on your spending in retirement. Before you can decide how much you need to save for retirement, you need to consider how much you plan to spend.

As you tally up your retirement expenses, consider the following:

• Mortgage payments and other housing costs: Are you planning to downsize in retirement or take on a bigger mortgage for your dream home? If you plan on moving to a new area, that can also have an impact on your housing costs.
• Living expenses, like food and clothing: You’ll still need to eat, but food costs can rise over time.
• Transportation: Do you plan on keeping a vehicle to get around? If so, you’ll need to factor in insurance and maintenance costs. For anyone driving an older vehicle, consider that you might have to replace it at some point in retirement.
• Traveling and vacations: Are you planning to see the world during retirement? Traveling costs can add up quickly.
• Entertainment and hobbies: Without paid work keeping you busy, you’ll have more time to commit to your hobbies. Ask yourself if you want to spend more on these pursuits.
• Other savings and emergency funds: Life often throws unexpected expenses your way, even in retirement. Don’t forget to include some emergency savings in your retirement plans.
• Health care: As you age, you might encounter more health care expenses. Set aside funds for health care in your annual budget.

Many experts recommend planning to spend 70% – 90% of your current annual income in retirement. For example, if you earn $100,000 now, you might spend $70,000 – $90,000 per year in retirement.

But everyone has a unique retirement vision. In general, it’s best to overestimate your retirement expenses. If you have some extra funds, you can use them to splurge. But it’s not a good feeling to run low on money in retirement.

How To Plan For Retirement: 3 Steps 

Retirement planning involves making big decisions. As with any large goal, it’s often easier to sort through your retirement planning by breaking it into steps.

1. Determine How Much Money You’ll Need To Save

After you’ve estimated how much money you’ll spend in retirement, it’s time to determine how much money you’ll need to save. Generally, it’s helpful to break down your retirement savings goals into monthly savings goals.

For example, you might decide to put aside $500 per month into your retirement savings. You can track your progress by keeping up with this benchmark.

It’s possible that you’ll need to rework your current spending to make your retirement goals work. If you are looking for a new budgeting approach, consider the 50/30/20 rule. Within this budgeting framework, you would spend 50% of your income on living expenses and 30% of your income on discretionary purchases. This leaves 20% of your income for retirement savings.

2. Choose And Contribute To Retirement Accounts

It’s not enough to tuck money into your savings account. As you save for retirement, it’s best to consider what kind of retirement account will work best for your needs.

For many, this choice is easy to make because their employer offers access to a particular retirement account option. But those who don’t have access to a workplace option will need to open a retirement account on their own, usually through a brokerage platform.

Here’s a look at some of the most common retirement accounts:

• 401(k): A 401(k) is an employer-sponsored retirement plan that allows you to save directly from your paycheck. The contributions you make will lower your taxable income. Some employers offer matching funds for your 401(k) contributions.
• 403(b): A 403(b) is similar to a 401(k) but it is offered by public schools and other tax-exempt organizations.
• Traditional IRA: A traditional IRA is available to anyone but comes with relatively low contribution limits. The funds you contribute to a traditional IRA can lower your taxable income.
• Roth IRA: A Roth IRA is similar to a traditional IRA because anyone can open one. However, the contributions made to a Roth IRA will not lower your taxable income. Instead, you can withdraw your contributions tax-free in retirement.
• SIMPLE IRA: A SIMPLE IRA is an employee retirement plan for small businesses with less than 100 employees. You’ll receive matching funds from your employer for a portion of your contributions.

3. Build Your Investment Portfolio

When you open a retirement account, you’ll have access to a wide range of investment options. It’s often recommended to build your retirement nest egg through investing, which puts your funds to work for you. With enough time, investing your funds can lead to more money to spend in retirement.

Some of the most common investment options include:

• Stocks: The stock market is a popular way to build an investment portfolio. While it takes some time to learn how to invest in the stock market, the right portfolio can lead to big returns.
• Bonds: A bond offers regular interest payments to the bondholder. In other words, a bond is like an IOU that you purchase in exchange for promised interest payments.
• Mutual funds: Mutual funds allow you to pool your funds with others to purchase stocks and bonds. Instead of picking individual stocks, you can diversify through mutual funds.
• ETFs: On the surface, exchange-traded funds (ETFs) are very similar to mutual funds. Through an ETF, you’ll pool your funds with other investors. But you can purchase or sell an ETF at any time of the day, not just after the market is closed.

Other Tips To Help Save For Retirement

Setting up a plan for retirement is a big milestone. Let’s take a look at tips to help you reach retirement success.

1. Create And Follow A Budget

After you know how much you want to save for retirement, it’s important to include this savings goal in your budget. Essentially, a budget offers a straightforward plan for how you intend to spend your money.

For example, you likely already allocate funds to cover housing, food, transportation and entertainment. It’s helpful to make room for retirement savings in your monthly budget, too.

If you are struggling to fit saving for retirement into your other spending habits, it might be time to make some changes. Take a closer look at your budget to find realistic ways to cut down on your expenses. What you are able to save now will come in handy for your retirement.

But keep in mind that you can only cut your spending by so much. If you still don’t have enough wiggle room to save for retirement, find ways to increase your income. Many pick up a side hustle or ask for a raise at work to make their financial goals a reality. Find a balance that works for your situation.

2. Pay Down Existing Debts

The reality is that many of us take on debt to afford major life purchases. Many milestones, like buying a home or car, are tied to taking on a loan. Some types of debt, like an affordable mortgage, are generally considered good. But other types of debt, like a credit card balance, are generally considered bad.

While debt serves a purpose, it can be a drain on your financial situation. If you are facing a high debt burden, paying it off can help you funnel more money toward your retirement savings.

Of course, paying off debt is often easier said than done. But the good news is that it’s possible. The snowball method and the avalanche method are both popular strategies to help you reach a debt-free status.

3. Set Up Automatic Transfers

Saving money isn’t always easy. In fact, it can be downright difficult. That’s especially true if you have to choose to transfer funds into your retirement account each and every month. You might simply forget to make the transfer or find a more enjoyable way to spend the funds.

Automatic transfers offer a solution. You won’t ever forget to transfer funds to your savings ever again. When your paycheck hits your account, you can choose to automatically send a portion of those funds to your retirement savings.

4. Factor In Additional Savings Funds

Saving for retirement is important, but it’s likely not the only savings goal on your radar. For example, you might want to save for a house down payment or build an emergency fund. It’s best to keep these funds separate from your retirement savings. Many choose to stash their emergency fund in a high-yield savings account.

If all of your savings are tucked into a retirement account, you might face a penalty to access these funds. So, don’t forget to keep some savings on hand to cover any unexpected expenses life throws your way.

5. Check In Regularly

Building a retirement nest egg is a long-term goal. It will likely take you several decades to accomplish your savings goals unless you choose to funnel a larger portion of your income toward retirement savings.

Since it will take you a long time to reach your savings goals, it’s critical to check in regularly. On an annual basis, confirm that you are hitting your savings goals. If you aren’t on track, look for ways to adjust your spending or income to reach your savings goals.

Not only should you consider your savings progress, but also check in on your retirement plans. If you make a big change to your retirement dream, update the numbers to reflect this. For example, if you decide you want to purchase a second home in retirement, make sure to factor this into your savings calculations.

Why Is It Important To Plan For Retirement?

It’s difficult to envision what your life might look like decades into the future. But if you are lucky enough to live into your golden years, you’ll need funds to support yourself after leaving the working world behind.

The sad reality is that senior poverty rates are rising. According to the U.S. Census Bureau, poverty increased among Americans age 65 and older from 8.9% in 2020 to 10.3% in 2021. Retirement savings are what can keep you living above the poverty line in your golden years.

It can take a long time to build a sufficient nest egg. The sooner you can start planning for retirement, the more time you’ll have to save for this major expense.

Retirement Planning FAQs

You have questions about retirement planning. We have answers.

When should I start planning for retirement?

You should start saving for retirement as soon as you can. In a perfect world, you would start saving for retirement in your 20s. But regardless of your current age, now is the best time to start planning for retirement.

What is the 4% rule in retirement planning?

The 4% rule suggests that you can withdraw up to 4% of your portfolio’s value each year in retirement. For example, if you save $1.5 million for retirement, you could spend $60,000 per year, according to the 4% rule.

How much money do I need to retire at 55?

If you want to retire at 55, you’ll likely need to save 25x your annual retirement expenses. For example, if you want to spend $40,000 per year in retirement, you should expect to need $1 million for retirement. However, it’s never a bad idea to add some extra cushion to your nest egg.

What is the best retirement plan?

The best retirement plan is to save early and often. When you combine the habit of saving with a tax-advantaged retirement plan, like a 401(k) or IRA, you’ll be well on your way toward building a nest egg. Understanding your goals for retirement can help tailor any guideline or budget to your unique situation.

The Bottom Line: Planning For Retirement Is Worth It

Planning for retirement is a big deal. The right planning can make the difference between living out your retirement dreams or spending extra time in the workforce.

If you want a convenient place to monitor your retirement savings and investments, the Rocket Money℠ app can help. Want to get started? Create an account on the Rocket Money app today.