- Starting early can help your retirement savings grow over time.
- Clear goals can help shape how much you may need to save.
- Common options include 401(k)s, IRAs and SEP IRAs.
- A strong plan may include diversified savings and professional guidance.
A Beginner’s Guide to Retirement Planning
Even if your retirement seems far away, the earlier you begin to think about it and plan ahead, the better off you'll be. Retirement planning helps you invest wisely, reduce financial stress, and take more control over your future.
Key Takeaways
Quick takeaway: One of the most useful tips on retirement planning is to begin with an amount you can manage now, then increase contributions when your income rises. Consistency can matter as much as timing.
Setting your retirement goals
Think about what you want in retirement. Some questions to ask yourself include:
- What age do you want to retire? Do you want to retire early? Or do you enjoy your job and want to continue working well into your 60s? How long you plan on working and your desired retirement age affects how much money you need to have saved for retirement.
- What do you want to do in retirement? What is your ideal retirement? Perhaps you want to buy a beach house and golf every day. Or, you may want to downsize and move closer to your kids. Or, you might want to travel the world. Your lifestyle and expectations will affect the kind of income you need in retirement.
- How is my health? Your health is one factor you can't predict. But if you have existing health issues that may worsen over time or a family history of significant health conditions, you may have higher medical expenses, which means you'll need a larger safety net.
Although your plans and goals can change, these questions can give you an idea of what your financial needs will be in retirement. It also helps to explore your options. You can also use a retirement calculator to estimate how much you need to save to reach your goals.
Setting goals:
| Retirement planning question | Why it matters |
|---|---|
| When do you want to retire? | Your timeline affects how long you have to save and how long your money may need to last. |
| What lifestyle do you want? | Travel, housing choices and hobbies can all influence your retirement income needs. |
| What income sources will you have? | Social Security, employer plans, IRAs and annuities may work together in your overall plan. |
Wondering how to plan for retirement? A good place to start is by setting goals, understanding your account options and saving consistently over time.
How to save for retirement
Retirement planning involves more than saving money or automating your retirement account contributions. It's also about using tools to grow your money so you can build a solid financial future and achieve your goals.
Starting early with the process is the best gift you can give yourself. Thanks to compound interest and market growth, saving a relatively small amount when you’re young can allow you to enjoy a much larger retirement fund than someone who starts saving late in life.
Understanding retirement accounts
Most workers save for retirement by contributing to a tax-advantaged investment account to help their money grow over time. An investment account that lets your money grow is preferable to a savings account or certificate of deposit (CD). That’s because the interest rates on these deposit accounts are too low to achieve the kind of long-term growth you need. Depending on your situation, you ideally should use one or more of the following accounts:
401(k) or 403(b)
Employer-sponsored retirement accounts, such as 401(k)s or 403(b)s, allow you to invest money from your paycheck on a pre-tax basis. You place your contributions into stocks and bonds, typically via mutual funds or exchange-traded funds (ETFs). Your money grows tax-deferred. When you take withdrawals in retirement, those distributions are taxed as ordinary income.
As a bonus, some employers will match employee contributions to 401(k) plans or 403(b) accounts. For example, an employer may match 50% of savers’ contributions, up to 6% of the employee’s salary. For example, if you earn $60,000 per year and contribute $1,500 toward your 401(k), your employer would contribute an additional $750 on your behalf.
Such matching contributions are effectively “free money,” which can help you grow your nest egg faster. An employer match, then, is a key part of your compensation package.
Traditional individual retirement account (IRA)
A traditional IRA is a tax-deferred investment account that isn't tied to employment. Depending on your income and your access to an employer-sponsored retirement plan, IRA contributions may be tax-deductible. As with a 401(k), your contributions grow tax-deferred, and you pay income tax on distributions you take in retirement.
IRAs have lower contribution limits than employer-sponsored accounts. However, if you are 50 or older, you can take advantage of catch-up contributions to bolster the balance in your retirement fund.
Roth IRA
Like traditional IRAs, Roth IRAs are opened by individuals and not tied to an employer. They have the same contribution limits as traditional IRAs. Where they differ is in the source of your contributions. Roth IRAs are funded with after-tax dollars. This means your contributions are not tax-deductible, but qualified withdrawals in retirement are tax-free.
IRA for self-employed workers
If you're self-employed, you also have the option of opening a Simplified Employee Pension IRA (SEP IRA). These accounts have much higher contribution limits than traditional or Roth IRAs. That perk is to make up for the fact that self-employed people don’t have the benefit of a workplace retirement plan.
An overview of retirement accounts:
| Account type | Key details |
|---|---|
| 401(k) or 403(b) | Workplace retirement plan funded through your paycheck, typically with pre-tax contributions. Money grows tax-deferred, withdrawals in retirement are generally taxed as ordinary income, and some employers may offer a match. |
| Traditional IRA | Individual retirement account not tied to an employer. Contributions may be tax-deductible depending on your situation, growth is tax-deferred, and withdrawals in retirement are generally taxed as income. |
| Roth IRA | Individual retirement account funded with after-tax dollars. Contributions aren’t tax-deductible, but qualified withdrawals in retirement are tax-free. |
| SEP IRA | Retirement account option for self-employed workers with higher contribution limits than traditional or Roth IRAs, which may help offset the lack of a workplace plan. |
Diversifying your retirement investments
When it comes to investing for your retirement and retirement strategy, two key terms are useful to know: allocation and diversification.
Asset allocation
Your asset allocation is how your retirement portfolio is spread out among different investment types to balance risk and returns. Diversification refers to investing in a broad range of investments and companies so all your eggs aren't in one basket. This tactic also helps spread your risk and improve your returns.
When investing for retirement, you can invest in stocks, bonds, mutual funds, ETFs and other securities. (Mutual funds containing pooled stocks or bonds are the most common investment options for 401[k]s.) When you're in your 20s and 30s, an investment strategy focused on stocks may maximize the growth of your retirement accounts. Your long-time horizon means you have more time to recover from losses if the market drops.
As you age, it’s prudent to shift to a more conservative allocation focused more on lower-risk options like bonds to help protect the nest egg you’ve spent decades building.
Diversification
Diversification goes beyond portfolio content. It also means having multiple retirement income streams. Besides your 401(k) or IRA, other income sources may include Social Security benefits, a pension or an annuity.
Annuities, which are contracts with insurance companies, can be powerful complementary tools. An annuity provides a fixed, reliable income stream you can count on every month. Guaranteed income gives you both peace of mind and the funding you need for a comfortable and secure retirement.
Planning for benefits and withdrawals
As you move into retirement, there are important milestones to keep in mind. You’ll need to know when to start taking withdrawals from your retirement accounts, as well as when you become eligible for benefits like Social Security and Medicare. Staying ahead of these dates can help you feel confident and prepared for this next chapter.
Take the first step in retirement planning
Take steps now to build a retirement plan that will help you reach your goals. If you possibly can, do any or all of the following: Take full advantage of any employer match, adjust your monthly contributions to take advantage of employer matches, increase your contributions along with raises, use catch-up contributions to invest even more and diversify your portfolio.
To be sure your retirement savings plan is on track, consult with a financial-planning professional. Discussing your personal finances with a financial advisor or certified financial planner (CFP) can provide you with a road map to follow for your future, and help you enhance your financial security in your retirement years.
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FAQs about retirement planning
A simple way to start is to choose one retirement account you’re eligible for, set a monthly contribution amount and automate it. If your employer offers a match, consider contributing enough to capture it if you can.
You can still build a useful plan by reviewing your target retirement age, increasing contributions where possible and focusing on realistic savings goals. A financial professional may also help you prioritize next steps.
Start early if you can, save consistently, review your account options, revisit your goals over time and avoid relying on one income source alone. Keeping your plan simple can make it easier to stick with.
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