What Is Retirement Planning? Steps, Stages, and What to Consider

What Is Retirement Planning?

An effective retirement plan begins with identifying your long-term financial goals and your risk tolerance, and then commencing efforts to reach those goals, with the sooner the better to get started.

In making a retirement plan, you would first identify your income and then add up your expenditure to devise a plan for savings and manage your assets. You would make a guess about your future cash flows to determine whether the goal of your retirement income is reasonable or not.

Of course, a retirement plan is not a one-time document. From time to time you need to update it. As you get closer to and during retirement, you will also want to review it and track your progress.

Key Takeaways

It is never too early or too late to start a retirement plan.

A retirement plan is how you save money and invest it over the long-term and, when the day comes, withdraw it in order to give you a comfortable retirement.

An integral feature of almost any retirement plan – encouraged by the tax code – is to contribute to one of the investment vehicles sponsored by the federal government that allow retirement savers tax advantages, either an individual retirement account (IRA) or a 401(k) account.

your retirement planning will have to reflect your likely future expenditures, liabilities and longevity.

What Is a Retirement Plan?

A retirement plan could be trying to tell you that you’ve got a plan to retire. You’re saving money – in fact, you’re planning on saving enough money so that down the road, when you retire from your job, you can live the life you want. Your retirement plan, of course, might change a few times, but hopefully you get that plan going as soon as possible.

8 Essential Tips For Retirement Saving

How Retirement Planning Works

After all, a retirement plan is the foundation of your life after you put away what you do to pay the bills, or even after you put away what you do full-time to pay the bills. But it isn’t just about money.

While the financial variables are fairly straightforward – IRA withdrawals, social security payouts, real estate investments, pensions, etc – the non-financial aspects of making a second life come into focus – how exactly do you want to spend your time in retirement? – the places you want to live, and so on – are hugely important. Indeed, a holistic approach to retirement planning ought to take all these variables into account.

The goals for your retirement plan will change in focus over time:

No matter how small your contribution to a fund early in your working life, your reward is 40-plus years of compounded investment growth.

In midcareer, when your income may be highest, you might decide on prior targets based on income levels or asset amounts – and then start making progress towards them.

Between retirement and the grave, you convert from what financial planners call the accumulation phase to the distribution phase. You stop flinging ‘retirement funds’ into some mysterious expense-free netherworld. Instead you start to draw on, and largely take out, pensions and retirement accounts.

Some retirement fund situations also vary by location. There are two different systems of employer-provided plans in the US and Canada.

How Much Do You Need to Retire?

The amount you need to collect, your magic number, will be highly personal. What are the rules of thumb that give you a sense of what to save?

People used to say that you need around $1 million to retire comfortably.

Some others employ the 80 per cent rule, which suggests you need to replace 80 per cent of the income that you currently need to maintain a comfortable lifestyle. If you earn $100,000 a year, to maintain your lifestyle you’ll need savings producing a pay cheque of $80,000 annually for around 20 years or $1.6 million.

Still others say that most of us aren’t saving nearly enough to reach those targets and it’s time to rein in our lifestyles.

Estimating Expenses

Your post-retirement expenses largely determine that “magic number.”

It is, therefore, beneficial to create a retirement budget that projects the average expenses for housing, health insurance, food, clothes and other transportation needs.

Plus, if you’ll be living more on your own, you’ll likely have more free time and thus need to account for entertainment and leisure pursuits and travel.

It is hard to be precise, but a ballpark figure is useful.

Steps to Retirement Planning

Independent of where you happen to be in the lifetime process of preparing for retirement, the following are some of the steps that apply to virtually everyone:

Make a plan. This means figuring out when you want to start saving, when you want to retire, and how much you want to save to reach that goal.

Determine how much you will deposit each month. Use automatic deductions so that you never have to guess, you won’t fall behind, and you won’t have the choice to avoid or forget about when you’re depositing money.

Choose the types of accounts that are right for you. Start a 401(k) or similar account if your employer offers that, and grab free money if they have an employer match – why would you give away free money? – but even if there’s no employer match, it’s a good deal. Tax breaks.

Go back and look at your investments from time to time, and stay on top of adjustments. This might be right after a big life event (marriage, baby).

Retirement Plans

Tax-advantaged retirement savings plans are the core of long-term savings for Americans. You should have access to one or more of them depending on where you work. Each plan has its own rules.

Employer-Sponsored Plans

Most large companies offer their employees 401(k) plans. Nonprofit employers have similar 403(b) plans.

The main immediate benefit of these qualifying retirement plans is that an employer can match what is invested by you, up to an amount. For instance, if you have your annual income put into your ‘account’, 3 per cent, your employer may match this amount, putting this sum into your retirement account and yours together.

You might invest more than you need to earn the match – say, up to 10 per cent or so.

401(k) Limits

The maximum is adjusted annually by the IRS. In 2024, a participant can put away up to $23,000 in a 401(k) or 403(b), and some of that may be matched by an employer. Employees aged 50 and higher can contribute an extra $7,500 as a catch-up contribution in 2024.

Such accounts can earn a far greater return than the interest garnered on a savings account (nor are they entirely without risk). Money in the account (as opposed to a Roth account) is not taxed until you withdraw it. By having contributions removed from your gross income, you get an immediate tax break.

According to some, those on the very ‘border’ of a higher tax band would wish to give enough to lessen their responsibility.

Traditional Individual Retirement Accounts (IRAs)

This is the classic individual retirement account (IRA), similar to the 401(k) but available at nearly any bank or brokerage. It’s intended for the self-employed and people who otherwise don’t have access to an employer-sponsored 401(k), but since anyone who earns income is entitled to invest in an IRA, you can set one up at the first job and contribute to it until retirement.

This tax break is achieved by the money you put in an IRA being subtracted from your income for the year, which drops your taxable income – and thus your tax liability.

The tax advantage to that type of account is front-loaded, meaning that when distributions are taken out of the account, you pay your ordinary tax rate at that time. Now remember, the money grows on a tax deferred basis. There is no capital gains or dividend tax on the balance of your account until you start taking withdrawals.

IRA Limits

The IRS sets limits on how much money goes to a traditional IRA each year. If you are younger than 50, the limit is $7000. For 2024, people 50 and older can invest an extra $1,000, making it $8,000 in total.

Distributions must be taken after age 72 (although they can be taken as early as age 59½); and you will owe income taxes on the withdrawal at your regular income tax rate for that year.

Roth Individual Retirement Account (IRA)

A Roth IRA, established with post-tax dollars, is essentially the hybrid IRA. A little pain up front for a lot of gain later on.

The Roth IRA has no deduction immediately in that year, unlike the traditional IRA. You pay taxes on that money in the year you put it in.

Yet, you owe no taxes on your withdrawals, whether on the basis of your contributions or the investment growth those dollars achieved.

If you can afford to start a Roth IRA early, you’ll accrue a lot of tax-free interest, even if you start out small. The magic of time is that, theoretically, the longer the money remains in a retirement account, the more interest compounds.

Roth Limits

With a Roth or traditional IRA, there is an annual contribution limit of $7,000 in 2024, or $8,000 if you’re over age 50. A Roth has additional income-based restrictions as well: For example:

A single filer may put in only the full amount if making no more than $146,000 (during the 2024 tax year).

Following that, you have the option to contribute at a reduced level, up to an annual income of $161,000 (in 2024) 1.

Note that the income limits are higher for married couples filing jointly.

Like a 401(k), some penalties accrue if you take money out of a Roth IRA before you reach retirement age – though there are a handful of exceptions that can come in handy in a pinch. For example, you can always pull out as much of your deposits as you want, penalty-free.

SIMPLE Individual Retirement Account (IRA)

SIMPLE IRA, a retirement arrangement for small-business employees – a cheaper alternative to the 401(k) for an employer to administer, it works much like the 401(k), with automatic payroll deductions for money you can sock away with the option of employer match.

That amount is capped at 3 per cent of an employee’s salary in a given year. A worker can contribute up to $16,000 to a SIMPLE IRA in 2024; workers aged 50 and older can put in an additional $3,500 in catch-up contributions that add $2,500 to the limit for that year, coming up to $19,500 in calendar year 2024.

How do you allocate the assets you’ve directed to your account? When you begin with a new retirement account, you have to decide how to invest the money. You will be offered a menu of choices, usually mutual funds or exchange‑traded funds (ETFs), with some offering options of a more hands‑off design, known as target‑date funds, which automatically alter your selections over time, putting more of your money into more conservative choices as you get closer to retirement age.

Stages of Retirement Planning

Below are some guidelines for successful retirement planning at different stages of your life.

Young Adulthood (Ages 21–35)

Such adults, launching themselves into the world, might not have much money to set aside, but they do have time, years of it, for those investments to accumulate – aka, compound.

Compounding allows interest to earn interest, and the more time you have, the more interest you’ll earn. If all you can afford is a $50 a month investment, it will be three times as much if you put it away at age 25 than it will be if you wait until age 45 to get going, because of compounding.

There is value to you in a retirement plan that allows you to pour more money into it at a later date – you might have the means then that you lack now – but you cannot possibly recover the lost component of time.

Early Midlife (Ages 36–50)

Indeed, early midlife brings with it financial pressures of mortgages, student loans, life insurance, and credit card bills.

Nonetheless, it’s key to keep saving. Thanks to both higher earnings and your remaining years of contribution and earn income, these decades are also some of the best years for aggressive saving.

At you’ll want to utilize any 401(k) matching your employer offers, and contribute as much as possible to a 401(k) or Roth IRA (you can have both at the same time). Roth IRA options for those who are ineligible can include a traditional IRA; it’s funded with pretax dollars, and the assets within it are tax-deferred, just like your 401(k).

A few employer-sponsored plans allow you to contribute after-tax dollars to a retirement savings account called a Roth (generally, you can contribute to a Roth only in a retirement plan not sponsored by your employer or you can contribute to an IRA Roth). You can allocate the same annual limit, but there is no income restriction like the Roth IRA.

Finally, don’t forget life insurance and disability insurance: if you’re young, you should buy enough of this to ensure that your family can survive without touching your retirement savings if you pass away or become disabled.

Later Midlife (Ages 50–65)

By the time you are near retirement, you will want your collection of investment accounts to normally be more conservative. As they get more conservative, the returns will be lower (still a better deal than most other investments). One of the most conservative investments is the Treasury bill (T-bill) Issued by the US Treasury.

However, this group has some advantages over other savers. Often these include higher pay as well as more spare cash than young savers.

It’s never too late to establish and make contributions to a 401(k) or an IRA. A nice feature about this stage of retirement planning is catch-up contributions. Starting at age 50, you can add an additional $1,000 a year to your traditional or Roth IRA and an additional $7,500 a year to your 401(k) in 2024.

Other Investments

And because of the tax incentives on the retirement savings vehicles you have already filled up, those investors in search of another vehicle to top off your nest egg can reasonably look at CDs, blue-chip stocks or real estate (eg, a vacation home to help supplement your retirement by allowing you to rent it out).

Likewise, you can start to get a general idea of what your Social Security benefits will be, and at what age it makes sense to start taking them. You can qualify for early benefits at age 62, whereas your full retirement age is 66.

It would also be a good time to buy long-term care insurance, which might pay for a nursing home or home care for you later on in life. If you don’t plan ahead to cover health-related costs – – especially the unexpected ones – – they’ll wipe out a significant portion of your savings.

You can actually get a sense of how much you’ll one day receive by checking out the Social Security Administration’s (SSA) website and its online estimator.

Other Aspects of Retirement Planning

And this is part of the reason why retirement planning is about far more than how much you’ll save and how much you’ll need. For better or worse, it’s also about your total financial picture.

Your Home

Your home is probably your biggest asset — and you can’t live in it twice. What does your plan for retirement include?

They viewed a home as an asset – until the housing market crash, that is, when planners began to regard the home as less of an asset than they once did. This caused many homeowners to retire saddled with mortgage debt instead of well above water. In between the purchase of a home and a homeowner’s retirement, nowadays, it’s popular for homeowners to take out home equity loans and, especially, home equity lines of credit (HELOCs).

And perhaps even selling your home and downsizing when you finally do retire, especially if you’re still living in the house where you raised the kids. It might be bigger than you like, and pricier, even if the kids have moved out.

One thing to do for your own retirement plan is to solve the question of the house in a non-sentimental way.

Estate Planning

Your estate plan covers what happens to your assets when you die. It must include a will stating what you want to happen.

But before you do, you had better put it in a trust, or at least some other structure that defendants it as much as possible from estate taxes.

By 2024, the first $13.61 million of an estate is free from federal estate taxes (up from $12.92 million for 2023), but there are few rich people who are willing to just hand their kids lots of cash outright.

And, down the road, changes might come in Congress to the estate tax; the amount of the estate tax drops to $5 million in 2026.

Tax Efficiency

When you are old enough to start taking money out, you pay too much in taxes anyway. Tax-deferred accounts are taxed at your ordinary income tax rate upon your retirement age when you start to take money out.

That’s another argument for the Roth IRA or the Roth 401(k), which both let you pay the taxes upfront as opposed to when you take the money out.

If you believe you will have more taxable income in retirement, a Roth conversion could help. If you don’t, you don’t want to pay more tax now by converting. An accountant or financial planner can help you walk through such tax considerations.

Medical Insurance

Medical expenses tend to rise with age. You will have government-guaranteed Medicare at very low cost to you as a beneficiary, but many supplement its coverage with a Medicare Advantage or Medigap policy.

The decisions you’ll have to make are numerous and sometimes so complex you might want to start finding out your options years before you quit work.

How Do I Start a Retirement Plan?

Planning for retirement is not difficult: all you have to do is save something from your monthly salary at the end of every month – any amount would do.

Step one is a tax-favoured retirement savings plan, either a 401(k) via work or an IRA at a bank or brokerage firm.

And you might want to talk to a professional, perhaps an IFA or even an investment broker to help get you on your way.

The earlier you start, the better, because your investments grow over time as they receive interest – and interest on interest.

Why Is a Retirement Plan So Important?

A retirement strategy helps you put away enough cash to enable you to live as you are living now when you retire. Sure it is possible you’ll still work half-time or you’ll find some freelance work here and there, and that will contribute to your income stream during retirement. But probably you won’t be able to maintain your lifestyle today as you get older. Social Security benefits can take you only so far. That is why having a viable long-term strategy for your financially happy retirement is paramount.

What Are the Main Pieces of a Retirement Plan?

A pension is a retirement plan: imagine that you have accumulated some money so that you can enjoy yourself in retirement. There are two main points to make:

Think about how to minimise taxes on the earnings from your retirement savings. You could save as much as possible in a Roth account or convert your traditional account into a Roth before you retire.

Perfect your estate planning. Everyone has loved ones they want to look after.

What Are the Options Beyond a 401(k)?

If you don’t have access to a 401(k) – say, you’re a freelancer set up as a sole proprietor – options include an individual retirement account, or IRA. But not only are IRA contribution limits low when compared with 401(k)s ($7,000 vs $23,000), it can be a serious pain trying to meet the due date by the 15th of April every year. For those who are self-employed, there’s also the solo 401(k). Then of course there’s annuity, which we definitely don’t recommend. (They’re opaque, illiquid, and expensive.) There’s always the brokerage account, though that won’t provide the tax advantage of the above-listed accounts.

The Bottom Line

Everyone dreams of the day they can stop working; the problem is that stopping work costs money. And that is retirement planning.

Whatever age you are, the earlier you can put money away, the less you’ll have to worry about trying to do so later on.