Retirement Planning

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Table of Contents What Is Retirement Planning? Understanding Retirement Planning Retirement Planning Goals It is never too early—or too late (although earlier is better)—to start retirement planning. In the simplest sense, retirement planning is the planning that one does to be prepared for life after paid work ends, not just financially but in all aspects of life. Other tax-advantaged retirement savings accounts include the traditional individual retirement account (IRA) and the Roth IRA. Many popular investment vehicles, such as individual retirement accounts (IRAs) and 401(k)s, allow retirement savers to grow their money with certain tax advantages. For those who have maxed out tax-incentivized retirement savings options, consider other forms of investment to supplement your retirement savings.

Retirement planning refers to financial strategies of the saving, the investment, and ultimately the distribution of money meant to sustain oneself during retirement.

What Is Retirement Planning?

Retirement planning is the process of determining retirement income goals, and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, sizing up expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to gauge whether the retirement income goal will be achieved. Some retirement plans change depending on whether you’re in, say, the United States, or Canada, which has its own system of workplace-sponsored plans.

Retirement planning is ideally a lifelong process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. That’s the best way to ensure a safe, secure — and fun — retirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.

Understanding Retirement Planning

In the simplest sense, retirement planning is the planning that one does to be prepared for life after paid work ends, not just financially but in all aspects of life. The nonfinancial aspects include lifestyle choices such as how to spend time in retirement, where to live, when to completely quit working, etc. A holistic approach to retirement planning considers all these areas.

The emphasis that one puts on retirement planning changes throughout different life stages. Early in a person’s working life, retirement planning is about setting aside enough money for retirement. During the middle of your career, it might also include setting specific income or asset targets and taking the steps to achieve them.

Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying in; instead, your decades of saving are paying out.

Retirement Planning Goals

Remember that retirement planning starts long before you retire — the sooner, the better. Your “magic number,” the amount you need to retire comfortably, is highly personalized, but there are numerous rules of thumb that can give you an idea of how much to save.

People used to say that you need around $1 million to retire comfortably. Other professionals use the 80% rule (i.e., you need enough to live on 80% of your income at retirement). If you made $100,000 per year, then you would need savings that could produce $80,000 per year for roughly 20 years, or a total of $1.6 million, including the income generated by your retirement assets. Others say most retirees aren’t saving anywhere near enough to meet those benchmarks and should adjust their lifestyle to live on what they have.

Start as early as you can on whatever method that you, and possibly a financial planner, use to calculate your retirement savings needs.

Employer-Sponsored Plans

Young adults should take advantage of employer-sponsored 401(k) or 403(b) plans. An up-front benefit of these qualified retirement plans is that your employer has the option to match what you invest, up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, then your employer may match that, depositing the equivalent sum into your retirement account, essentially giving you a 3% bonus that grows over the years.

However, you can and should contribute more than the amount that will earn the employer match if you are able to; some experts recommend upward of 10%. For the 2020 tax year, participants under age 50 can contribute up to $19,500 of their earnings to a 401(k) or 403(b), some of which may be additionally matched by an employer. This amount remains unchanged for 2021. Participants over age 50 can contribute an extra $6,500 per year as a catch-up contribution.

Additional advantages of 401(k) plans include earning a higher rate of return than a savings account (although the investments are not free of risk). Also, the funds within the account are not subject to income tax until you withdraw them. Since your contributions are taken off your gross income, this will give you an immediate income tax break. Those who are on the cusp of a higher tax bracket might consider contributing enough to lower their tax liability.

Roth IRAs

Other tax-advantaged retirement savings accounts include the traditional individual retirement account (IRA) and the Roth IRA. A Roth IRA can be an excellent tool for young adults, as it is funded with post-tax dollars. This eliminates the immediate tax deduction but avoids a bigger income tax bite when the money is withdrawn at retirement. Starting a Roth IRA early can pay off big time in the long run, even if you don’t have a lot of money to invest at first. Remember, the longer the money sits in a retirement account, the more tax-free interest is earned.

Roth IRAs have some limitations. The contribution limit for either type of IRA, Roth or traditional, is $6,000 a year, or $7,000 if you are over age 50, but a Roth has some income limits: A single filer can contribute the full amount only if they make $124,000 or less annually, as of the 2020 tax year, and $125,000 in 2021. After that, you can invest to a lesser degree, up to an annual income of $139,000 in 2020 and $140,000 in 2021. (The income limits are higher for married couples filing jointly.)

Like a 401(k), a Roth IRA has some penalties associated with taking money out before you hit retirement age. But there are a few notable exceptions that may be very useful for younger people or in case of emergency. First, you can always withdraw the initial capital you invested without paying a penalty. Second, you can withdraw funds for certain educational expenses, a first-time home purchase, healthcare expenses, and disability costs.

Once you set up a retirement account, the question becomes how to direct the funds. For those intimidated by the stock market, consider investing in an index fund that requires little maintenance, as it simply mirrors a stock market index like the Standard & Poor’s 500. There are also target-date funds designed to automatically alter and diversify assets over time based on your goal retirement age. Keep in mind that certain federal agencies and uniformed services offer thrift savings plans.

Stages of Retirement Planning

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

Young Adulthood (ages 21–35)

Those embarking on adult life may not have a lot of money free to invest, but they do have time to let investments mature, which is a critical and valuable piece of retirement savings. This is because of the principle of compound interest.

Compound interest allows interest to earn interest, and the more time you have, the more interest you will earn. Even if you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing until age 45, thanks to the joys of compounding. You might be able to invest more money in the future, but you’ll never be able to make up for lost time.

Early Midlife (ages 36–50)

Early midlife tends to bring a number of financial strains, including mortgages, student loans, insurance premiums, and credit card debt. However, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings.

People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs that their employers offer. They should also try to max out contributions to a 401(k) or Roth IRA (you can have both at the same time). For those ineligible for a Roth IRA, consider a traditional IRA. As with your 401(k), this is funded with pretax dollars, and the assets within it grow tax-deferred.

Some employer-sponsored plans offer a Roth option to set aside after-tax retirement contributions. You are limited to the same annual limit, but there are no income limitations as with a Roth IRA.

Finally, don’t neglect life insurance and disability insurance. You want to ensure that your family could survive financially without pulling from retirement savings should something happen to you.

Later Midlife (ages 50–65)

As you age, your investment accounts should become more conservative. While time is running out to save for people at this stage of retirement planning, there are a few advantages. Higher wages and potentially having some of the aforementioned expenses (mortgages, student loans, credit card debt, etc.) paid off by this time can leave you with more disposable income to invest.

And it’s never too late to set up and contribute to a 401(k) or an IRA. One benefit of this retirement planning stage is catch-up contributions. From age 50 on, you can contribute an additional $1,000 a year to your traditional or Roth IRA and an additional $6,500 a year to your 401(k).

For those who have maxed out tax-incentivized retirement savings options, consider other forms of investment to supplement your retirement savings. Certificates of deposit (CDs), blue-chip stocks, or certain real estate investments (like a vacation home that you rent out) may be reasonably safe ways to add to your nest egg.

You can also begin to get a sense of what your Social Security benefits will be and at what age it makes sense to start taking them. Eligibility for early benefits begins at age 62, but the retirement age for full benefits is 66. The Social Security Administration offers an online calculator. This is also the time to look into long-term care insurance, which will help cover the costs of a nursing home or home care should you need it in your advanced years. Such health-related expenses can decimate your savings if not properly planned for.

Other Aspects of Retirement Planning

Retirement planning includes a lot more than simply how much you will save and how much you need. It takes into account your complete financial picture.

Your Home

For most Americans, the single biggest asset they own is their home. How does that fit into your retirement plan? In the past, a home was considered an asset, but since the housing market crash, planners see it as less of an asset than they once did. With the popularity of home equity loans and home equity lines of credit, many homeowners are entering retirement in mortgage debt instead of well above water.

Once you reach retirement, there’s also the question of whether you should sell your home. If you still live in the home where you raised multiple children, it might be larger than you need, and the expenses that come with holding onto it might be considerable. Your retirement plan should include an unbiased look at your home and what to do with it.

Estate Planning

Your estate plan addresses what happens to your assets after you die. It should include a will that lays out your plans, but even before that, you should set up a trust or use some other strategy to keep as much of it as possible shielded from estate taxes. The first $11.58 million of an estate is exempt from estate taxes, but more and more people are finding ways to leave their money to their children in a way that doesn’t pay them in a lump sum.

Tax Efficiency

Once you reach retirement age and begin taking distributions, taxes become a big problem. Most of your retirement accounts are taxed as ordinary income tax. That means you could pay as much as 37% in taxes on any money that you take from your traditional 401(k) or IRA. That’s why it’s important to consider a Roth IRA or a Roth 401(k), as both allow you to pay taxes up front rather than upon withdrawal. If you believe you will make more money later in life, then it may make sense to do a Roth conversion. An accountant or financial planner can help you work through such tax considerations.


A key component of retirement planning is protecting your assets. Age comes with increased medical expenses, and you will have to navigate the often-complicated Medicare system. Many people feel that standard Medicare doesn’t provide adequate coverage, so they look to a Medicare Advantage or Medigap policy to supplement it. There’s also life insurance and long-term care insurance to consider.

Another type of policy issued by an insurance company is an annuity. An annuity is much like a pension. You put money on deposit with an insurance company that later pays you a set monthly amount. There are many different options with annuities and many considerations when deciding if an annuity is right for you.

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Terms in Retirement Planning

408(k) Plan

A 408(k) account is an employer-sponsored, retirement savings plan similar to but less complex than a 401(k). read more


AARP is America's leading organization for people age fifty and older, providing member benefits, marketing services, and lobbying on their behalf. read more

Accrued Benefits

Accrued benefits are those benefits earned or accumulated by employees that are not paid immediately, such as sick pay, paid time off, or employee stock plans. read more

Accrued Monthly Benefit

An accrued monthly benefit is the dollar amount of the pension that an employee can expect to receive after retiring. read more

Active Participant Status

Active participant status is a reference to an individual's participation in various employer-sponsored retirement plans. read more

Actual Deferral & Actual Contribution Percentage Tests

The Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests assure that 401(k) plans don't favor higher-paid employees. read more

Additional Voluntary Contribution (AVC)

An additional voluntary contribution is a payment to a retirement savings account that exceeds the amount that the employer pays as a match. read more

Annual Addition

The annual addition is the total dollar amount contributed in a given year to a participant's retirement account under a defined-contribution plan. read more

Auto Enrollment Plan

An auto enrollment plan is a retirement plan in which worker's are automatically enrolled.  read more

Automatic Rollover

Automatic rollover refers to the transfer of account assets into a new investment vehicle with no action required by the account holder. read more

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