One Sunday afternoon, I caught up with a friend who was turning 60. She told me she wished she had paid more attention to her retirement savings when she was younger. She didn’t realize how fast time would fly, and now she was worried she might not be able to travel as much as she had hoped in her golden years.
That conversation made me realize just how often we delay thinking about our future selves. According to the Transamerica Center for Retirement Studies, around 40% of workers in the U.S. believe they’re behind on retirement savings. But the truth is, whether you’re 25 or 55, it’s never too early or too late to start retirement planning and set up a personal finance strategy that helps you live comfortably in retirement.
Let’s walk through how to plan for retirement with confidence instead of fear.
Key Takeaways
- Start saving as early as possible. The earlier you begin, the more time your money has to grow through compound interest.
- Aim around 70% to 80% of your pre-retirement income or save 25 times your expected annual expenses.
- Take advantage of retirement accounts to maximize tax benefits and employer contributions.
- Don’t rely on one type of asset, and spread your savings across different assets.
Seven Tips for Retirement Planning
1. Figure Out Your Target Amount
We often wonder how much we actually need to retire. Some financial planners recommend saving at least 70% to 85% of your current annual income for each retirement year. Others like using the “25x rule,” which involves multiplying your expected yearly expenses by 25.
For example, if you expect to spend $50,000 a year in retirement, this rule suggests aiming for about $1.25 million in total savings. According to Vanguard, the median 401(k) balance for Americans in their 50s is around $60,763. So, if your savings fall short of this target, don’t feel alone.
You also want to consider factors like travel, hobbies, and housing to figure out your target amount. Doing the math upfront may feel like too much, but careful financial planning for retirement makes sure you won’t be caught off guard by unexpected expenses later.
2. Start Early, Even if It Feels Small
Time is truly your greatest ally when it comes to retirement planning and saving. Compound interest lets your money earn returns, and then those returns can earn returns of their own. So, starting early will give your money more time to grow and retire with a larger nest egg. Even if you can only set aside a modest amount at first, getting into the habit can pay off in a major way.
Let’s say you begin saving $300 a month at 25 years old and invest in a fund that averages a 7% annual return. You might reach almost a million dollars by age 65. Waiting until 35 might mean you’d have to contribute significantly more each month to catch up.
3. Take Advantage of Any “Free Money” from Employers
Employer-sponsored plans like 401(k)s let you invest part of your paycheck before taxes. Some companies even match your contributions up to a certain percentage, with an average of 4.8%.
Even if your employer doesn’t match, a 401(k) can still lower your current taxable income, which means you get to keep more of each paycheck. Over the long haul, the money you don’t pay in taxes each year can make a noticeable difference in your retirement balance.
4. Diversity Your Investments to Balance Risk
No single investment is perfect for anyone, so it’s wise to have a variety that can weather different market conditions. Stocks can offer higher returns but carry more risk, especially in the short term. Bonds often provide more stability. Real estate can act as a hedge against inflation, and some folks choose to invest in Real Estate Investment Trusts (REITs) if owning property outright is not in the budget.
A diversified portfolio can help smooth out the market’s ups and downs. Some may prefer to own a mix of mutual funds and exchange-traded funds (ETFs) in their personal financial plan to spread their money across many companies at once. This can help lower the impact if one sector hits a rough patch.
Picking the right balance depends on your age, your comfort risk, and how soon you want to retire. Check with a financial advisor for personalized guidance.
5. Factor in Healthcare Costs Early
Think about health expenses because they can climb quickly. According to the Employee Benefit Research Institute, a 65-year-old couple may need around $351,000 in savings to cover healthcare costs throughout retirement. This number can vary based on medical needs, and there are ways to prepare.
If you have access to a Health Savings Account (HSA) through a high-deductible insurance plan, you can set aside money before taxes and even invest those contributions. Unlike a Flexible Spending Account (FSA), your HSA balance can roll over year to year, and you won’t pay taxes on the earnings when you use them for qualified medical expenses, like doctor visits, prescriptions, and certain long-term care needs.
6. Tackle High-Interest Debt Before It Drains You
Debt can be a big drain on your monthly budget, and it can keep you from investing as much as you’d like if credit cards or student loans carry higher interest rates. You might spend thousands more over time.
A study by the Consumer Financial Protection Bureau found that the average interest rate on credit cards can easily exceed 22.8%, which can outpace the typical returns you might earn in your investment account.
Paying costly debts early can free up more money for your future self. Mortgages can be a bit trickier because they usually have lower rates. Some retirees choose to pay off the mortgage completely before leaving the workforce, but that’s not always necessary, depending on your overall plan for retirement.
The main point is that you don’t want large debt payments to weigh you down when you should be enjoying your leisure years.
7. Keep Inflation on Your Radar
Inflation might sound like a boring topic, but it has a big effect on how far your money goes. For example, if prices rise by 3% a year, your favorite $3 cup of coffee might cost around $5 in less than 20 years. This means that if you’re aiming for $50,000 a year in retirement income, you could actually need a lot more to maintain the same lifestyle.
That’s why having at least some portion of your portfolio in growth-oriented assets can help, as they can potentially outpace inflation and protect your buying power. Inflation rates can vary. Some years, they’re under 2%; in others, they might spike above 5%. Even though the U.S. Bureau of Labor Statistics publishes inflation data, no one can predict these numbers perfectly.
Types of Retirement Plans
Retirement financial planning may feel overwhelming, but understanding the different types of retirement accounts can help you a lot.
Traditional IRA
With a traditional individual retirement account (IRA), you contribute pre-tax dollars, which can reduce your taxable income for the year. The money grows tax-deferred, meaning you don’t pay taxes on earnings until you withdraw them in retirement. For 2025, you can contribute up to $7,000 if you’re under 50 and $8,000 if you’re 50 or older.
Anyone with earned income can contribute to a traditional IRA, but whether you can deduct those contributions depends on your income, tax filing, and whether you or your spouse have a workplace retirement plan. If neither you nor your spouse has a workplace plan, you can deduct the full amount. Otherwise, deductions phase out based on income.
Roth IRA
Unlike a traditional IRA, contributions are made with after-tax dollars, so there’s no immediate tax break. However, your money grows tax-free, and qualified withdrawals in retirement are also tax-free. The contribution limits are the same as a traditional IRA — $7,000 if you’re under 50 and $8,000 if you’re 50 or older.
To qualify for a full contribution, single filers must earn less than $150,000, while married couples filing jointly must earn under $236,000.
Traditional 401(k)
401(k) plans are employer-sponsored plans allowing you to save for retirement directly from your paycheck. Contributions are made with pre-tax dollars, lowering your taxable income now. Taxes are paid upon withdrawal in retirement. For 2025, you can contribute up to $23,500. If you’re 50 or older, you can add a “catch-up” contribution of $7,500, totaling $31,000. If you’re between 60 and 63, you get an extra boost with a $34,750 limit. The total combined employee and employer contribution cap is $70,000.
New rules require employers to automatically enroll employees at a minimum 3% contribution. Part-time workers are now eligible after two years of working more than 500 hours annually. Required minimum distributions (RMDs) start at age 73.
Roth 401(k)
A Roth 401(k) is similar to a Roth IRA but with higher contribution limits and no income restrictions. Contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free as long as you’re 59.5 years old and have had the account for at least five years.
Contributions are up to $23,500 for 2025, plus the $7,500 catch-up. And if you’re between 60 and 63, you can contribute up to $34,750. The total combined contribution is the same as a traditional 401(k).
Unlike Roth IRAs, there are no income limits, so anyone with access to a Roth 401(k) can contribute. Required minimum distributions (RMDs) start at age 73, but you can roll the balance into a Roth IRA to avoid them.
SEP IRA
A simplified employee pension IRA is designed for small business owners and self-employed individuals. It allows employers to contribute to traditional IRAs set up for employees. Contribution limits are up to 25% of an employee’s compensation or $70,000, whichever is less.
Any employer, including self-employed individuals, can establish a SEP. Contributions must be made equally for all eligible employees.
SIMPLE IRA
A savings incentive match plan for employees IRA is a plan that allows both employer and employee contributions. Employees can contribute up to $16,500, with a catch-up contribution of $3,500 if 50 or older. Employers are required to match contributions up to 3% of the employee’s compensation.
Employers with 100 or fewer employees who earned $5,000 or more during the preceding calendar year can establish a SIMPLE IRA.
Retirement Planning FAQ
What Are the First Steps of Retirement Planning?
Start by understanding how much you will need in retirement. Look at your current expenses and estimate what they’ll be when you stop working. Next, check what savings, investments, or retirement accounts you already have. If you don’t have one, open a 401(k) through work or an IRA and start contributing.
When Should I Start Planning for Retirement?
The earlier you start, the more time your money has to grow. If you start saving in your 20s or 30s, you can contribute smaller amounts and still build a large nest egg. If you’re starting in your 40s or 50s, you’ll need to save more aggressively, but it’s still possible to retire comfortably.
How Much Should I Save for Retirement?
A good goal is to save 70% to 89% of your pre-retirement income per year. Another common rule is to save 25 times your expected annual expenses. To stay on track, aim to save at least 15% of your income each year, including employer contributions.
What is the $1,000-a-month Rule for Retirement?
This rule suggests that for every $240,000 saved, you can withdraw $1,000 per month in retirement, assuming a 5% withdrawal rate each year. So, if you want $3,000 per month, you’d need to save $720,000.
What Mistakes to Avoid in Retirement?
One of the biggest retirement planning mistakes is not saving enough or relying too much on Social Security, which won’t cover all your expenses. Another mistake is being too conservative with investments too early. Withdrawing money too quickly and underestimating healthcare costs are also common mistakes to avoid.
Sources
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Employee Benefit Research Institute. New Research Report Finds Projected Savings Medicare Beneficiaries Need for Health Expenses Increased Again in 2023. Accessed February 27, 2025.
National Institutes of Health. “The Difference Between a Flexible Spending Account (FSA) and a Health Savings Account (HSA).” NIH HR Benefits News. Accessed February 27, 2025.
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