Planning for Retirement

Retirement planning involves setting goals for your retirement income, then creating a strategy and taking concrete steps to achieve them. It requires you to identify your sources of income, set up a savings plan, estimate your expenses during retirement and to plan for unforeseen events.

What Is Retirement Planning?

Retirement planning allows you to create financial security while you’re working so that you can be financially comfortable when you retire.

More than six in 10 American workers — 61 percent — say they feel stressed about preparing for retirement, according to the 2020 Retirement Confidence Survey by the Employee Benefit Research Institute.

The survey found that people who have a retirement plan are “dramatically more likely” to say they have saved money for retirement. But only about four in 10 workers say they or their spouse have ever tried to figure out exactly how much money they will need to live comfortably in retirement.

When Should You Start Planning for Retirement?

Ideally, you should start retirement planning as soon as you start your first job. But it’s never too late to start.

Create a checklist to map out a route to your retirement. List every goal you need to meet to retire on time and with enough income.

Questions for a Retirement Planning Checklist
  • When should you retire? Choose the age at which you want to retire.
  • How many years do you expect to live after retirement?
  • What kind of lifestyle do you plan for yourself after retirement?
  • What sources of income do you expect to receive after retirement?
  • How long do you have to save for retirement?
  • What steps can you take to prepare for unpredictable risks such as inflation or recession?

Refer to your list from time to time to adjust your plans as needed. Take into account changes in employment, new family members and other major life events.

Three Stages of Retirement Planning

You will need to adjust your retirement planning throughout your lifetime as you earn more income, owe more debt, raise a family and experience other major life events.

Generally, there are three stages of retirement planning played out over your lifetime that loosely take into account all these changes. Each offers opportunities and challenges to your retirement goals.

What to Consider During the Three Stages of Retirement Planning
StageRisksOpportunitiesWhat You Should Do
Young Adulthood (21 to 35)People starting careers don’t have as much money to invest.You have more time for your investments to mature.
  • Take advantage of employer 401(k) plans.
  • Start an IRA or Roth IRA.
Early Midlife (36 to 50) Growing debt (mortgages, student loans, etc.) ties up much of your income. After establishing your career, you should have higher earning power.
  • Attempt to max out 401(k) and IRA contributions.
  • Purchase life and disability insurance.
Late Midlife (51 to 67)You have less time to begin retirement planning.You will likely reach the peak of your earning potential and may have many of your debts paid off.
  • Be conservative with your 401(k) and IRA investment options.
  • From age 50 onward, you can increase your maximum IRA contribution an extra $1,000 per year and your 401(k) an extra $6,000 per year.
  • Consider long-term care insurance to cover the cost of nursing home care.

Types of Retirement Investments

There are several types of retirement income and investment options to help you reach your retirement goals. Knowing how these work, and how much return you can expect from each, can help you lay out your strategy for retirement.

Types of Investment Options for Retirement Income
401(k) Plans
These are qualified profit-sharing plans that allow you to contribute some of your wages to an individual retirement account. The money you donate to your 401(k) is not taxed until you withdraw money from your plan. In addition, your employer is able to contribute additional money to your account.
403(b) Plans
Sometimes called a tax-sheltered annuity or a TSA plan, these are offered by some school districts and certain nonprofit organizations. Workers contribute to an individual account and their employers may also contribute to their account.
IRAs
An Individual Retirement Arrangement, or IRA, allows you to make contributions to a retirement account, without having to pay taxes on the income you contribute until you withdraw it from the IRA. The maximum amount you can contribute each year is limited.
Roth IRAs
They work similar to traditional IRAs, but your withdrawals in retirement are not taxed.
Pensions
This is a retirement plan that requires your employer to make contributions to a pool of money set aside for your retirement. Pension funds are invested on your behalf.
Annuities
Sold to individuals by private financial institutions, annuities are financial products that pay you a stream of income during retirement.
Social Security
Not an investment, but a financial insurance program administered by the federal government. While you work, you pay a portion of your income as taxes into the Social Security system. When you retire or become disabled, you, your spouse and your dependent children receive monthly Social Security benefits based on the amount of money you contributed.

Health Care in Retirement

Any type of retirement planning must take into account health costs in retirement. As you age, these costs will become a growing part of your budget.

While you’ll qualify for Medicare when you turn 65, it doesn’t cover all your health care costs. You can buy Medicare Supplement Insurance, sometimes called Medigap coverage, that can help you pay uncovered costs such as copayments, coinsurance and deductibles.

You need to be aware of premiums for Medicare Advantage plans in case you chose one of these Part C plans to cover some of these costs. These are different from Medigap plans.

And be aware that if you wait to buy an advantage plan when you turn 65, you’ll have to pay higher premiums for them if you buy one later on.

You’ll want to consider the cost of Medicare prescription drug coverage, called Part D. Original Medicare does not pay for drug costs.

Other Things to Consider Before You Retire

Retirement planning should also take into account other assets you may have, how you want to distribute your assets and how you want to take care of your family after you are gone.

You need to think about how these assets factor into your retirement and make sure you are maximizing your net worth into retirement.

Home and Real Estate

Your housing costs should be factored into your retirement planning. If you have paid off your mortgage or have a large amount of equity in your home, it can play a role in your overall financial well-being during retirement.

Working with a financial manager may help you understand different ways your house or other real estate can be used as a tool in your retirement planning.

You may also want to discuss whether it would be best for you to rent or own and what tax advantages or expenses you may have with real estate property.

Estate Planning

This allows you to determine how your assets will be distributed after you die. Without a plan, your loved ones could be left facing expensive and sometimes emotionally painful consequences.

Estate planning protects your loved ones by designating which of your heirs receives specific assets. It can spare your family from a huge tax bill and it can eliminate family disagreements over property.

Tax Efficiency

This involves withdrawing your investments in a way that minimizes your tax burden. When you invest in certain retirement accounts, such as IRAs and 401(k) plans, the taxes on that money are diverted — meaning you don’t pay taxes on the contributions until you start taking money out of your account.

A financial planner can help you with a strategy to withdraw that money in the most tax efficient means possible, giving you more bang for your buck.

Life Insurance

Life insurance plays a major role in any retirement plan. It helps your loved ones weather financial risk and unexpected costs in the event of your death, while helping them reach their financial goals after you are gone.

Last Modified: November 4, 2020

8 Cited Research Articles

  1. Employee Benefit Research Institute. (2020, April 23). 2020 Retirement Confidence Survey Summary Report. Retrieved from https://www.ebri.org/docs/default-source/rcs/2020-rcs/2020-rcs-summary-report.pdf?sfvrsn=84bc3d2f_7
  2. Internal Revenue Service. (2020, March 18). 401(k) Plans. Retrieved from https://www.irs.gov/retirement-plans/401k-plans
  3. Internal Revenue Service. (2020, January 9). Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
  4. Employee Benefit Research Institute. (2019, April 23). 2019 RCS Fact Sheet #1; Retirement Confidence. Retrieved from https://www.ebri.org/docs/default-source/rcs/2019-rcs/rcs_19-fs-1_confid.pdf?sfvrsn=c6553f2f_4
  5. Employee Benefit Research Institute. (2019, April 23). 2019 RCS Fact Sheet #2; Expectations About Retirement. Retrieved from https://www.ebri.org/docs/default-source/rcs/2019-rcs/rcs_19-fs-2_expect.pdf?sfvrsn=2a553f2f_4
  6. Employee Benefit Research Institute. (2019, April 23). 2019 RCS Fact Sheet #3; Preparing for Retirement in America. Retrieved from https://www.ebri.org/docs/default-source/rcs/2019-rcs/rcs_19-fs-3_prep.pdf?sfvrsn=3a553f2f_4
  7. Hopkins, M. (2017, April 27). Why Life Insurance Is Essential for Retirement Planning. Forbes. Retrieved from https://www.forbes.com/sites/jamiehopkins/2017/04/27/why-life-insurance-is-essential-for-retirement-planning/#311f149631cd
  8. U.S. Centers for Medicare & Medicaid Services. (n.d.). What’s Medicare Supplement Insurance (Medigap)? Retrieved from https://www.medicare.gov/supplements-other-insurance/whats-medicare-supplement-insurance-medigap