- Written by Terry Turner
Senior Financial Writer and Financial Wellness Facilitator
Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).Read More
- Edited ByMatt Mauney
Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.Read More
- Financially Reviewed ByEbony J. Howard, CPA
Ebony J. Howard, CPA
Credentialed Tax Expert at Intuit
Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation. She specializes in analyzing financial information in the health care, banking and real estate sectors.Read More
- Published: April 22, 2020
- Updated: October 25, 2023
- 8 min read time
- This page features 8 Cited Research Articles
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 % — 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.Is Your Retirement Plan on Track?Explore annuity solutions that align with your planning needs.
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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
Stage Risks Opportunities What 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.
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- 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 $6,500 per year.
- Consider long-term care insurance to cover the cost of nursing home care.
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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 IncomeReviewing Your Retirement Plan
- 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.
- 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.
- 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.
- 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.
Before you retire, it’s important to consider your financial situation and create a budget so you know what your post-retirement income will be. Additionally, it is wise to research banking products designed specifically for those interested in low-risk investments. Choosing the right products can save you money while ensuring your financial security.
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.
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.
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.
It’s crucial that you have a good understanding of the questions to ask your financial advisor regarding tax-efficient withdrawal strategies. This knowledge, paired with the expertise of a financial planner or fiduciary, can help you get the most out of your retirement savings.
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.
Financial literacy is a crucial component of retirement and longevity planning. Understanding financial concepts such as budgeting, saving, investing, managing debt and planning for the uncertainty of the length of retirement is essential to achieving long-term financial stability.
Without financial literacy, it’s easy to make mistakes that can have a significant impact on your retirement savings, such as overspending, failing to save enough, or making poor investment decisions.
By taking the time to educate yourself on financial matters, you’ll be better equipped to navigate the complexities of retirement planning and make informed decisions that can help you achieve your financial goals.
Considering demand-pull inflation is important when planning for retirement because it can significantly reduce the value of savings over time. This means that as prices rise, the purchasing power of retirement savings decreases. It is essential to factor in inflationary pressures when considering the amount of retirement savings needed to maintain a comfortable lifestyle in the future.Advertisement
Connect With a Financial Advisor InstantlyLast Modified: October 25, 2023
8 Cited Research Articles
- 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
- Internal Revenue Service. (2020, March 18). 401(k) Plans. Retrieved from https://www.irs.gov/retirement-plans/401k-plans
- Internal Revenue Service. (2020, January 9). Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
- 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
- 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
- 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
- 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
- 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
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