Your guide to retirement planning (2024)

For most people, the core of retirement planning is developing a way to replace income from work with a comparable income level in retirement so that you can maintain your current living standard and not run out of money in your post-working years.

Relevant in that planning are the lifestyle, health and family issues that will shape your retirement.

The importance of retirement planning: Your 20s, 30s and 40s

While many aspects of retirement planning can wait until your 50s and later, the most important part of retirement — saving — should start in your 20s and 30s and continue throughout your 40s. Because of the long-term effects of compounding, early saving and investing can help create a sizable retirement nest egg. A good rule of thumb is to save 10% to 15% of each paycheck. Maximizing your contribution to a workplace saving program, such as a 401(k) or 403(b) plan, in which many employers make matching contributions, effectively turbocharges your savings while at the same time lowering your current taxable income.

Also consider contributing to a traditional individual retirement account (IRA), which is funded with pre-tax dollars, or a Roth IRA (if you are eligible based on your income), funded with post-tax dollars. Other IRAs to consider, depending on your employment status, are a SIMPLE IRA, a way for small business owners and their employees to save for retirement; a SEP IRA, designed for the self-employed; and a solo 401(k), which is much like a SEP IRA but with additional administrative responsibilities.

When to start planning for your retirement: Your 50s and 60s

After age 50, retirement planning starts to become more detailed. A retirement start date is often top of mind, and health is often a major consideration. Many people retire “early” (in their late 50s or early 60s) because of health problems. Others are forced into retirement or quasi-retirement because they lose their job and cannot find comparable employment. For those in good health, who love their work and are able to continue working for as long as they wish, retirement may come later.

Determining the income stream needed for retirement, regardless of when it begins, is tricky. Here’s a way of thinking about it that may be helpful. Let’s say your current family income is $75,000 a year (about the median in the United States) and you would like the same income in retirement. If you could get $75,000 a year from a safe investment, such as a 30-year US Treasury bond yielding about 4.3%, how much of an investment would you need to generate that income? The answer: a little over $1.7 million.

Many families currently earning $75,000 a year would find $1.7 million a staggering sum to accumulate. But there are ways to plan on dealing with that as retirement approaches. To cut retirement expenses, which would decrease the nest egg needed to provide income, consider a change in housing — a major expense that can be lowered by downsizing. Selling one’s home (which adds to your nest egg) can also lower monthly expenses, as can moving to a less expensive part of the country, which many people wish to do in retirement anyway. Consider, too, that at 65 you generally must enroll in Medicare parts A (hospital insurance) and B (medical insurance), which could well result in much lower health insurance costs in retirement.

Social Security

On the income side, consider the value of your likely Social Security benefits, which can vary significantly depending on when you start taking benefits. Benefits can be claimed as early as age 62 but are reduced by as much as 30% from benefits received at your full retirement age (FRA), which could be 66, 67 or somewhere in between depending on your birth year. If you delay claiming benefits past your FRA, you receive an 8% boost to your benefit for every year you delay until age 70, when the extra credits end. The Social Security Administration offers an online calculator to help you estimate the benefit you will receive.

Similar to the income assurance provided by Social Security or a defined benefit pension, some retirees may benefit from converting some of their nest egg into a single-premium immediate annuity. In exchange for a lump-sum payment, this type of annuity will deliver monthly income for the rest of the purchaser’s life. By accepting a slightly lower monthly income, a spouse also can be covered for the rest of his or her life.

Income from retirement plans

In addition to Social Security, also consider the income you will receive from any defined benefit pension you may have (common in the public sector but increasingly rare in the private sector) and from withdrawals from tax-qualified defined contribution plans including 401(k)s and retirement accounts including IRAs. With the exception of Roth IRAs, where withdrawals of any size after age 59 1/2 can be made tax-free if the account is over five years old, withdrawals from qualified plans are subject to required minimum distribution (RMD) rules set by the Internal Revenue Service (IRS) based on age and must begin by age 73.

Safe withdrawal rates

In the financial planning profession, considerable time and attention has been paid to devising a safe withdrawal rate that can ensure someone doesn’t run out of money in retirement. After researching the issue, financial planner William Bengen published a paper in 1994 saying that a withdrawal rate of around 4% would carry someone through a 30-year retirement with a very high probability of not being depleted. The so-called 4% rule has since become a kind of mental benchmark, although planners tend to agree that retirees can probably safely withdraw a little more when the value of their assets go up and that it’s safer to withdraw less when assets decline. While not intentional, the IRS requirements for RMDs, based on life expectancies, largely parallel the rule, starting off slightly lower than 4% and rising slowly with age.

One way to increase income and reduce demands on retirement savings is to work slightly longer than planned or to work part-time in retirement. Earning even $150 a week could make a difference for some retirees. Moreover, many retirees find that retirement isn’t so much like a vacation but more a series of snow days — boring and isolating. They miss the stimulation and camaraderie of the workplace and actually enjoy being kept busy by working, even at a lesser job than their old one.

Taxes and legacy issues

Whatever the sources of income in retirement, it’s important not to neglect the tax impact of that income. Retirement isn’t tax-free and, after years of income-tax deferral in qualified savings plans, many retirees are surprised to discover that they may wind up paying just as much tax in retirement as they did while working — sometimes even more. They also may be subject to penalties if they don’t follow IRS rules, which can be confusing.

Finally, retirement planning should include whatever legacy plans you may have. This could include the best ways to set aside money for children and grandchildren as well as any philanthropic bequests you might like to make to favorite charitable, civic or cultural organizations.