How to Plan for Retirement: A Step-by-Step Guide

Retirement planning is one of the most consequential financial tasks you will ever undertake, yet surveys consistently show that most Americans feel underprepared. The good news is that a clear, step-by-step approach makes the process manageable regardless of your current age or savings balance. This guide walks you through every phase of retirement planning, from estimating expenses and setting a savings target to choosing investments, optimizing Social Security, and creating a withdrawal strategy.

Why Start Retirement Planning Now?

Time is the single most powerful variable in retirement planning. Thanks to compound interest, money invested earlier has dramatically more growth potential than money invested later. A 25-year-old who invests $500 per month at a 7% average annual return accumulates approximately $1,199,000 by age 65. A 35-year-old making the same contributions accumulates only about $567,000, less than half, despite investing for only 10 fewer years.

The math is unforgiving: those first 10 years of contributions at age 25 to 35 are worth more than the 20 years of contributions from age 45 to 65, because the early money has the longest runway to compound. Whatever your age, starting today is always better than starting tomorrow.

Step 1: Estimate Your Retirement Expenses

Before you can set a savings target, you need a realistic estimate of what retirement will cost. Many expenses decrease in retirement (commuting, work clothes, payroll taxes), but others increase (healthcare, travel, hobbies). Your first task is to build a retirement budget.

The 80% Rule and Beyond

A common starting point is the 80% rule: plan to spend 80% of your pre-retirement income each year in retirement. If you earn $100,000 before retiring, budget for $80,000 per year. This rule accounts for the elimination of payroll taxes (7.65%), retirement contributions (10% to 20%), and reduced work-related expenses.

However, the 80% rule is a rough guideline. Your actual needs depend on several factors:

• Housing: If your mortgage is paid off by retirement, housing costs drop significantly. If you plan to relocate, research costs in your target area.
• Healthcare: Medicare begins at age 65 but does not cover everything. Budget $6,000 to $8,000 per year per person for premiums, deductibles, and out-of-pocket costs.
• Travel and hobbies: Many retirees spend more on leisure in their first decade of retirement. Budget 10% to 15% of annual expenses for activities.
• Taxes: Withdrawals from traditional 401(k) and IRA accounts are taxed as ordinary income. Plan for a 15% to 25% effective tax rate on retirement income.
• Inflation: At 3% annual inflation, expenses double approximately every 24 years. A 65-year-old retiring today may need twice the income by age 89.

Step 2: Calculate Your Retirement Savings Target

The 25x Rule and Safe Withdrawal Rate

The 25x rule provides a quick savings target: multiply your desired annual retirement spending by 25. This is derived from the 4% safe withdrawal rate, which research suggests allows a diversified portfolio to last at least 30 years with high probability.

The Social Security offset column shows how Social Security income reduces the amount you need to save personally. If you expect $28,000 per year in Social Security benefits and need $60,000 per year total, you only need to withdraw $32,000 from your portfolio, requiring approximately $800,000 in savings rather than $1,500,000.

Step 3: Maximize Tax-Advantaged Accounts

Tax-advantaged retirement accounts are the most powerful savings vehicles available because your money grows without annual tax drag. In a taxable account, you pay taxes on dividends and capital gains each year, reducing your compounding base. In a 401(k) or IRA, the full amount compounds tax-deferred (traditional) or tax-free (Roth).

2026 Retirement Account Contribution Limits

The optimal contribution strategy is: first, contribute enough to your 401(k) to capture the full employer match (this is free money with an instant 50% to 100% return). Second, maximize your IRA or Roth IRA. Third, return to your 401(k) and maximize the remaining contribution room. Finally, if you have a high-deductible health plan, maximize your HSA, which offers a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Step 4: Choose the Right Investment Allocation

Your asset allocation, the mix of stocks, bonds, and other investments, is the most important investment decision you will make. Research consistently shows that asset allocation determines roughly 90% of long-term portfolio performance, far more than individual stock selection or market timing.

Age-Based Allocation Guidelines

Target-date funds automate this glide path, gradually shifting from stocks to bonds as you approach retirement. They are an excellent choice for investors who prefer a hands-off approach. Choose a fund with a target date close to your expected retirement year (for example, a 2060 fund if you plan to retire around 2060).

Step 5: Plan Your Social Security Strategy

Social Security is likely the largest single source of guaranteed retirement income you will receive. Your claiming age dramatically affects your lifetime benefits. Each year you delay claiming between age 62 and 70 increases your monthly benefit, and the increase is permanent and adjusted for inflation.

Social Security Benefit by Claiming Age

The following table shows the approximate monthly benefit for someone with a full retirement age of 67 and a full benefit of $2,500 per month:

For married couples, the higher earner should generally delay to age 70 when possible. The delayed credits produce a larger benefit not only for the higher earner but also for the surviving spouse, who inherits the larger of the two benefits. The Social Security Fairness Act, signed in January 2025, repealed the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), removing benefit reductions that previously affected workers with both public pensions and Social Security coverage.

Step 6: Create a Withdrawal Strategy

How you draw down your savings in retirement matters as much as how you built them. A thoughtful withdrawal strategy minimizes taxes and maximizes the longevity of your portfolio.

The standard approach is to withdraw from taxable accounts first (brokerage accounts), then tax-deferred accounts (traditional 401(k) and IRA), and finally tax-free accounts (Roth IRA and Roth 401(k)). This sequence allows your tax-advantaged accounts the longest possible time to grow.

However, a more tax-efficient strategy involves strategic Roth conversions in low-income years between retirement and age 72 (when required minimum distributions begin). Converting some traditional IRA funds to Roth during years when your income is in the 12% or 22% tax bracket can save substantial taxes compared to being forced to take large RMDs later at potentially higher rates.

Real-World Retirement Planning Examples

Example 1: Early Career Saver at 28

Mia is 28, earns $75,000 per year, and her employer matches 50% of 401(k) contributions up to 6% of salary. She contributes $750 per month (12% of salary) to her 401(k), capturing the full employer match of $187.50 per month. With a combined monthly contribution of $937.50 invested at a 7% average annual return, Mia's 401(k) is projected to reach approximately $2,100,000 by age 65. Her early start means compound interest does the heavy lifting: she contributes roughly $415,000 of her own money, the employer adds about $83,000, and investment growth generates approximately $1,600,000.

Example 2: Mid-Career Catch-Up at 45

Carlos is 45 with $180,000 saved in his 401(k) and a household income of $130,000. He realizes he needs to accelerate his savings. Carlos increases his 401(k) contribution to $1,800 per month, and his employer adds $250 per month in matching contributions. He also opens a Roth IRA and contributes $625 per month ($7,500 per year). At 7% average annual returns, his projected balance at age 65 is approximately $1,350,000 across all accounts. When he turns 50, he increases his 401(k) by the additional $8,000 catch-up contribution allowed in 2026, adding roughly $667 per month to his savings.

Example 3: Pre-Retiree Fine-Tuning at 58

Patricia is 58 with $850,000 in her 401(k) and plans to retire at 65. She earns $110,000 and maximizes her 401(k) with the catch-up contribution: $24,500 + $8,000 = $32,500 per year. When she turns 60, she takes advantage of the SECURE 2.0 super catch-up provision, contributing $24,500 + $11,250 = $35,750 per year for ages 60 through 63. At 6% average annual returns (she has shifted to a more conservative allocation), Patricia projects a balance of approximately $1,450,000 at age 65. Combined with an estimated $30,000 per year in Social Security at age 67, she is well-positioned for a comfortable retirement.

Common Retirement Planning Mistakes

• Not contributing enough to capture the full employer match. Leaving employer match money on the table is literally turning down free money. Even if you can only afford the minimum to get the full match, do that first before paying off low-interest debt.
• Investing too conservatively when young. A 25-year-old with a 100% bond portfolio misses decades of stock market growth. Young investors have time to recover from market downturns, making a stock-heavy allocation the mathematically optimal choice.
• Withdrawing from retirement accounts early. Taking a 401(k) withdrawal before age 59.5 triggers a 10% penalty plus ordinary income taxes, often consuming 30% to 40% of the withdrawal. Cash out a $50,000 401(k) early, and you may only receive $30,000 to $35,000 after taxes and penalties.
• Ignoring healthcare costs. Healthcare is often the largest retirement expense after housing. Budget at least $6,000 to $8,000 per person annually for Medicare premiums, supplemental insurance, and out-of-pocket costs. Long-term care costs can be catastrophic without insurance or savings.
• Underestimating how long retirement lasts. A 65-year-old couple has a 50% chance that at least one partner will live past age 90. Plan for a 25 to 30 year retirement, not a 15 to 20 year one.
• Failing to plan for taxes in retirement. Traditional 401(k) and IRA withdrawals are taxed as ordinary income. Required minimum distributions starting at age 73 can push you into a higher tax bracket. Strategic Roth conversions during lower-income years between retirement and RMD age can reduce your lifetime tax burden significantly.

Last updated: February 23, 2026