Free Guide to Preparing for Retirement Planning Steps

Understanding Retirement Planning Basics

Retirement planning means thinking ahead about how you will pay for living expenses when you stop working. Most people retire around age 65 or 67, though some retire earlier or later. The main question retirement planning answers is: where will your money come from after you stop earning a paycheck?

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According to the U.S. Social Security Administration, about 65 million people received Social Security benefits in 2023. However, Social Security replaces only about 40 percent of the average worker's pre-retirement income. This means most people need additional sources of money during retirement.

Common sources of retirement income include:

• Social Security payments from the government
• Pension payments from employers
• Personal savings and investments
• Part-time work during early retirement years
• Rental income from property

Starting retirement planning early makes a real difference. A person who saves $200 per month starting at age 25 can accumulate significantly more money by age 65 than someone who starts saving at age 45, even if both save the same monthly amount. This happens because money invested has time to grow through compound interest—meaning your money earns returns, and those returns earn their own returns.

Many people underestimate how long they will live in retirement. According to the Social Security Administration, a 65-year-old man today has about a 50 percent chance of living past 85, and a 65-year-old woman has about a 50 percent chance of living past 88. Some will live well into their 90s. This means your retirement savings may need to last 20, 25, or even 30 years.

Practical Takeaway: Begin by writing down your current age, expected retirement age, and estimated life expectancy based on your family health history. Subtract your retirement age from your life expectancy to understand how many years you may need to fund. This simple calculation helps frame why planning matters.

Calculating Your Retirement Needs

Calculating how much money you will need in retirement involves understanding your expected spending. Many financial guides suggest you will need 70 to 80 percent of your current annual income to maintain your lifestyle in retirement. However, your actual needs depend on your personal situation.

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Some expenses decrease in retirement. You may no longer pay Social Security or Medicare taxes on work income. If you own your home outright, you may have no mortgage payment. Commuting costs disappear. However, some expenses increase. Healthcare costs typically rise significantly after age 65. According to Fidelity Investments, a 65-year-old couple retiring in 2023 can expect to spend approximately $315,000 on healthcare throughout retirement, not including long-term care.

To estimate your retirement needs, follow this approach:

• List all current monthly expenses (housing, food, utilities, transportation, insurance, entertainment)
• Identify which expenses will decrease (commuting, work clothing, taxes)
• Identify which expenses will increase (healthcare, travel, hobbies)
• Calculate your estimated monthly retirement expenses
• Multiply by 12 to get annual spending
• Multiply by the number of years you expect to live in retirement

For example, consider a 45-year-old earning $60,000 annually and spending $4,500 per month ($54,000 per year). They plan to retire at 67 and potentially live to 90—about 23 years of retirement. If they estimate retirement spending at 75 percent of current levels, they need $40,500 annually, or $931,500 over 23 years. This figure does not account for inflation, which typically increases costs by 2 to 3 percent yearly.

Inflation deserves special attention. The U.S. Bureau of Labor Statistics reported that prices increased an average of 3.1 percent per year over the past 30 years. This means something costing $100 today will likely cost about $248 in 30 years, assuming the same inflation rate. When calculating long-term retirement needs, multiply your annual expenses by an inflation factor. A simple approach: if you retire in 20 years, add about 60 percent to your current expense estimate as a rough inflation adjustment.

Practical Takeaway: Create a detailed expense worksheet listing every monthly cost. Separate expenses into three categories: those that will decrease in retirement, those that will stay the same, and those that will increase. This reveals your true retirement spending target and shows where you have the most control.

Exploring Retirement Income Sources

Building retirement income involves understanding the different buckets of money available to you. Most retirees rely on a combination of sources rather than depending on any single stream.

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Social Security: This is a federal insurance program that provides monthly payments to eligible workers at retirement age. The amount you receive depends on your earnings history and the age you start receiving benefits. Workers can claim Social Security as early as age 62, but the monthly payment is reduced if claimed before full retirement age (which ranges from 66 to 67 depending on birth year). The Social Security Administration reports that the average monthly benefit for retired workers was $1,827 in January 2024. Waiting to claim until age 70 results in a significantly higher monthly payment—roughly 32 percent more than claiming at full retirement age.

Employer Pensions: Some employers, particularly government agencies and large corporations, offer traditional pension plans. These provide guaranteed monthly payments based on salary history and years of service. However, the Bureau of Labor Statistics indicates that only about 16 percent of private-sector workers have access to traditional pensions today, down from about 60 percent in the 1980s. Many employers now offer 401(k) or similar retirement plans instead, where employees contribute their own money.

Personal Retirement Savings Plans: These accounts allow you to save money with tax advantages. Common types include:

• 401(k) plans through employers—you contribute pre-tax dollars, and some employers match a portion of contributions
• Individual Retirement Accounts (IRAs)—personal accounts where you can save up to $7,000 per year (2024 limit)
• Roth IRAs—accounts where you contribute after-tax dollars but withdrawals in retirement are tax-free
• SEP-IRAs and Solo 401(k)s—for self-employed individuals

Investment Accounts and Savings: Money in regular savings accounts, stocks, bonds, mutual funds, and real estate investments can fund retirement. Unlike retirement accounts, these have no contribution limits but also no tax advantages.

Part-Time Work and Business Income: Many retirees continue working part-time or running small businesses. The AARP reports that about 40 percent of people over 65 work or are looking for work. Part-time income reduces the amount you need from savings and allows your investments more time to grow.

Practical Takeaway: Make a list of every retirement income source you may have access to, including estimated monthly amounts. Include Social Security (you can view your projected benefit at ssa.gov), any pension, current retirement account balances, and non-retirement savings. This shows your total retirement income picture and identifies gaps you need to address.

Building Your Retirement Savings Strategy

Creating a savings strategy involves deciding how much to save, where to save it, and how to invest the money. The goal is accumulating enough that your total retirement income sources meet your needs.

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Financial advisors often reference the "savings rate"—the percentage of income you set aside for retirement. A common target is 10 to 15 percent of gross income. However, the right rate for you depends on how much you have already saved, your age, and your retirement goals. Someone who begins saving at 25 might reach their goal with 10 percent annually, while someone starting at 45 may need 20 percent or more.

The power of starting early appears clearly in this comparison: A 25-year-old investing $250 monthly for 40