Retirement Planning Guide - Save for and Secure Your Future

Table of contents

Introduction

Retirement planning is one of the most important financial decisions you’ll make. Starting early and planning systematically allows you to build a sufficient nest egg to enjoy your retirement years without financial stress.

With proper planning, you can determine how much you need to save, choose the right retirement accounts, and develop a sustainable withdrawal strategy for retirement.

Retirement Planning Fundamentals

Why Retirement Planning Matters

• Inflation Impact - $30,000 today may need $60,000+ in 30 years
• Longevity Risk - Increasing lifespans mean longer retirements
• Social Security Uncertainty - Benefits may be reduced
• Healthcare Costs - Medical expenses often increase with age
• Independence - Build wealth to live on your terms

When to Start

The Earlier the Better:

• Age 25: Need to save ~$500/month for $2M at 65
• Age 35: Need to save ~$1,000/month for $2M at 65
• Age 45: Need to save ~$2,000/month for $2M at 65
• Age 55: Need to save ~$4,500/month for $2M at 65

Power of Time: Starting 10 years earlier cuts required monthly savings by 50%

Calculating Your Retirement Number

Step 1: Estimate Annual Retirement Expenses

Method 1: Percentage of Current Income

• Conservative estimate: 70-80% of pre-retirement income
• Example: $100,000 income → $70,000-80,000 annual retirement needs

Method 2: Detailed Expense Calculation Create categories:

• Housing (mortgage-free/property tax/insurance/maintenance): $20,000
• Healthcare: $5,000
• Food: $10,000
• Transportation: $8,000
• Entertainment: $8,000
• Utilities: $3,000
• Insurance: $4,000
• Miscellaneous: $5,000
• Total: $63,000/year

Step 2: Account for Inflation

Current Needs: $63,000/year Years Until Retirement: 25 years Inflation Rate: 3% annually Future Need: $63,000 × (1.03)^25 = $132,700/year

Step 3: Calculate Total Retirement Nest Egg

The 4% Rule: Withdraw 4% of portfolio annually to maintain purchasing power

Formula: Annual Retirement Need ÷ 0.04

Example: $132,700 needed ÷ 0.04 = $3,317,500 nest egg required

Alternative: Life Expectancy Method

Assume retirement age 65, life expectancy 95

• Retirement years: 30 years
• Annual need: $132,700
• Total needed: $132,700 × 30 = $3,981,000
• Adjust for investment returns and inflation

Retirement Income Sources

Social Security

How It Works:

• Funded by payroll taxes (12.4% of income)
• Benefits based on earnings history
• Full retirement age: 67 (for 1960+ born)
• Can claim as early as 62 (reduced 30%)
• Can delay until 70 (increased 32%)

Average Benefits (2024):

• Full retirement age: ~$1,900/month
• Early claim (62): ~$1,300/month
• Delayed claim (70): ~$2,500/month

Planning Considerations:

• Supplement with savings, don’t rely solely on SS
• Consider lifespan and health
• Married couples have spousal benefits
• Coordinate claiming strategies

Pension (if applicable)

Traditional Pension:

• Defined benefit from employer
• Monthly guaranteed income
• Often have survivor options
• Becoming rare in private sector

Pension Calculation:

• Example: 30 years service × 1.5% × $80,000 salary = $36,000/year
• Usually indexed for inflation

Investment Income (Dividends, Interest, Capital Gains)

Portfolio Income (4% rule):

• Withdraw 4% annually from $3M portfolio = $120,000/year
• Portfolio stays same with inflation-adjusted withdrawals
• Requires discipline not to over-withdraw

Annuities

Fixed Annuity:

• Pay lump sum for guaranteed income
• Example: $500,000 → $2,500/month for life (5% rate)
• Guaranteed by insurance company
• No flexibility

Immediate Annuity Advantages:

• Longevity protection (insurance against outliving savings)
• Guaranteed income
• Simplified planning

Disadvantages:

• No flexibility
• Lower returns than markets
• Inflation erodes purchasing power
• Not liquid

Retirement Account Types

401(k) Plans

Employer-Sponsored Plan

Contribution Limits (2024):

• Employee: Up to $23,500/year
• Employer match: Varies (avg 3-6%)
• Age 50+ catch-up: Additional $7,500

Tax Treatment:

• Traditional 401(k): Pre-tax contributions, taxed in retirement
• Roth 401(k): Post-tax contributions, tax-free in retirement

Benefits:

• Employer match (free money)
• Tax-deferred growth
• Higher contribution limits
• Portability (roll to IRA)

Drawbacks:

• Limited investment choices
• High fees (sometimes)
• Early withdrawal penalties
• Required distributions at 73

Individual Retirement Accounts (IRAs)

Traditional IRA

Contribution Limits (2024):

• Up to $7,000/year
• Age 50+: Additional $1,000

Tax Treatment:

• Pre-tax contributions (if eligible)
• Deduct from taxes
• Taxed upon withdrawal
• Lower income limits for deduction

Roth IRA

Contribution Limits (2024):

• Up to $7,000/year
• No age limit
• Income limits for eligibility

Tax Treatment:

• After-tax contributions
• Tax-free growth
• Tax-free withdrawals
• No required distributions
• Can pass to heirs tax-free

Comparison:

SEP-IRA (Self-Employed)

Perfect For: Freelancers, contractors, business owners

Contribution Limit: Up to 25% of net income, max $69,000 (2024)

Advantages:

• High contribution limits
• Simple to set up
• Flexible contributions
• Tax-deductible

Solo 401(k)

Perfect For: Self-employed with no employees (or just spouse)

Contribution Limits:

• Employee deferral: $23,500
• Employer contribution: 25% of net income
• Combined limit: $69,000

Advantages:

• Very high limits
• Both employee and employer contributions
• Loan provisions available
• Plan-to-plan rollovers

Retirement Savings Strategy

Phase 1: Take Full Employer Match (Age 25-35)

Action: Contribute enough to get full 401(k) match

• Employer matches 5% → contribute 5%
• This is an immediate 100% return on investment
• Free money, don’t leave it on the table

Example: $60,000 salary, 5% match

• Contribution: $3,000
• Employer match: $3,000
• Immediate return: $3,000 (100%)

Phase 2: Max Out Retirement Accounts (Age 35-50)

Priority Order:

1. 401(k) to company match (get free money first)
2. Max Roth IRA ($7,000)
3. Max 401(k) ($23,500)
4. Taxable brokerage account

Example: $100,000 salary

• 401(k) match (5%): $5,000 (company: $5,000)
• Roth IRA: $7,000
• Remaining 401(k): $16,500
• Total retirement savings: $28,500

Phase 3: Catch-Up Contributions (Age 50+)

Additional Limits:

• 401(k) catch-up: +$7,500 (age 50+)
• IRA catch-up: +$1,000 (age 50+)

Example: Age 55, still working

• Max 401(k): $30,500 ($23,500 + $7,000 catch-up)
• Max IRA: $8,000 ($7,000 + $1,000 catch-up)
• Total annual savings: $38,500+

Retirement Withdrawal Strategies

The 4% Rule

Concept: Withdraw 4% of portfolio in first year, adjust for inflation annually

Example:

• Retirement portfolio: $1,000,000
• Year 1 withdrawal: $40,000 (4%)
• Year 2 withdrawal: $41,200 (4% + 3% inflation adjustment)
• Continue indefinitely

Success Rate: Historical data suggests 95% success (portfolio lasts 30+ years)

Limitations:

• Assumes 60/40 stock/bond allocation
• Doesn’t account for market crashes early in retirement
• Individual results vary

Bucket Strategy

Concept: Divide portfolio into time-based “buckets”

Bucket 1 (Years 1-3): Cash, Bonds

• $120,000 (3 years × $40,000)
• No stock market risk
• Provides peace of mind

Bucket 2 (Years 4-10): Balanced (stocks/bonds)

• $280,000 (7 years × $40,000)
• Some growth, some stability
• Replenish Bucket 1 as needed

Bucket 3 (Years 11+): Stocks

• Remainder in stocks
• Long-term growth
• Refill other buckets when market is strong

Advantages:

• Reduces sequence of returns risk
• Psychological comfort
• Flexibility for spending adjustments

Guaranteed Income Strategy

Create stable income base first:

• Social Security: $2,000/month = $24,000/year
• Pension (if any): $1,500/month = $18,000/year
• Annuity purchase: $500,000 → $2,500/month = $30,000/year
• Total guaranteed: $72,000/year

Then supplement with portfolio withdrawals:

• Need $120,000/year total
• Guaranteed provides $72,000
• Portfolio needs to cover only $48,000 (much less risky)

Common Retirement Planning Mistakes

Retirement Readiness Checklist

• Calculated retirement number based on expenses
• Contributing to 401(k) to get full company match
• Maximizing Roth IRA contributions annually
• Paying off high-interest debt before retirement
• Have 3-6 months emergency fund
• Reviewed insurance needs (life, disability, health)
• Estimated Social Security benefits at different claim ages
• Developed withdrawal strategy (4% rule, buckets, etc.)
• Created healthcare plan for pre-Medicare years
• Reviewed investment allocation for retirement timeline
• Considered working part-time early in retirement
• Updated estate plan and beneficiaries

Conclusion

Retirement planning requires systematic savings, strategic account selection, and disciplined withdrawals. By starting early, maximizing contributions, and following proven strategies, you can build a sufficient nest egg to enjoy your retirement years.

The key components are:

1. Calculate your retirement number
2. Maximize employer matches and retirement account contributions
3. Maintain appropriate asset allocation
4. Implement safe withdrawal strategies
5. Create multiple income sources

With these elements in place, you can confidently transition from earning to living off your accumulated wealth, achieving financial independence and retirement security.