How to Plan Your Retirement

Four Parts:Planning Your RetirementFiguring Out How Much You Need to SaveSaving for RetirementInvesting for Retirement

Unfortunately, retiring is getting harder and harder, with more expensive medical insurance and the possibility that social security will not exist or be severely watered-down. Many hard working people are forced to save as much as possible for the golden years to sidestep the possible hardship they may face. Whether you are 50 or 22, the best thing you can do is to start planning as early as possible for your retirement.

Part 1
Planning Your Retirement

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    Determine your planned retirement age. The age at which you will retire has a large impact on your retirement planning. While it is impossible to know, especially early on, when exactly you will retire, planning for a certain age can help guide your decisions. For Social Security purposes, your retirement age can be either be after or before your "full" retirement age. However, you will not receive any benefits until age 62.
    • Retiring past your full retirement age allows you to receive full Social Security benefits. Retiring at any point between 62 and your full retirement age slightly decreases your benefits, depending on how close your age is to 62.
    • Your full retirement age depends on the year of your birth. The Social Security Administration (SSA) provides a schedule for determining this age here:
    • The reductions in benefits are calculated such that the average beneficiary receives the same amount of total Social Security payments, regardless of when they retire.[1]
    • If in doubt, just use your full retirement age.
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    Estimate your life expectancy. Although it may be unpleasant to think about, calculating your life expectancy is necessary to figure out how many years of retirement you will have to save for. According to the SSA, the average American male can expect to live to around age 84, while women can expect to reach 87. However, one in four (for both genders) will live past 90 and about ten percent will live to 95. Consider your own lifestyle choices and family history to make an assessment of how long you can expect to live.[2]
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    Consider whether or not you will continue to work after retirement. If you have not yet reached full retirement age and continue working, you may experience a reduction in Social Security benefits until you reach full retirement age. This depends on how much you make each year. However, after you reach full retirement age, there is no limit to how much you can make each year. Considering whether or not you will continue working after retirement can also factor into your deciding how much you need to save.[3]
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    Estimate your retirement expenses. Start by estimating the length of your retirement. This is just your estimated life expectancy minus your expected retirement age. So, for example, if you are planning to retire at 65 and are a male (life expectancy 85), you should plan for at least 20 years of retirement. From here, the standard rule of thumb is to multiply your annual income from before retirement by 70 percent to get your estimate retirement expenses. So, for example, if you made $60,000 before retirement, you would need $42,000 per year in retirement. So, for an expected 20 year retirement, you would need a total of 20*$42,000, or $840,000.
    • The percentage of your pre-retirement income may vary depending on how you plan to live after retirement. For example, 70 percent is satisfactory if you have your home paid for and are in good health. However, if you are unhealthy you may want to save more for medical costs.
    • Alternately, you may want to save more if you have more expensive goals for your retirement, like if you want to spend it traveling or build your dream home.[4]

Part 2
Figuring Out How Much You Need to Save

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    Estimate your Social Security benefits. Your actual benefit amounts will not be known until you apply for them. However, you can estimate your benefits if you are close to retirement by visiting the SSA's website and using their calculation tool. The tool can be found here: If you are younger, you can estimate your Social Security benefits using another calculator provided by the Consumer Financial Protection Bureau:
    • At any point before you retire, Social Security benefits could be reduced, increased, or eliminated. If at all possible, it's best to plan for retirement until the assumption that you may not receive these benefits.[5]
    • For example, imagine that you qualify for $2,000 per month in Social Security benefits. This would give you $24,000 per year and $480,000 over your estimated 20-year retirement. This would reduce your total amount needed for retirement from $840,000 to $360,000.
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    Figure out your income from pensions and annuities. Depending on your choices before retirement, you may receive income in retirement from company pensions or annuities you have purchased. Calculate how much you will receive from these benefits over the course of your retirement and subtract that amount from the total that you need for retirement.[6]
    • For example, if you expect to receive $6,000 per year from these payments, this would give you a total of 20*$6,000, or $120,000 over the course of your retirement. This would reduce your total required retirement amount to $240,000.
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    Add in other sources of income you will receive in retirement. Determine if you have any sources of passive income that you will continue to benefit from in retirement. These can include rental properties, royalties, dividend securities, and business investments. Add up the total value of these payments over your retirement years and subtract this figure from the total.
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    Calculate how much of your expenses are left. Subtract your Social Security benefits, income from annuities, and passive income from your total retirement cost. This figure is how much you will need to save before retirement in order to meet your goals.[7]
    • Using the previous figures, you would need to save a total of $240,000 before retirement.

Part 3
Saving for Retirement

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    Understand compound interest. Compound interest is a way to save money and have your savings work hard for you over the course of your working career. Compound interest is earned by most bank accounts and retirement accounts. Specifically, compound interest refers to a situation where interest is earned on the principal (initial investment) plus interest earned up to that point. This allows it to build value faster than simple interest, in which interest is only earned on the principal.[8]
    • For example, you can put away $1,000 per year for 30 years at 10% interest and have a nest egg of close to $200,000. You actually earned $170,000 on an investment of only $30,000. This is all due to the power of compounded interest.
    • Furthermore, if you put that $30,000 in all at once in the beginning of the 30-year period, your total would instead be about $525,000.
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    Calculate how much you need to save each month. Search online for a compound interest calculator with the option to add a monthly or annual contribution. Input a reasonable interest for the type of investment account you plan to use and how many years you have until retirement as the time limit. Then, play around with the initial deposit and monthly contributions until you reach your goal for retirement.
    • For example, make your initial deposit the amount of money you currently have to put into retirement and start with an initial monthly deposit of a small amount ($50 or $100). Work up the monthly deposit amount until you reach your goal.
    • You may find that you don't need to deposit much. A 25-year old that starts with $10,000 and deposits $100 per month until retirement at 65 will have over $550,000 by retirement.[9]
    • The interest rate that you use will depend on the nature of your investment account. However, for preliminary purposes use 8 percent. This number represents the average return you can expect from a diversified securities portfolio over time.[10]
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    Create a saving plan. Based on the monthly amount that you need to save, create a monthly budget that takes this amount into account. Even if you can't afford the full amount now, set aside what you can and put it into your retirement account. The important thing is to stick to your plan over the years until retirement, when it will all be worth it.[11]
    • Saving some now for retirement can make it easier to save more later. That is, the act of setting aside even $50 per month now can make it easier for you to remember and have the ability to put in $300 per month when you can afford it.[12]
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    Increase your savings if you can. Over time, you will advance in your career and pay off debts that you currently have. You can then contribute this additional money to your retirement account. Remember, there is no harm in contributing money above the amount that you originally calculated. Most people end up contributing the most to retirement in their fifties and early sixties, as other expenses are reduced.
    • An easy way to shift money into your retirement account to contribute more when your children leave home. After they have started supporting themselves, take the money you were spending to support them and put it into retirement. This way, you won't even notice the increase in savings (except in your account balance).[13]
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    Don't touch your money until you retire. It may be tempting to reach into your retirement account for large purchases as the balance grows. However, any money you take out is money you can't have later and only reduces the amount of interest you can earn. In addition, any money taken out of the account is taxed as income as your standard tax bracket rate. Those under age 59.5 will also have to pay an additional 10 percent penalty on the withdrawal.
    • You can prevent having to use this account for emergency expenses by keeping an emergency account that contains at least six months' worth of living expenses.
    • You can prevent paying taxes on your retirement account when you switch jobs by rolling over the balance into a retirement account with your new employer.[14]

Part 4
Investing for Retirement

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    Take advantage of employer plans. Many employers offer the benefit of 401(k) plans. These plans allow employees to put aside a percentage of their salary each pay period to invest in stocks, bonds and mutual funds. In addition, many larger companies offer matching plans. You personally contribute a set amount of money; let’s say 3% and your company will match that 3% with their own 3% (essentially free money). You should definitely take advantage of both employer 401K plans, as well as a company’s matching of funds.
    • Be sure to talk to your employer about the conditions of the 401(k) plan and matching, for example contribution/matching limits or time constraints.[15]
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    Contribute to an IRA. An IRA, or individual retirement account, is a type of account that can be used to easily save for retirement. You can contribute up to $5,500 per year to an IRA, and may be able to contribute up to $6,500 if you are over 50. Your contribution limit depends on your income, and some high-earning individuals or households may not qualify to contribute to an IRA at all. Talk to a financial professional about your options when selecting an IRA.[16]
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    Counteract retirement savings gaps. If you change jobs, you may have a gap period in which you are unable to contribute to retirement or unable to qualify for the company plan at your new job. In this instances, work to still save the same amount you did before in an IRA or personal investment account. Any gaps just mean that you will have to contribute more to the account later in order to meet your goal.[17]
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    Go high risk if you're younger. For younger investors, you have the option of investing in high risk vehicles. For instance, you can buy international stocks or purchase large amounts of small-cap stock (stock in small and growing companies). Because you have lots of time to grow your investments you won’t be completely devastated if your investments decline. For those that have built up a substantial nest egg and are close to retirement, your best bet is to stick with low to moderate investments; you don’t want to lose your entire retirement the year before you plan on retiring.[18]


  • Start saving as early as you can. Compound interest will make saving easy for you if you start in your twenties.
  • You're never too old to start saving for retirement. Anything you can save will benefit you at least a little bit.
  • Even saving a little bit every week or month can help you save a lot for retirement.
  • The Social Security Administration provides a helpful retirement planner at

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Categories: Retirement