Retirement planning determines retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, sizing up expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to gauge whether the retirement income goal will be achieved. Some retirement plans change depending on whether you’re in, say, the United States or Canada, which has its unique system of workplace-sponsored plans.
Retirement planning is ideally a lifelong process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. That’s the best way to ensure a safe, secure — and fun — retirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.
Retirement planning refers to financial strategies of saving, investments, and ultimately distributing money meant to sustain oneself during retirement.
Many popular investment vehicles, such as individual retirement accounts (IRAs) and 401(k)s, allow retirement savers to grow their money with certain tax advantages.
Retirement planning takes into account not only assets and income but also future expenses, liabilities, and life expectancy.
In 2022, the amount you can contribute to a $401(k) is $20,500 if you are under age 50.2
It is never too early—or too late (although earlier is better)—to start retirement planning.
Understanding Retirement Planning
In the simplest sense, retirement planning is the planning that one does to be prepared for life after paid work ends, not just financially but in all aspects of life. The non-financial aspects include lifestyle choices such as how to spend time in retirement, where to live, when to quit working altogether, etc. A holistic approach to retirement planning considers all these areas.
The emphasis that one puts on retirement planning changes throughout different life stages. Early in a person’s working life, retirement planning is about setting aside enough money for retirement. During the middle of your career, it might also include setting specific income or asset targets and taking steps to achieve them.
Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying in; instead, your decades of saving are paying out.3
Retirement Planning Goals
Remember that retirement planning starts long before you retire — the sooner, the better. Your “magic number,” the amount you need to retire comfortably, is highly personalized, but there are numerous rules of thumb that can give you an idea of how much to save.4
People used to say that you need around $1 million to retire comfortably. Other professionals use the 80% rule (i.e., you need enough to live on 80% of your income at retirement). If you made $100,000 per year, then you would need savings that could produce $80,000 per year for roughly 20 years, or a total of $1.6 million, including the income generated by your retirement assets. Others say most retirees aren’t saving anywhere near enough to meet those benchmarks and should adjust their lifestyle to live on what they have.
Start as early as you can on whatever method that you, and possibly a financial planner, use to calculate your retirement savings needs.
Young adults should take advantage of employer-sponsored 401(k) or 403(b) plans. An up-front benefit of these qualified retirement plans is that your employer has the option to match what you invest up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer may match that, depositing the equivalent sum into your retirement account, essentially giving you a 3% bonus that grows over the years.
However, you can and should contribute more than the amount that will earn the employer match; some experts recommend upward of 10%. For the 2022 tax year, participants under age 50 can contribute up to $20,500 of their earnings to a 401(k) or 403(b), some of which may be additionally matched by an employer.2 This amount remains unchanged for 2022. Participants over age 50 can contribute an extra $6,500 per year as a catch-up contribution.5
Additional advantages of 401(k) plans include earning a higher rate of return than a savings account (although the investments are not free of risk). Also, the funds within the account are not subject to income tax until you withdraw them. Since your contributions are taken off your gross income, you will get an immediate income tax break. Those who are on the cusp of a higher tax bracket might consider contributing enough to lower their tax liability.6
This article was prepared by Investopedia Company of America.
Investopedia used primary sources to support the article work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Canada Revenue Agency. “Registered Retirement Savings Plan (RRSP).” Accessed Nov. 20, 2021.
Internal Revenue Service. "IRS Announces 401(k) Limit Increases to $20,500." Accessed Nov. 20, 2021.
U.S. Department of Labor, Employee Benefits Security Administration. “Report of the Working Group on Retirement Distributions & Options.” Accessed Nov. 20, 2021.
Merrill Edge. “How Much Do You Really Need to Save for Retirement?” Accessed Nov. 20, 2021.
Internal Revenue Service. "Retirement Topics-Catch-Up Contributions." Accessed Nov. 20, 2021.
Internal Revenue Service. “Maximize Your Salary Deferrals.” Accessed Nov. 20, 2021.
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