Retirement planning is a multistep process that evolves over time. To have a comfortable, secure—and fun—retirement, you need to build the financial cushion that will fund it all. 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 starts with thinking about your retirement goals and how long you have to meet them. Then you need to look at the types of retirement accounts that can help you raise the money to fund your future. As you save that money, you have to invest it to enable it to grow.

The last part of planning is taxes: If you’ve received tax deductions over the years for the money that you’ve contributed to your retirement accounts, then a significant tax bill awaits when you start withdrawing those savings. There are ways to minimize the retirement tax hit while you save for the future—and to continue the process when that day arrives and you actually stop working.

We’ll get into all of these issues here. But first, start by learning the five steps that everyone should take, no matter what their age, to build a solid retirement plan.


  • Retirement planning should include determining time horizons, estimating expenses, calculating required after-tax returns, assessing risk tolerance, and doing estate planning.
  • Start planning for retirement as soon as you can to take advantage of the power of compounding.
  • Younger investors can take more risk with their investments, while investors closer to retirement should be more conservative.
  • Retirement plans evolve through the years, which means portfolios should be rebalanced and estate plans updated as needed.
  • Your career, family size, age of retirement, and post-retirement goals will all factor in to retirement planning.

How Much Do You Need to Save for Retirement?

Before anyone starts crunching the numbers on their retirement goals, they will need a good idea of how much money they need to save. Naturally, this will depend on many situational factors, such as their annual income and the age when they plan to retire.

While there is no fixed rule about how much money to save, many retirement experts offer rules of thumb such as saving about $1 million, or 12 years of one’s pre-retirement annual income. Others recommend the 4% rule, which suggests that retirees should spend no more than 4% of their retirement savings each year in order to ensure a comfortable retirement.

Since everyone’s circumstances are different, it is worth sitting down to calculate the ideal retirement savings for your own situation.

Factors to Consider

As you begin to think about retirement, it is worthwhile to consider some of the factors that will affect your retirement goals. For example: what are your family plans? For many people, starting a family is a central life goal, but having children can also put a large dent in your savings. For that reason, the type of family you hope to have will play a factor in your retirement planning.

Likewise, it is also worth thinking about your plans for retirement, including any changes to your home or residence. Many people dream of travel during retirement, and while it can be an exciting adventure, extensive travel will eat away at your retirement savings faster than staying at home. On the other hand, moving to a country with an extremely low cost of living may allow you to stretch out your savings while enjoying a high living standard.

Finally, one should also consider the different types of tax-advantaged retirement accounts. Most Americans qualify for social security, but those benefits are rarely enough to support all of their expenses in retirement.

While pension funds were once the norm for skilled professionals, they have largely been replaced by self-funded plans like 401(k) or IRA accounts. Since these have a maximum contribution limit, your retirement strategy will depend on what types of tax-advantaged accounts are available to you.

Once you have thought these factors through, these are the next steps for planning your retirement:

1. Understand Your Time Horizon

Your current age and expected retirement age create the initial groundwork for an effective retirement strategy. The longer the time from today to retirement, the higher the level of risk that your portfolio can withstand. If you’re young and have 30-plus years until retirement, you can have the majority of your assets in riskier investments, such as stocks. There will be volatility, but stocks have historically outperformed other securities, such as bonds, over long time periods. The main word here is “long,” meaning at least more than 10 years.

Additionally, you need returns that outpace inflation so you can maintain your purchasing power during retirement. “Inflation is like an acorn. It starts out small, but given enough time, can turn into a mighty oak tree,” says Chris Hammond.

“We’ve all heard—and want—compound growth on our money,” Hammond adds. “Well, inflation is like ‘compound anti-growth,’ as it erodes the value of your money. A seemingly small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years. Doesn’t seem like much each year, but given enough time, it has a huge impact.”

In general, the older you are, the more your portfolio should be focused on income and the preservation of capital. This means a higher allocation in less risky securities, such as bonds, that won’t give you the returns of stocks but will be less volatile and provide income that you can use to live on. You will also have less concern about inflation. A 64-year-old who is planning on retiring next year does not have the same issues about a rise in the cost of living as a much younger professional who has just entered the workforce.

You should break up your retirement plan into multiple components. Let’s say a parent wants to retire in two years, pay for a child’s education at age 18, and move to Florida. From the perspective of forming a retirement plan, the investment strategy would be broken up into three periods: two years until retirement (contributions are still made into the plan), saving and paying for college, and living in Florida (regular withdrawals to cover living expenses).

A multistage retirement plan must integrate various time horizons, along with the corresponding liquidity needs, to determine the optimal allocation strategy. You should also be rebalancing your portfolio over time as your time horizon changes.

2. Determine Retirement Spending Needs

Having realistic expectations about post-retirement spending habits will help you define the required size of a retirement portfolio. Most people believe that after retirement, their annual spending will amount to only 70% to 80% of what they spent previously.1

Such an assumption is often proven unrealistic, especially if the mortgage has not been paid off or if unforeseen medical expenses occur. Retired adults also sometimes spend their first years splurging on travel or other bucket-list goals.

“For retired adults to have enough savings for retirement, I believe that the ratio should be closer to 100%,” says David G. Niggel, .2 “The cost of living is increasing every year—especially healthcare expenses. People are living longer and want to thrive in retirement. Retired adults need more income for a longer time, so they will need to save and invest accordingly.”

As, by definition, retired adults are no longer at work for eight or more hours a day, they have more time to travel, go sightseeing, shop, and engage in other expensive activities. Accurate retirement spending goals help in the planning process as more spending in the future requires additional savings today.

“One of the factors—if not the largest—in the longevity of your retirement portfolio is your withdrawal rate. Having an accurate estimate of what your expenses will be in retirement is so important because it will affect how much you withdraw each year and how you invest your account. If you understate your expenses, you easily outlive your portfolio, or if you overstate your expenses, you can risk not living the type of lifestyle you want in retirement,” says Kevin Michels.3

Your longevity also needs to be considered when planning for retirement, so you don’t outlast your savings. The average life span of individuals is increasing.4