No matter where you are in life right now, the time to plan for retirement and start saving is today.
Explore this Retirement Guide:
- Retirement Vocabulary
- Retirement Questions You Need to Ask Yourself
- Steps to Planning Your Retirement:
- Step 1: Have a Retirement Goal
- Step 2: Save at Least 10%
- Step 3: Make Long-Term Investments
- Step 4: Plan for Insurance
- Step 5: Make Plans for Getting Debt Free
- How Much Money Do I Need to Retire?
- How to Retire Early
- How to Save for Retirement
- How Old Do You Have to Be to Retire?
- How to Write a Retirement Letter
We’ve already gone over how to save for retirement. Now it’s time to talk about how to plan for retirement.
Before you can plan for retirement you have to know your retirement vocab. Below are some of the basic retirement items you’ll want to be familiar with before you can start planning your retirement.
Retirement Nest Egg
“Nest egg” is a financial term used for savings that are set aside for a long-term purpose, like retirement, buying a home, or college tuition.
A good retirement nest egg is a set of savings that is able to grow incrementally over a long period of time. You can help your retirement funds grow by investing or utilizing the interest benefits of different retirement plans and long-term savings accounts.
Social security is a federal funding program that takes a portion of taxes and saves it in a government trust fund. This social security fund can then be used by eligible citizens who have retired, have a disability that keeps them from working, or for those who’ve lost a working loved one they depended on.
A 401k is a retirement plan sponsored by an employer. Often, 401k plans include tax benefits and many employers match the funds you put in your 401k retirement savings plan. 401ks are usually set up so that a portion of each paycheck goes into this fund.
Individual Retirement Account (IRA)
An IRA is a retirement plan that is opened by an individual. IRAs are different from 401ks because they allow you to include many kinds of investments, but you can put more into your 401k each year. There are also many different kinds of IRAs you can choose from.
A pension is another type of retirement plan. It can also be referred to as a Defined Benefit Plan. The nature of a pension retirement plan is that it promises a certain amount of regular income during your retirement years.
Retirement Questions You Need to Ask Yourself
Once you understand common retirement terms and the different retirement plans there are to choose from, it’s time to start asking some important retirement questions. If you have a partner, then sit down with them one evening to talk about these questions and make notes about both of your responses.
Asking yourself these questions is the first step to planning for retirement today. These retirement questions will also help you figure out your ideal retirement lifestyle goals to work toward.
Download a Free Printable Retirement Questionnaire Here.
- What will you do in retirement?
- When do you want to retire?
- Where do you want to retire?
- Will you and your spouse retire at the same time?
- Will you still want to work at all in retirement?
- Will your spouse still want to work at all in retirement?
- Will you want to travel during retirement?
- How much money do you want to live on each month during retirement?
- How much will I need to save in total to achieve this goal?
- How much do I want to save for medical expenses?
- How will inflation change how much money I need saved?
- Which retirement plan sounds right for me?
Steps to Planning Your Retirement
Planning for retirement might feel intimidating, but it doesn’t have to be. Retirement planning also isn’t something that you should put off for later. Planning for retirement is something that financially savvy individuals are working on right now.
Step 1: Have a Retirement Goal
After you answer the retirement questions above this step should be easy. You need to know what your retirement goals are. Having a retirement goal will give you something definite to work toward as you save, plan, and prepare for retirement today.
You need a goal for how much you want to have saved in total for your retirement years so you can determine how much you need to be saving each year now.
You need to have a goal for where and how you want to live so you can plan to pay off debts and mortgages before you retire.
Step 2: Save at Least 10%
You want to save at least 10% of your income for retirement. Every paycheck you get, put 10% of it aside into the retirement fund of your choosing.
Saving 10% of your income for retirement is also a great place to start if you’re still unsure about your answer to many of the key retirement questions. If you aren’t sure what your retirement plans are, then at least start saving 10% today.
If you do have a clear picture of where you want to be financially during retirement then you can increase or decrease this percentage as needed.
For example, if you make $5,000 a month, then you’ll want to save at least $500 a month in a retirement fund. If you save only 10% of your income every year, then after 20 years you’ll already have $120,000 saved up for retirement.
$5,000 x 0.10 = $500
$500 x 12 (months of the year) = $6,000 (saved for retirement each year)
$6,000 x 20 (years) = $120,000 (saved for retirement in just 20 years)
But even if you can’t afford to put away 10% of your monthly income into a retirement fund, 5% will still help you start building those retirement savings. Every little bit counts! You might also need to focus on other payments at the moment that could also be helping your future retirement plans, like making payments on your home so you can live in a paid-off home during retirement.
Step 3: Make Long-Term Investments
Another great way to save for retirement is to make smart, long-term investments. Investing works really well for retirement savings because good investing takes time. There are also endless ways you could start investing for the future.
Step 4: Plan for Insurance
Many insurance plans are linked to our jobs, but during retirement, you probably won’t have a job. Some employers do include types of health insurance plans for their employees who retire. You’ll want to talk to your employer about such plans so you understand the benefits available to you.
One insurance plan you can look into for retirement is a Long-Term Care (LTC) Insurance plan. By purchasing an LTC plan, this insurance plan will protect your retirement savings and help pay for your long-term care, like a retirement home, should you need it later down the road.
You can also start saving in a Health Savings Account (HSA) or a High-Deductible Health Plan (HDHP). A health savings plan will help you also save for future medical costs in retirement.
Step 5: Make Plans for Getting Debt Free
Debt is a very common and useful financial tool. Many people need to use debt and loans to finance for a car, their home, or a college degree. But debt isn’t something you want to still have by the time you retire.
Make plans today for how you can become debt-free by the time you’re ready to retire. Part of this plan is to focus on the unnecessary debts you currently have and paying them down quickly. This includes things like loans or credit card debt. Then make plans to avoid all unnecessary debt wherever possible.
Then you can focus on tackling more necessary types of debts like student loans, home mortgage, and car loans. Make sure your loan payment plans on these things don’t extend into your retirement years but are structured to end before you reach retirement age.
For example, if you buy a home when you’re 35 years old, and you have a 30-year mortgage plan, then you won’t be finished paying off your home until you are 65 years old. That also means, that you probably won’t be able to retire until you are at least 65 years old.
If you want to make sure you can retire at the age you want then considering a shorter year-term for your mortgage might be necessary.
How Much Money Do I Need to Retire?
Many financial experts advise that you start saving for retirement in your 20s. They also suggest people save 10% to 15% of their monthly income in a retirement fund.
But if you want to determine how much money you’ll need each year during retirement, just take 70% to 90% of your yearly income now. That’s how much most people need a year in retirement. This is because most retirees have finished paying off their mortgage and other loans and debt payments.
So if you make $50,000 a year right now, then most likely you’ll need $35,000 to $45,000 a year available in your retirement savings for each year of retirement.
$50,000 x 0.70 = $35,000 (a year for retirement)
$50,000 x 0.90 = $45,000 (a year for retirement)
How Much is Enough to Retire?
You can then take this yearly estimate and multiply it by roughly how many years you’ll need retirement funds to get the total amount you need to save for retirement. So if you want to save at least 30 years’ worth of retirement funds, then you’ll need around $1,050,000 to $1,350,000 saved up for retirement in total.
$35,000 (a year for retirement) x 30 (years of retirement) = $1,050,000 (saved up for retirement in total)
$45,000 (a year for retirement) x 30 (years of retirement) = $1,350,000 (saved up for retirement in total)
How to Retire Early
There are several ways to achieve an early retirement. One of the main things you’ll need to consider is living below your means and finishing payment plans for loans and mortgages early.
In order to retire early, you’ll most likely need to speed up your payment plans for different debts. That means choosing a 15-year mortgage instead of a 30-year mortgage and making higher payments on other loans so you can get debt-free faster.
Retiring early could also mean making higher deposits than average into your retirement and HAS funds. To retire early you should consider saving 15% or more each month in your retirement savings account.
How to Save for Retirement
When figuring out how to save for retirement, talking to your employer about their retirement plans and benefits is a good place to start. An employer-sponsored retirement plan is often the best choice to help grow your retirement savings quickly, and get the benefits you’ll need during your retirement years.
If your employer doesn’t offer a retirement plan, then your next best option is to visit your bank or credit union and open a long-term savings account or an IRA.
How Old Do You Have to Be to Retire?
If you are retiring on an employee retirement plan then there might be an age requirement for when you can retire. On average, the normal retirement age is between 62 and 70 years old.
How to Write a Retirement Letter
A retirement letter is how you notify your employer that you are planning on retiring soon. It is like a traditional 2-week notice you give before you leave a job, but in this case, you are notifying your employer that you are leaving to retire.
It can help to talk with your workplace’s HR representative about your retirement plans before you write your retirement letter. That way you’ll have all the details you need for your letter.
Address the Letter’s Recipient
Your retirement letter should be addressed to your boss. Normally you would write “Dear Mr. or Mrs.” and then insert the full name of your boss.
You’ll probably want to also include the current date somewhere at the top of the letter so that the recipient knows when the retirement letter was written and/or sent.
Paragraph 1: Your Intent to Retire
First things first, talk about your intent to retire and when. This paragraph includes any retirement plans that your boss might need to be aware of, like when your last day at work is.
Paragraph 2: Reflect on Your Time
In the next paragraph take a moment to reflect back on your time at this job. Talk about positives rather than any negatives, like the ways that you have been able to grow and evolve while working there.
Paragraph 3: Make Plans for Transitions
Since you are retiring, some transitions will have to be made. Someone will need to be promoted or hired to take your place, that person might need training or guidance, and there might be work or projects you are leaving behind that need passed on to another before you go.
In the final paragraph of your retirement letter, you should outline your plans for transitioning smoothly to retirement as someone else takes your job position.
Close the Letter
End your retirement with good wishes for your employer, coworkers, and place of work. You might even want to include a very brief paragraph reiterating your thanks and best wishes toward the company and those you’re leaving.
Then you can end the letter on a professional note with closing like Sincerely, Regards, or Best Wishes. Sign your letter, and make sure the letter includes your full name, job position, and personal contact information in case they need to get ahold of you in the future.
Retirement is an exciting new time in your life. After diligent saving and planning, it’s now time to do whatever you want! This might include visiting more with grandkids, taking up hobbies like gardening, or taking some time to travel to places you’ve never been to.
With some diligent retirement planning on your part, you can know how to plan for retirement and rest at ease knowing your retirement years are taken care of.
USA.gov. “Infographic: Common Options to Save for Retirement.”
WikiHow. “How to Prepare a Retirement Plan.”
Investopedia. “Retirement Planning Guide: These five steps will help you toward a safe, secure, and fun retirement,” by Arthur Pinkasovitch
US Department of Labor. “Top 10 Ways to Prepare for Retirement.”
Dave Ramsey Blog. “How to Plan for Retirement,” by Chris Hogan.
Smart Asset. “A Guide to Health Insurance for Retirees,” by Javier Simon.