Retirement Planning Basics and Goals

Older couple holding hands and walking on a path in the woods

Pierre Amerlynck

Visions for retirement may include spending time with family and friends for some, or travel, volunteer work, or even a part-time job for others. But unfortunately, a lot of people put off retirement planning, and the possibility of achieving financial independence becomes a real hurdle.

The good news is that living comfortably during your retirement years is largely within your control. Working forever doesn't have to be your retirement reality if you do a little planning and create a solid foundation for financial wellness. This means setting goals and knowing how to save.

Only 14% of workers feel that they've saved enough money for retirement, according to, and only 10% have a firm grasp of how much income they'll need.

Set Your Retirement Goals

Start by creating your own unique definition of what retirement means to you:

  • When would you ideally like to retire and how many years do you have left to save?
  • What do you look forward to the most and how will you spend your time in retirement?
  • How many years do you expect to live in retirement? What's your life expectancy?
  • What lifestyle do you want?
  • What monthly income will you need to maintain your current lifestyle?
  • Which income sources are available to fund your retirement? These might include Social Security, a pension, a 401(k) plan, investment earnings, or home equity.

Put your retirement goals in writing. Focus on the things you can control, such as how much you must save and where to invest that money.

Having a written retirement plan will help you track your progress over time. Just be sure to monitor your plan and adjust it over the years as necessary.

Are You Saving Enough?

You can use your retirement goals as a guide to determine if you're saving enough, but it's okay to simply target a percentage of your current income as a retirement goal if your planned retirement age is more than 10 years away.

Many financial planners recommend trying to replace around 80% of your current income to maintain the same comfortable lifestyle during retirement.

Use the Budget Planning for Retirement worksheet by Financial Finesse to estimate your retirement expenses.

There are steps you can take if your results aren't exactly as you planned. The key is to at least have an awareness of where you stand today. It's also a good idea to run a retirement estimate at least once each year.

Gather Information

A retirement calculator will help you determine if you're on the right track to meet your retirement goals. Make sure you aren't missing any important details. Gather some information first:

  • Your most recent statements and current account balances for all retirement accounts, including employer-sponsored retirement plans such as 401(k) plans, 403(b) plans, pension plans, and IRAs
  • The total planned contribution amounts to be made each year into your retirement accounts
  • The anticipated inflation rate and average annual rate of return expectations that will be used in the calculations
  • Desired and acceptable income levels during your retirement years
  • An estimate your future income from Social Security—the Social Security Administration offers a retirement estimator to guide you

Keep in mind that the federal government limits how much you can contribute to certain retirement accounts each year. You can only contribute $6,000 a year to a Roth or traditional IRA as of 2020, or up to $7,000 if you're 50 years old or older. And this depends on whether you also have a retirement plan at work.

The limit is $19,500 in 2020 for 401(k) employee elective deferrals.

Choose the Right Accounts

Asset location is an important aspect of retirement planning. A variety of retirement savings options are available. Saving is so important that Uncle Sam is willing to provide tax advantages for specific retirement accounts:

Employer-Sponsored Retirement Plans

Many financial experts suggest that your company retirement plan—such as a 401k, 403b, or 457 plan—can be one of your best investments for several reasons:

  1. Contributions are made on a pre-tax basis so they directly reduce your taxable income in the year you make them. They also grow tax-deferred. You won’t pay taxes on the gains until you withdraw the funds.
  2. The majority of companies offer matching contributions to employees that can enhance the return on your money. Make sure you're contributing at least up to the company match, but don’t feel like you must stop there. The average employer contribution amount is around 3%, but it's generally recommended that you should strive to save between 10% and 20%.
  3. Employer-sponsored plans are becoming more portable. They can be transferred without tax consequences into an IRA or to a future employer’s retirement plan through a rollover.

Roth account options are becoming more prevalent within employer-sponsored retirement plans. Consider making Roth contributions if you don't care about reducing your taxable income or if you anticipate being in a higher income tax bracket during retirement.

Individual Retirement Accounts (IRAs)

You might be eligible to fund a traditional (IRA) if your employer doesn't offer a 401(k) or similar retirement plan. Otherwise, there are certain limitations.

IRAs are another great way to sock money away for the future. Some income limits and other restrictions apply if you want to deduct the contributions or to contribute to a Roth IRA, so make sure you're choosing the best IRA for your situation. You can always contribute to both if you're not quite sure.

Health Savings Accounts (HSAs)

Health savings accounts provide excellent tax benefits for out-of-pocket health care expenses. You can contribute pre-tax dollars to an HSA to cover qualified medical expenses if you have a high deductible health plan. Interest and earnings aren't taxable.

Retirement Plan Options for the Self-Employed

You have several options for self-employed retirement plans that make it easier to save and reduce your taxes along the way if you're self-employed or own a very small business. They include:

Insurance and Annuities 

A variety of insurance and annuity products exist that can be used as part of a well-structured retirement income plan. Annuities also offer tax-deferred growth and income.

Taxable Investment Accounts 

Tax-deferred investment accounts are usually the first place to start with tax-smart investing, but taxable accounts also have some benefits. The flexibility to use funds for a variety of reasons is one. Another is the ability to take advantage of tax loss harvesting and low capital gains rates when you're using tax-efficient investments.

You can also look at municipal bonds for tax-free income.

The Risk of Bank Accounts

You're not going to get too far with your savings plan if you put your money into a savings account, money market fund, or another "safe" place. These options are subject to a significant risk: inflation. You'll be able to buy less with your money when you retire than you can today after taxes are paid on your investment earnings.

Review How Your Money Is Invested

How you choose to allocate your assets across different investment types can significantly impact your ability to reach your retirement goals. Do some self-assessment to determine what asset allocation works best for your particular situation.

You can start by assessing your risk tolerance. Another important decision is whether you prefer an active versus passive style of management.

Compare your current asset allocation with models that are consistent with your risk tolerance and time horizon. Then determine if you prefer a "hands on" or a "hands off" approach to investing. Hands-off retirement investors might prefer the ease and convenience of target date retirement funds or pre-mixed asset allocation portfolios.

Create a Plan You Can Easily Follow

Saving for retirement isn’t a one-time event; it’s a lifelong process of creating good habits. The more you can do to simplify your retirement plan, the easier it will be to stay on the right course.

Article Sources

  1. "How Much Do I Need to Save for Retirement?" Accessed May 10, 2020.

  2. IRS. "Retirement Topics - IRA Contribution Limits." Accessed May 10, 2020.

  3. IRS. "Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits." Accessed May 10, 2020.

  4. "Health Savings Account (HSA)." Accessed May 10, 2020.

  5. IRS. "Retirement Plans for Self-Employed People." Accessed May 10, 2020.