How to Plan for Retirement (Step-by-Step Guide)

Retirement planning isn’t something you figure out the week before you leave your job. It’s a decades-long process where small decisions—starting a year earlier, contributing an extra 1%, picking the right account type—compound into massive differences by the time you’re 65. The math behind retirement savings is surprisingly simple, but most people never sit down and run the numbers.

This guide walks through the core concepts: how much you need, how compound growth works in your favor, which accounts to use, and how Social Security fits into the picture. For a quick estimate of your retirement readiness, try our Free Retirement Calculator.

How Much Do You Need? The 4% Rule

The 4% rule, developed from the Trinity Study in 1998, provides a reliable starting target. It states that if you withdraw 4% of your portfolio in your first year of retirement and adjust for inflation each year after, your savings should last at least 30 years.

Formula:

$Retirement \ Target = \frac{Annual \ Expenses}{0.04}$

Example: You expect to spend $50,000 per year in retirement.

• $50,000 / 0.04 = $1,250,000

That is your target nest egg. If you expect to spend $70,000 per year, you need $1,750,000. If you can live on $35,000, you need $875,000.

Adjustments to consider:

• If you plan to retire before 60, use a 3.5% withdrawal rate instead (your money needs to last longer)
• If you have a pension or significant Social Security income, subtract that from your annual expenses before applying the formula
• Healthcare costs in the U.S. average $6,500+ per year per person for retirees—factor this into your annual expense estimate

Compound Growth: Why Starting Early Matters

Compound interest is the engine behind every retirement plan. Your money earns returns, and those returns earn their own returns. Over decades, this creates exponential growth.

Formula:

$FV = PV \times (1 + r)^n$

Where FV is the future value, PV is the present value (or regular contribution), r is the annual return rate, and n is the number of years.

For regular monthly contributions, the formula becomes:

$FV = PMT \times \frac{(1 + r)^n - 1}{r}$

Where PMT is the monthly payment and r is the monthly interest rate.

Starting at 25 vs. Starting at 35

Let’s compare two people who each invest $500 per month at a 7% average annual return (the historical stock market average after inflation):

Person A starts at age 25 (40 years of contributions):

• Monthly contribution: $500
• Total contributed: $500 x 12 x 40 = $240,000
• Portfolio at age 65: $1,197,811

Person B starts at age 35 (30 years of contributions):

• Monthly contribution: $500
• Total contributed: $500 x 12 x 30 = $180,000
• Portfolio at age 65: $566,764

Person A contributed only $60,000 more but ended up with over $631,000 more. That extra decade of compounding more than doubled the result. This is why every financial advisor will tell you: the best time to start saving for retirement was yesterday.

What If Person B Tries to Catch Up?

To match Person A’s $1,197,811 by age 65, Person B would need to contribute about $1,057 per month—more than double. The longer you wait, the more money you have to set aside each month to hit the same target.

401(k) vs. IRA: Picking the Right Account

Not all retirement accounts are equal. The tax treatment, contribution limits, and access rules vary significantly.

401(k) Plans

A 401(k) is offered through your employer. Contributions come from your paycheck before taxes (Traditional 401k) or after taxes (Roth 401k).

• 2026 contribution limit: $23,500 ($31,000 if you’re 50+)
• Tax treatment (Traditional): Contributions reduce your taxable income now; you pay taxes when you withdraw in retirement
• Tax treatment (Roth): No tax deduction now, but withdrawals in retirement are completely tax-free
• Required Minimum Distributions (RMDs): You must start withdrawing at age 73

IRA (Individual Retirement Account)

An IRA is opened independently at a brokerage. You have two flavors:

• Traditional IRA: Tax-deductible contributions, taxed withdrawals. 2026 limit: $7,000 ($8,000 if 50+)
• Roth IRA: After-tax contributions, tax-free withdrawals. Same contribution limits. Income limits apply ($161,000 single / $240,000 married for full contribution)

Which Should You Choose?

Use this decision tree:

1. Does your employer offer a 401(k) match? Contribute enough to get the full match first. Always.
2. Do you expect to be in a higher tax bracket in retirement? Choose Roth (pay taxes now at the lower rate).
3. Do you expect to be in a lower tax bracket? Choose Traditional (defer taxes to when your rate is lower).
4. Not sure? Split contributions between Traditional and Roth to hedge your bets.

Many people use both: max out the employer match in their 401(k), then contribute to a Roth IRA for tax diversification.

Employer Matching: Never Leave Free Money Behind

If your employer matches 401(k) contributions, that match is an instant 50-100% return on your money before any market gains.

Example: Your employer matches 50% of contributions up to 6% of your $80,000 salary.

• You contribute 6%: $4,800 per year
• Employer adds 50% of that: $2,400 per year
• Total going into your 401(k): $7,200 per year
• You just earned an instant 50% return on your $4,800

If you only contribute 3%, you’re leaving $1,200 per year on the table. Over 30 years at 7% growth, that unclaimed match would have grown to roughly $113,000. Treat the employer match as the absolute floor for your contributions.

Social Security: A Foundation, Not a Plan

Social Security was designed to replace about 40% of pre-retirement income for average earners. It was never meant to be your entire retirement income.

Key facts:

• Full retirement age: 67 for anyone born after 1960
• Early claiming (age 62): Reduces your benefit by about 30% permanently
• Delayed claiming (age 70): Increases your benefit by about 24% over the age-67 amount
• Average monthly benefit (2026): Approximately $1,920

Example: Your full retirement benefit at age 67 is $2,200/month.

• Claiming at 62: $2,200 x 0.70 = $1,540/month
• Claiming at 70: $2,200 x 1.24 = $2,728/month

The difference between claiming at 62 vs. 70 is $1,188/month—or $14,256 per year. If you can afford to wait, the higher benefit pays off around age 80 in total lifetime payments.

Planning tip: Check your estimated Social Security benefit at ssa.gov and subtract it from your target annual expenses before applying the 4% rule. If Social Security covers $23,000 per year and you need $50,000 total, you only need to generate $27,000 from savings—which requires $675,000 instead of $1,250,000.

Building Your Retirement Timeline

Here is a practical framework by decade:

In your 20s: Start contributing to your 401(k) at least up to the employer match. Open a Roth IRA. Even $200/month matters enormously at this stage thanks to compounding.

In your 30s: Aim to have 1x your annual salary saved by age 30. Increase contributions whenever you get a raise. Automate everything so you don’t have to think about it.

In your 40s: Target 3x your salary saved. Review your asset allocation—you still have 20+ years, so equities should remain a large portion. Max out both 401(k) and IRA if possible.

In your 50s: Target 6x your salary. Take advantage of catch-up contribution limits. Start modeling your actual retirement budget in detail. Consider long-term care insurance.

In your 60s: Target 8-10x your salary. Gradually shift toward more conservative investments. Decide on your Social Security claiming strategy. Run the numbers with our Retirement Calculator.

Frequently Asked Questions

How much of my income should I save for retirement?

A common guideline is 15% of your gross income, including any employer match. If you start in your 20s, 15% is usually sufficient to retire comfortably by 65. If you start later, you’ll need a higher percentage—20% or more in your 40s, and potentially 25-30% if you’re starting in your 50s.

Can I retire early with the 4% rule?

The original Trinity Study was based on a 30-year retirement. If you retire at 40 and live to 90, that’s 50 years. Many early retirees use a 3.25-3.5% withdrawal rate to add a safety margin, or they plan to earn some income in the first few years of retirement to let their portfolio grow before they begin full withdrawals.

What happens if the market crashes right before I retire?

This is called “sequence of returns risk,” and it’s the biggest threat to new retirees. A bear market in your first two years of retirement can permanently damage your portfolio if you’re withdrawing at the same rate. Strategies to mitigate this include keeping 2-3 years of expenses in cash or bonds, reducing withdrawals temporarily during downturns, and maintaining a flexible spending plan.

Should I pay off my mortgage before retiring?

It depends on your interest rate. If your mortgage rate is below 5%, the math often favors investing the extra money instead (since long-term stock returns average 7-10%). But there’s a psychological benefit to entering retirement debt-free. Many retirees prefer the security of no monthly housing payment, even if the pure numbers suggest otherwise.

Is $1 million enough to retire on?

Using the 4% rule, $1 million generates $40,000 per year. Add Social Security (average $23,000/year) and you’re looking at about $63,000 annually. Whether that’s enough depends entirely on your location, lifestyle, healthcare needs, and whether your home is paid off. In a low-cost area with no mortgage, $63,000 can be very comfortable. In an expensive city, it may feel tight.