What are the first steps of retirement planning?

Regardless of your specific goals or timeframe, the key to a financially secure retirement is proper planning.

With a solid retirement plan in place, you’ll have a roadmap to follow throughout your working life. And you’ll be in a better position to know what to do every step of the way - how much to save, how to invest, and when to make lifestyle and budget adjustments to reflect new life circumstances or goals.

Without a plan, you won’t have an accurate idea of whether you’re on track to meet your goal, and you could fall short.

Getting ready for retirement doesn’t need to be complicated. In this guide, you’ll learn:

• Retirement planning rules of thumb

• How to set retirement goals

• How much retirement income you might need

• How much retirement income you might expect from Social Security

• How to choose retirement savings vehicles

You’ll also learn when to use online retirement calculators and how to select a financial professional should you need help with retirement planning details now or in the future.

First, learn the three rules of thumb of planning for retirement

At the heart of the retirement planning process is estimating how much money you will need to save during your working years. These three rules-of-thumb can be helpful for estimating your needs, though remember that they're general rules that may not be right for every person or situation.

1. The 25 times rule

According to the 25 times rule, one should accumulate retirement savings equal to 25 times their annual expenses. For example, if your estimated annual expenses are $50,000, you would want$1,250,000 in savings to meet the 25 times rules.

2. The 4% rule

According to the 4% rule, one can withdraw 4% of their retirement savings in the first year of retirement and adjust subsequent withdrawals for inflation in the following years. At this withdrawal rate, one's savings could possibly last around 30 years without running out of money. For example, if a person's retirement fund is $1 million, they can withdraw roughly $40,000 per year (4% of $1,000,000).

3. The 70-80% rule

A commonly suggested benchmark is a retirement income that replaces around 70-80% of your pre-retirement annual income. For example, if you earn $100,000 per year in your final working years, you’ll want to aim for $70-$80,000 per year in retirement income (or withdrawals from savings).

Applying these three recommendations individually or in combination is a great way to simplify the retirement planning process and can help you get a ballpark estimate of how much you'll have to save.

Of course, everyone’s situation, circumstances, goals, and needs will differ, so it's important to remember that these are not really "rules" but general guidelines. You should also note that they are based on certain assumptions, such as having retirement funds invested in a diversified portfolio with moderate risk.

What are the first steps of retirement planning?

With the three key retirement planning rules in hand, you’ll be ready to start the retirement planning process. Take it step by step, as outlined below, to simplify the process.

1. Figure out when your retirement will start and how long it might last

When would you like to retire? Will you shoot for the 2023 median retirement age of 62,¹ or do you plan to continue working to 65? Or later?

Take a best guess based on your current circumstances and goals. It’s important to know approximately how many working years you’ll have to build your retirement fund.

You should also consider how long your retirement might last. It can be a tricky calculation, but it's important to have some idea of how many years you'll have to rely on your retirement savings. Consider the average longevity in your family, your current health status, and the expected lifespan of people in the same socioeconomic group as you.

You can also look at national averages for life expectancy. According to data from the Social Security Administration, a typical 65-year-old male can expect an approximate 17-year retirement on average, while a 65-year-old female can expect a nearly 20-year retirement.

Keep in mind that Social Security benefits can be withdrawn early, but your monthly payout will be lower if you retire before your full retirement age. Medicare also doesn’t start until age 65, so you’ll need to maintain private health insurance before then. If you choose to retire at an early age, you’ll want to account for these fluctuations in benefits during your retirement years.

2. Determine what type of lifestyle you want in retirement

Next, think about what kind of lifestyle you’d like to achieve or maintain after you stop working. Here are some questions to ask yourself:

• Do you plan to stay in your current home and maintain your current lifestyle?

• Do you hope to move to a more upscale resort location where housing and other costs may be higher?

• Are you looking forward to extensive travel or other costly endeavors?

• Do you intend to downsize and cut back to minimize your financial needs?

Your retirement lifestyle will, in large part, determine your retirement expenses. These expenses will also determine how much retirement savings you will need.

3. Estimate how much you will spend per year in retirement

Your goal for this step is to come up with a solid ballpark estimate that you can alter as your life circumstances change or you get closer to retirement age.

Here’s how to estimate your retirement spending:

• Start by recording your current monthly expenses. This will serve as a baseline for estimating your retirement expenses.

• Consider the impact of inflation. Generally, it's advisable to assume an average inflation rate of about 3% per year. You can use an inflation calculator to help visualize how inflation might affect your spending.

• Consider any anticipated lifestyle changes – such as downsizing or relocating – and how they might affect your expenses.

• Add in healthcare costs, which tend to increase with age. How much do you expect to spend on insurance, out-of-pocket expenses, and more?

• Evaluate your outstanding debts — including mortgage payments — and determine whether they'll be paid off by the time you retire.

• Think about any retirement plans you have — such as travel and new hobbies — and include the estimated costs in your calculations.

• Consider any other potential expenses, from helping an adult child and their family to buying or leasing a new car.

Finally, assume that there will always be unanticipated expenses and build a cushion to account for them. For instance, if you determine that your household will spend around $75,000 per year in retirement, you may wish to round that up to $80,000 to account for various unknowns.

4. Estimate any income you will have during retirement (like Social Security)

Most retirees will have some sort of regular income in retirement, even though they're no longer working. For most Americans, this comes in the form of monthly Social Security benefits.

The average monthly benefit for Americans was $1,907 as of January 2024 , but your specific check will depend on various factors. You can use the Social Security Benefits Estimator to determine how much you can expect to receive each month based on your pre-retirement income (including current earnings) and your target retirement date.

Other income you may have could include payments from pensions, interest earned from savings, or rental property income.

5. Figure out your expenses-to-income gap

Now you know how much you'll be spending and earning each month. The difference between these two numbers reflects how much you'll need to withdraw from savings or investments each month.

For example, let’s say you determine you will spend $6,000 per month in retirement. You will earn $2,000 per month from Social Security. That means you have a gap of $4,000 per month and will need to pull this sum out of savings every month.

6. Set a retirement savings goal using your calculations

If you know you need to pull $4,000 per month ($48,000 per year) from savings, you can use the 25 times recommendation as a starting point to work backward and find your goal retirement savings amount. By multiplying your annual need ($48,000) by 25, you get $1,200,000 ($1.2 million).

If you follow the 25 times rule, you want to have $1.2 million in savings and/or investments by the time you retire. But how do you get there?

7. Make an actionable retirement savings plan

The next step is to develop a retirement savings plan that can help you reach your goal. Here are some strategies to use:

• Start by setting clear retirement goals: Use the steps above to get specific with the number you need to hit and get accurate retirement spending goals.

• Estimate how much you can afford to save: Looking at your current budget, calculate how much is left over after accounting for living expenses, debt repayment and other ongoing expenditures. If you're unhappy with the number, consider where you might economize to free up additional funds.

• Take full advantage of employer-sponsored retirement plans: If your employer offers a 401(k) or other retirement plan, try to contribute the maximum allowable amount each year, if possible. If your workplace offers employer matching (where your company kicks in extra money to your retirement accounts when you make contributions), even better.

• Take full advantage of Individual Retirement Accounts: If you’re self-employed or have the funds to supplement an employer-sponsored retirement plan, open an Individual Retirement Account. IRAs offer tax advantages and a broader range of investment options. Traditional IRAs provide tax-deferred growth and an upfront tax deduction, while Roth IRAs offer tax-free withdrawals in retirement. Deciding between a traditional or Roth IRA is something that a financial planner could help with. Learn more about IRAs here.

• Make contributions to your retirement accounts every month: To grow your retirement savings account long-term, consistency is key. Even small amounts contributed on a regular basis can grow into substantial sums. You can set up automatic transfers to your retirement savings accounts to make it easier.

• Diversify your investments: Allocate your retirement contributions across a diversified portfolio of investment options offered within the plan. Use a combination of stocks, bonds, mutual funds and FDIC-insured vehicles to balance risk and potential returns. Consider your risk tolerance and investment goals when selecting the appropriate investment mix for your retirement portfolio.

• Regularly review and adjust your plan: Review your retirement savings periodically to ensure they align with your evolving financial situation, retirement plans and goals. As you're getting ready to retire, you may want to adjust your asset allocation to lower your portfolio's risk profile.

By following these steps for retirement planning, you can create a retirement savings plan that works to help secure your financial future. Starting early and maintaining discipline throughout your working years will help to increase your retirement savings potential. And remember, if you need extra help with any of these steps, consider consulting a financial professional, such as a certified financial planner with retirement expertise.

It’s also helpful to use a retirement calculator to double-check your numbers.

Utilize professionals for retirement planning success

Creating a retirement plan can seem daunting, especially if you haven't attempted it before. But it doesn't have to be. Understanding the first steps of retirement planning is easy enough with this guide — and if you run into roadblocks or simply want a second opinion, there are knowledgeable financial professionals who can help.

Guardian can help you find a local financial professional. You can also ask friends or coworkers for recommendations. If possible, talk with a few candidates to see who you like best, and make sure they have the licensing and expertise needed to create a retirement plan.

Finally, remember that the earlier you start planning for retirement, the more likely you are to reach your goals. The best time to start is right now!