Retirement Planning

Learn how much you need to retire comfortably, and how to prepare for the "unexpected." Plan for everything from living expenses, to healthcare, to planning that trip you've always wanted to take.

Your Guide to Retirement Planning

Letter from The Editor

Our relationship with money has changed.

The pandemic accelerated a lot of those changes, but many of the forces were already set in motion over a decade ago. Investing apps and platforms, zero-commission trading, a historic bull market for stocks coming out of the Great Financial Crisis followed by record-breaking inflation, the emergence of cryptocurrencies, and the evolution of financial planning are just some of the forces that have reshaped the way we think, use, plan, save, and invest our money.

Our notions about retirement have changed, as well.

Younger generations are less likely to work at the same company their entire careers, collect a pension, and ease their way out of the workforce at the age of 65. We are living longer, and we need to be able to afford the lives we want to live when we stop working. For most people, retirement is not their end of work, but the end of being able to depend on a regular paycheck with benefits and a 401(k) match, if we were lucky enough to get one.

While over half of working adults in the U.S. are invested in the stock market, the average 401(k) balance for baby boomers and Generation X is only around $161,000 according to Fidelity. With the cost of living rising higher every year, and questions about the staying power of Social Security, the numbers just don't add up for most people nearing retirement.

There is no magic bullet solution to these problems. There are, however, some fundamental practices and approaches that younger adults and those approaching retirement, can focus on:

• Financial awareness: Do you really know what it costs to be you?
• Investing appropriately for your age: Are you too risky, or not risky enough, or well-balanced?
• Balanced portfolio: Is the 60/40 portfolio still the answer, given the shake-out in the stock market?
• Saving and budgeting in a world of rising prices: Inflation is not a bug in the system—it's a feature that we need to accept and incorporate into our personal budgets.
• Planning and caring for yourself or family members: The cost of care keeps rising, but few are prepared for those bills when they come due.
• Estate planning: If you can and want to pass along your savings to charity or the next generation, are your affairs in order?

Investopedia's special issue on retirement is our first foray into magazine publishing. We are honored to have been a go-to resource for millions of readers for the past 23 years, but we, like you, realize that the game has changed in retirement planning and investing. Therefore, we have dedicated those pages to laying out those changes and offering solutions that can help you change with the times.

Pick up your copy at your nearest retailer or buy now online. We hope you enjoy the issue and learn from it. The first step in financial awareness is to educate yourself, so let those pages help you get on the right path.

If you haven’t been tracking all this already, this is the time to calculate how much money you will need and how much income you can expect to have. Do the math, figure out whether you’re on track, and decide what to do next–everything from changing needs or retirement income to working a few more years.

Start by understanding your investment options–both the different types of retirement accounts and the various investment categories. Then start saving early, track your net worth, keep your cool, and watch out for fees that sap your gains. And unless you’re really good at this, don’t go it alone.

Retirement isn’t just one step called “stop working at a job.” After the pre-retirement stage and the big good-bye, expect to move through a honeymoon phase, disenchantment, the job of building a new identity, and finally settling into a routine.

If you’re thinking of relocating after you retire, here are the best places in both the U.S. and abroad, according to retirement researchers. Be sure to make extended visits to any new location you’re considering before making the move, especially if it involves living in another culture where people speak a different language.

One rule is that people generally need 80% of their current income in retirement. Will you have that much? Start by estimating your future expenses, looking at how much you’ll get from Social Security, and reviewing your retirement savings accounts and any pensions, plus other savings you may have.

Not thinking ahead can decimate your retirement. Among the bad steps: quitting your job before checking on your retirement-plan vesting status, not saving or planning, not maxing out employer matching funds, investment mistakes, poor tax planning and taking Social Security early.

Key Terms

Required Minimum Distribution Retirement Planning 4% Rule Financial Independence, Retire Early (FIRE) Substantially Equal Periodic Payment (SEPP) Catch-Up Contribution Hardship Withdrawal

This is an amount that people age 72 or over (the age requirement may rise to 75) must take from many tax-advantaged retirement accounts, including traditional IRAs, 401(k)s, Roth 401(k)s, and 403(b) accounts.The required amount is based on an IRS formula and the penalties for not taking RMDs are stiff.

The retirement-planning process sets retirement income goals and builds out the steps required to get there. These include determining income sources and expected expenses, creating a savings plan utilizing the best retirement account choices for you, and choosing investments. Prepare to adjust your plan to fit changing circumstances.

This rule recommends that, in order to ensure a safe, steady steam of income, retirees withdraw no more than 4% of their savings every year. Based on historical data, this rule is designed to ensure that savings last throughout retirement. Some experts think the rule could rise to 5% and others that 3% is more prudent with current interest rates.

Proponents of this movement, based on a best-seller originally published in 1992, save aggressively in order to retire well before age 65. This can involve stashing up to 70% of income until savings reach around 30 times expenses. Then the saver can retire, continuing to live on a very tight budget but without the constrictions of daily work.

SEPP is a way to receive funds from an IRA or other qualified retirement plan before age 59½. It lets the recipient avoid incurring IRS withdrawal penalties of 10% of the distributed amount. The process involves specified annual distributions for a period of five years or until the account-holder turns 59½, whichever comes later. Income tax is still due on withdrawals.

This is an additional contribution that people aged 50 or older can make to tax-advantaged retirement accounts, including traditional and Roth IRAs, traditional and Roth 401(k)s, 403(b)s, most 457 plans, the federal government’s Thrift Savings Plan (TSP), SIMPLE IRAs and Simplified Employee Pensions (SEPs).

People who withdraw from tax-advantaged retirement plans before age 59½ are usually subject to withdrawal penalties. However, emergency withdrawals in response to “an immediate and heavy financial need,” as the IRS terms it, may be allowed under certain circumstances. For 401(k)s, the employer’s rules determine which situations are permitted.