Retirement Planning Basics: Why Starting Now Matters More Than You Think

The Retirement Planning Crisis

Studies consistently show that most people are underprepared for retirement. The reasons vary—lack of knowledge, competing priorities, procrastination—but the consequences are the same: financial stress in what should be your golden years.

The single most powerful tool for retirement planning? Time. And every day you delay is a day of compounding you'll never get back.

The Cost of Waiting

The Math of Delay

Consider two people who both want $1 million by age 65, assuming 7% annual returns:

Starting at 25 (40 years):

• Monthly investment needed: $381
• Total invested: $182,880
• Growth: $817,120

Starting at 35 (30 years):

• Monthly investment needed: $820
• Total invested: $295,200
• Growth: $704,800

Starting at 45 (20 years):

• Monthly investment needed: $1,920
• Total invested: $460,800
• Growth: $539,200

The 25-year-old invests less than half what the 35-year-old does and less than a quarter what the 45-year-old invests. That's the power of starting early.

Real Dollar Impact

If you delay starting retirement savings by just 5 years:

At 7% returns, $500/month:

• Starting at 25: $1,320,000 by 65
• Starting at 30: $913,000 by 65
• Cost of 5-year delay: $407,000

Would you trade $407,000 for whatever you spent that money on in your late 20s?

How Much Do You Need for Retirement?

The 25x Rule

A common guideline: save 25 times your expected annual retirement expenses.

If you need $50,000/year in retirement: $50,000 × 25 = $1,250,000

This is based on the "4% rule"—withdrawing 4% of your portfolio annually, which historically has sustained 30-year retirements.

Factors Affecting Your Number

You might need more if:

• Planning for early retirement
• Expecting higher healthcare costs
• Want to leave inheritance
• Conservative withdrawal strategy
• Higher cost of living area

You might need less if:

• Strong pension or Social Security
• Paid-off home
• Lower cost of living area
• Part-time work in retirement
• Shorter retirement timeline

The Replacement Ratio

Many experts suggest planning to replace 70-80% of pre-retirement income. However, this varies:

• Higher replacement (80-100%) if you plan active retirement with travel
• Lower replacement (60-70%) if modest lifestyle with no debt

Understanding Retirement Accounts

Tax-Advantaged Accounts

401(k) / 403(b) / TSP:

• Employer-sponsored
• 2025 contribution limit: $23,000 ($30,500 if 50+)
• Pre-tax contributions reduce current taxable income
• Employer match = free money (always capture it!)
• Taxed on withdrawal in retirement

Traditional IRA:

• Individual account
• 2025 limit: $7,000 ($8,000 if 50+)
• May be tax-deductible depending on income
• Taxed on withdrawal

Roth IRA:

• Individual account
• Same contribution limits as Traditional
• Contributions made with after-tax money
• Withdrawals in retirement are tax-free
• No required minimum distributions

Roth 401(k):

• Employer-sponsored Roth option
• Same limits as traditional 401(k)
• After-tax contributions, tax-free withdrawals

Which Account to Prioritize?

General order of operations:

1. 401(k) up to employer match – Free money, always first
2. HSA (if eligible) – Triple tax advantage
3. Max out Roth IRA – Tax diversification
4. Max out 401(k) – Higher limits
5. Taxable brokerage – No limits, flexibility

Tax Diversification

Having both pre-tax (traditional) and post-tax (Roth) accounts gives flexibility in retirement:

• Traditional withdrawals = taxable income
• Roth withdrawals = tax-free
• Mix strategically to optimize taxes

Asset Allocation by Age

The Old Rule: 100 Minus Age

Traditional advice said subtract your age from 100 for stock percentage:

• Age 30: 70% stocks
• Age 50: 50% stocks
• Age 70: 30% stocks

The New Reality: More Aggressive

With longer lifespans and low bond yields, many advisors now recommend:

• Age 30: 90% stocks, 10% bonds
• Age 50: 70% stocks, 30% bonds
• Age 65: 50-60% stocks, 40-50% bonds
• In retirement: 40-50% stocks (need growth to last 30+ years)

Target-Date Funds

If this seems complicated, target-date funds automatically adjust:

• Pick fund matching your expected retirement year (e.g., 2055 Fund)
• Fund automatically becomes more conservative over time
• Simple, hands-off approach

The Retirement Savings Rate

How Much Should You Save?

Minimum: 10-15% of gross income (including employer match)

Ideal: 20-25% for earlier retirement or catching up

Aggressive: 50%+ (the FIRE movement—Financial Independence, Retire Early)

Sample Savings Rate Scenarios

Assuming 7% returns, retiring at 65 with 80% income replacement:

| Starting Age | Required Savings Rate | |--------------|----------------------| | 25 | 10-12% | | 30 | 15-18% | | 35 | 20-25% | | 40 | 30%+ | | 45 | 40%+ |

The later you start, the more extreme the required savings rate becomes.

Social Security Considerations

What to Expect

Social Security replaces approximately:

• 40% of income for average earners
• 27% for high earners
• 55% for low earners

It was never designed to be your only retirement income.

When to Claim

• Early (62): Reduced benefits (~30% less)
• Full retirement age (67): Full benefits
• Delayed (70): Increased benefits (~24% more)

Each year you delay past 62 increases benefits by ~7-8%.

Planning Assumption

Many financial planners recommend assuming:

• Social Security will exist but possibly reduced
• Plan to be 80% self-funded
• Consider Social Security as bonus

Creating Your Retirement Plan

Step 1: Define Your Vision

• What age do you want to retire?
• What will retirement look like?
• Where will you live?
• What activities/travel do you want?

Step 2: Calculate Your Number

• Estimate annual expenses in retirement
• Multiply by 25 (or use our retirement calculator)
• Adjust for Social Security and pension

Step 3: Assess Where You Are

• Current retirement savings
• Current savings rate
• Years until retirement

Step 4: Close the Gap

If you're behind:

• Increase savings rate
• Work longer
• Reduce retirement expenses
• Optimize investment returns (reduce fees)
• Delay Social Security

Step 5: Automate and Monitor

• Set up automatic contributions
• Review annually
• Adjust for life changes

Catching Up If You're Behind

Strategies for Late Starters

1. Maximize catch-up contributions

   • Extra $7,500 to 401(k) if 50+
   • Extra $1,000 to IRA if 50+

2. Reduce expenses dramatically

   • Housing downsize
   • Cut lifestyle inflation
   • Eliminate debt payments

3. Generate additional income

   • Side business
   • Part-time work
   • Monetize hobbies

4. Work longer

   • Each year adds savings and reduces withdrawal years
   • Delays Social Security for higher benefits

5. Geographic arbitrage

   • Retire somewhere cheaper
   • Consider international options

Common Retirement Planning Mistakes

Mistake 1: Not Starting

The biggest mistake. Something is infinitely better than nothing.

Mistake 2: Underestimating Healthcare

Healthcare costs in retirement can be $300,000+ per couple. Plan for it.

Mistake 3: Ignoring Inflation

$1 million today won't be worth $1 million in 30 years. Use real (inflation-adjusted) returns.

Mistake 4: Being Too Conservative

With 30+ year retirement horizons, you still need growth. Don't flee stocks entirely.

Mistake 5: Withdrawing Early

Taking retirement funds early triggers penalties AND loses decades of compounding.

Conclusion

Retirement planning isn't about deprivation—it's about making choices now that enable choices later. The earlier you start, the easier it is. The longer you wait, the harder it becomes.

Key actions:

1. Start now, even if small
2. Capture any employer match
3. Increase contributions annually
4. Don't touch retirement funds early
5. Stay invested through market cycles

Use our retirement planner to calculate your specific numbers and create a roadmap to the retirement you envision. Your future self will thank you.