Why Planning for Retirement Matters
Planning for retirement is one of the most important money decisions you'll make. The earlier you start saving, the more time your money has to grow. Even small amounts saved now can add up to a lot later.
Think of it like planting a tree. The sooner you plant it, the bigger it can grow. Money works the same way - it needs time to grow.
Here's why planning matters:
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Social Security alone isn't enough for most people to live on
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Without saving, you might have to work longer or cut back on your lifestyle
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Starting early means your money has more time to grow
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Having a plan gives you peace of mind about your future
The Three-Legged Stool of Retirement:
Experts often talk about retirement income as a "three-legged stool":
- Social Security benefits
- Employer retirement plans (like 401(k)s or pensions)
- Personal savings
You need at least two of these "legs" to have a secure retirement. Relying on just one (like Social Security) makes your retirement stool wobbly and unsafe.
Important Retirement Facts
There are several reasons why planning for retirement is more important than ever:
1. Prices Go Up Over Time (Inflation)
What costs $100 today might cost $200 in 30 years. This is called inflation. It means that $1,000 saved today won't buy as much in the future.
For example:
-
A gallon of milk that costs $4 today might cost $8 in 30 years
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A $1,500 rent payment could become $3,000
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A $25,000 car might cost $50,000
Your retirement savings need to grow faster than prices rise or you'll fall behind.
2. People Are Living Longer
Americans are living longer than ever before:
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One in four 65-year-olds today will live past age 90
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One in ten will live past 95
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The average 65-year-old man will live to about 84
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The average 65-year-old woman will live to about 86
This is great news! But it also means your money needs to last 20-30 years after you stop working. That's a long time to live without a paycheck.
3. Healthcare Costs A Lot
Healthcare is often the biggest expense for retirees after housing. Medicare helps, but doesn't cover everything.
A 65-year-old couple retiring in 2024 might need about $315,000 just for healthcare costs in retirement. This includes:
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Medicare premiums
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Deductibles
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Copays
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Prescription drugs
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Dental care
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Vision care
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Hearing aids
And this doesn't even include long-term care, like nursing homes, which Medicare doesn't cover.
4. Social Security Might Change
Social Security faces money challenges in the future. By 2034, the program might only be able to pay about 78% of promised benefits if nothing changes. Congress will likely fix this problem, but younger people should not rely only on Social Security for their retirement.
The Two Main Parts of Retirement Income
Social Security
Social Security is a government program that provides money to retirees. It's like a guaranteed paycheck for life.
How It Works:
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You earn it by working and paying taxes for at least 10 years
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The amount you get is based on your 35 highest-earning years
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Your benefit is adjusted each year for inflation
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Once you start, you get a payment every month for life
How Much You Get:
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The average monthly check is around $1,800-$2,000
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The maximum benefit for someone retiring at full retirement age in 2024 is $3,822 per month
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If you delay until age 70, the maximum jumps to about $4,873 per month
When to Start Taking It:
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Age 62: Smallest monthly check (about 70% of full amount)
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Age 66-67: Full amount (100%)
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Age 70: Largest monthly check (about 124% of full amount)
Cost to You:
While working, you pay 6.2% of your wages into Social Security (your employer pays another 6.2%). If you're self-employed, you pay the full 12.4%.
Personal Retirement Accounts
These are savings accounts that you fund during your working years. They're like special piggy banks that can grow over time.
Unlike Social Security, these accounts belong to you. The government created special rules to help your money grow faster through tax breaks.
Understanding Social Security in Detail 
Eligibility Requirements
To qualify for Social Security retirement benefits, you need:
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At least 40 credits of work (about 10 years of employment)
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To be at least 62 years old
How Benefits Are Calculated
Social Security looks at your highest 35 years of earnings to calculate your benefit. If you worked fewer than 35 years, zeros are counted for the missing years, which lowers your benefit.
Full Retirement Age (FRA)
Your "full retirement age" depends on when you were born:
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Born 1943-1954: FRA is 66
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Born 1955-1959: FRA is between 66 and 67
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Born 1960 or later: FRA is 67
When to Claim Social Security
The best time to start taking Social Security depends on your personal situation:
If You Claim Early (Age 62):
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Pros: You get money sooner and more years of payments
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Cons: Your monthly check is about 30% smaller for life
If You Claim at Full Age (66-67):
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Pros: You get your full earned benefit
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Cons: You missed out on some early years of payments
If You Claim Late (Up to Age 70):
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Pros: Your monthly check is about 24-32% larger for life
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Cons: You missed out on several years of payments
If you expect to live past your early 80s, waiting usually gives you more money overall. If you have health problems or really need the money sooner, claiming earlier might make sense.
Special Rules for Couples
If you're married, you have more options:
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Spouses can get up to 50% of their partner's benefit if that's more than their own
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Surviving spouses can get up to 100% of their deceased partner's benefit
This is why the higher-earning spouse might want to delay claiming until 70, to maximize the survivor benefit.
Working While Collecting
If you claim benefits before your full retirement age and keep working:
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You can earn up to $22,000 in 2024 without penalty
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For every $2 you earn above that limit, $1 is withheld from your benefits
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Once you reach full retirement age, there's no limit on how much you can earn
Social Security vs. Retirement Accounts Comparison
| Feature | Social Security | Retirement Accounts (401(k), IRA, etc.) |
|---|---|---|
| Source of Funding | - Payroll taxes during your working years (you and employer pay 6.2% each) - No personal account; current workers fund current retirees (pay-as-you-go) |
- Your own contributions (and possibly employer contributions/match) - You control how much to save (within limits) and how to invest - Funds are held in your individual account |
| Benefit Amount | - Based on your 35 highest years of earnings and claim age - Replaces ~40% of average income for median earners - Higher earners get higher dollars, but replace smaller % of income - Includes inflation-adjusted annual COLA increases |
- Based on your contributions and investment performance - Can potentially replace a much higher portion of income if you save aggressively - No automatic inflation adjustments—you manage investments to grow your balance |
| Guarantee/Risk | - Guaranteed lifetime benefit backed by the U.S. government - Not affected by market ups and downs - Benefits reduced if taken early (~70% at age 62 vs 100% at full retirement age) - Potential future funding shortfalls (post-2034) could reduce payments to ~78% if not fixed |
- Investment risk and reward; value can rise or fall with markets - Not guaranteed by government (except FDIC-insured parts) - You bear longevity risk (could outlive your money if not managed carefully) - Potential for higher returns and growth above inflation with stock investments |
| Tax Treatment | - Funded with payroll taxes (after-tax for employees, but effectively a tax) - Benefits can be taxable in retirement if income is above certain thresholds - Up to 85% of benefit can be taxable |
- Tax-advantaged: Traditional (pre-tax) or Roth (after-tax) options - Investments grow tax-deferred or tax-free - Traditional 401k/IRA withdrawals taxed as regular income - Roth withdrawals are tax-free |
| Withdrawal Rules | - Earliest claim age is 62 (with reduced benefit) - Full benefits at Full Retirement Age (~66-67) - Can delay to age 70 for larger benefit - Monthly pension for life; no lump sum access - Spousal benefits (up to 50% of your benefit) - Survivor benefits (up to 100% of deceased's benefit) |
- Generally can't withdraw before age 59½ without 10% penalty (exceptions apply) - Required minimum distributions (RMDs) at age 73 for Traditional accounts - No RMDs for Roth IRAs (for original owner) - Can withdraw as needed (regular income or lump sums) - Must manage withdrawal rate to avoid depleting funds - No automatic spousal benefit – but spouses may inherit accounts |
| Adjustment for Delay | - Benefits grow ~8% per year if delayed past full retirement age - Delay possible until age 70 - Can significantly increase lifetime monthly income |
- No guaranteed "delayed credits" - Delaying withdrawals allows investments to potentially grow longer - Growth rate based on market performance, not guaranteed - Market risk continues during delay period |
| Pros | - Guaranteed lifetime income, no matter how long you live - Protected against inflation (COLA increases annually) - No saving discipline required – automatic through payroll taxes - Offers spousal and survivor benefits for family protection - Especially valuable for lower earners (progressive formula) |
- Control and growth potential over savings and investments - Tax advantages can significantly boost savings - Employer matches in 401(k) are "free money" - You own the assets and can pass remaining funds to heirs - Can potentially outpace inflation through investing |
| Cons | - May not be enough for lifestyle maintenance (~40% income replacement) - Early retirement permanently reduces benefits (30% reduction at 62 if FRA is 67) - Uncertainty about future benefit levels (potential ~22% cut after 2034) - No lump sum access for emergencies - High earners get relatively smaller replacement rate |
- Requires discipline to contribute regularly and invest wisely - Market risk: investments can lose value in downturns - Longevity risk: possibility of outliving your savings - Complexity: requires investment decisions and planning - Fees and poor investment choices can erode returns |
Medicare and Healthcare in Retirement
Healthcare is a major expense in retirement. Medicare is the federal health insurance program for people 65 and older. Here's how it works:
Medicare Parts
Part A (Hospital Insurance)
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Covers hospital stays, skilled nursing care and some home health services
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Usually free if you worked 10+ years
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Has a deductible of $1,632 per hospital stay in 2024
Part B (Medical Insurance)
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Covers doctor visits, outpatient care and preventive services
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Costs about $175 per month for most people in 2024
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Has an annual deductible of $240 in 2024
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After the deductible, you pay 20% of the cost for services
Part C (Medicare Advantage)
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Private plans that combine Parts A, B and often D
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Often include extra benefits like dental, vision or gym memberships
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May have lower upfront costs but require you to use network doctors
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You still pay your Part B premium
Part D (Prescription Drug Plans)
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Helps pay for prescription medications
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Monthly premiums vary (average about $30)
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Has a deductible (maximum $545 in 2024)
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You pay copays or a percentage for your medicines
What Medicare Doesn't Cover
Medicare doesn't cover everything. It doesn't pay for:
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Long-term care (like nursing homes)
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Most dental care
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Eye exams for glasses
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Hearing aids
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Care outside the United States
Medigap (Medicare Supplement)
Many people buy extra insurance called Medigap to help cover the gaps in Medicare:
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Helps pay deductibles, copays and coinsurance
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Has a monthly premium (often $100-$200)
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Best time to buy is within 6 months of starting Medicare Part B
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Gives you freedom to see any doctor that accepts Medicare
When to Sign Up
Sign up for Medicare during the 7-month period around your 65th birthday (3 months before, your birth month and 3 months after). If you delay without other coverage, you'll pay penalties later.
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Retirement Savings Accounts
Here are the main types of retirement accounts:
401(k) Plans
A 401(k) is a retirement savings plan offered through your job.
Key Features:
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In 2024, you can contribute up to $23,000 per year ($30,500 if you're 50 or older)
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Many employers match part of what you contribute - this is free money!
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Your money is invested in options you choose (usually mutual funds)
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You can't easily withdraw the money until age 59½
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At age 73, you must start taking money out (called Required Minimum Distributions)
Types of 401(k)s:
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Traditional 401(k): You don't pay taxes on the money you put in now, but you pay taxes when you take it out in retirement
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Roth 401(k): You pay taxes on the money you put in now, but you don't pay taxes when you take it out in retirement
Employer Match:
If your employer offers a matching contribution, always try to contribute enough to get the full match. For example:
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If your employer matches 50% of the first 6% you contribute
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And you earn $50,000 a year
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Contributing 6% ($3,000) gets you a $1,500 match from your employer
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That's an immediate 50% return on your money!
Individual Retirement Accounts (IRAs)
An IRA is a retirement account you set up yourself at a bank or investment company.
Key Features:
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In 2024, you can contribute up to $7,000 per year ($8,000 if you're 50 or older)
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You have more investment choices than most 401(k)s
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Like 401(k)s, you typically can't withdraw until 59½ without penalties
Roth IRA:
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You pay taxes on the money now, but all growth and withdrawals in retirement are completely tax-free
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You can take out your contributions (but not earnings) anytime without penalty
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You're never forced to take money out (no required withdrawals)
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In 2024, you can contribute up to $7,000 ($8,000 if you're 50 or older)
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There are income limits - if you earn more than about $146,000 (single) or $230,000 (married), you can't contribute directly
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There's a "backdoor" way for high earners to still use a Roth IRA (ask a financial advisor about this)
Traditional IRA:
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You may get a tax deduction now (lowering your taxes today)
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Your investments grow without taxes until withdrawal
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You pay taxes when you take money out in retirement
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You must start taking money out at age 73
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Same contribution limits as Roth IRA: $7,000 for 2024 ($8,000 if 50+)
Accounts for Self-Employed People
If you work for yourself, you have special options:
SEP IRA:
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Allows you to contribute up to 25% of your income (maximum $69,000 in 2024)
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Works like a Traditional IRA for tax purposes
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Easy to set up and maintain
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Great for freelancers and small business owners
Solo 401(k):
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Similar to a regular 401(k) but for self-employed individuals with no employees
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Can often let you save more than a SEP IRA at lower income levels
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More paperwork than a SEP IRA
Other Retirement Plans:
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403(b) plans are like 401(k)s but for people who work at schools, hospitals and non-profits
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457(b) plans are for government employees and some non-profit workers
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A nice feature of 457(b) plans is that you don't pay the 10% penalty if you withdraw money before age 59½ (though you still pay taxes)
Retirement Accounts Comparison
| Account | 2024 Contribution Limits | Tax Benefits | Withdrawal Rules | Key Features |
|---|---|---|---|---|
| 401(k) / 403(b) | - $23,000 under age 50 - $30,500 if age 50+ - Plus employer contributions - Total max: $76,500 with catch-up |
Traditional: - Pre-tax contributions - Tax-deferred growth - Taxable withdrawals Roth: - After-tax contributions - Tax-free growth - Tax-free qualified withdrawals |
- 10% penalty before age 59½ - Age 55 exception if retiring - RMDs at 73 (Traditional only) - Loans often available |
- Employer matching - Automatic payroll deduction - High contribution limits - Strong creditor protection |
| Traditional IRA | - $7,000 under age 50 - $8,000 if age 50+ - Deductibility based on income |
- Potentially tax-deductible - Tax-deferred growth - Taxable withdrawals |
- 10% penalty before age 59½ - Exceptions: first home, education, medical - RMDs at age 73 |
- Wide investment options - Individual control - Available to anyone with earned income - Backdoor Roth conversion option |
| Roth IRA | - $7,000 under age 50 - $8,000 if age 50+ - Income limits apply: - Phases out starting $138K (single) - Phases out starting $218K (joint) |
- After-tax contributions - Tax-free growth - Tax-free qualified withdrawals |
- Contributions accessible anytime - Earnings: 10% penalty before 59½ unless qualified - No RMDs for original owner |
- Tax-free retirement income - Emergency access to contributions - No RMDs (great for legacy planning) - Doesn't impact retirement tax bracket |
| SEP IRA | - Employer contributions only - Up to 25% of compensation - Max $69,000 (2024) - No catch-up provision |
- Tax-deductible for employer - Pre-tax for employee - Tax-deferred growth - Taxable withdrawals |
- 10% penalty before age 59½ - Standard IRA exceptions apply - RMDs at age 73 |
- Ideal for self-employed/small business - Simple setup and administration - Flexible contribution amounts - No Roth option available |
| Solo 401(k) | - $23,000 employee deferral - Plus 25% of income (employer portion) - $7,500 additional if 50+ - Max $76,500 with catch-up |
- Employee: Traditional or Roth - Employer: Always pre-tax - Tax-deferred or tax-free growth |
- 10% penalty before age 59½ - RMDs at 73 (not for Roth portion) - Loan option possible |
- For self-employed with no employees - Higher contribution potential at lower incomes - Form 5500-EZ if assets >$250K - Combines employee & employer contributions |
| SIMPLE IRA | - $16,000 employee deferral - $19,500 if age 50+ - Employer must contribute (3% match or 2% non-elective) |
- Pre-tax contributions - Tax-deferred growth - Taxable withdrawals - No Roth option |
- 25% penalty within first 2 years - 10% penalty before 59½ after 2 years - RMDs at age 73 |
- Easier alternative to 401(k) - For small employers (under 100 employees) - Lower administration burden - Mandatory employer contributions |
How to Make the Most of Your Retirement Savings
1. Start Early
The sooner you begin saving, the more your money can grow. Consider this example:
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Sam starts at age 25, saves $200/month until 65 (40 years)
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Pat starts at age 45, saves $400/month until 65 (20 years)
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Sam contributes a total of $96,000 over 40 years
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Pat contributes a total of $96,000 over 20 years
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Assuming 7% average returns, Sam would have about $525,000
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Pat would have only about $197,000
Same total contribution, but Sam has over $328,000 more just by starting earlier!
2. Get the Full Match
If your employer offers matching contributions in your 401(k), contribute at least enough to get the full match. This is literally free money - don't leave it on the table.
3. Increase Savings Over Time
Try the "1% more each year" plan:
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Start by saving 6% of your pay
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Each year, increase it by 1%
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After 10 years, you'll be saving 15% and may hardly notice the difference
-
Whenever you get a raise, put at least part of it toward retirement
4. Spread Your Investments
Don't put all your eggs in one basket. Spread your money across different types of investments:
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Stocks (for growth)
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Bonds (for stability)
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Cash (for safety)
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U.S. and international investments
Many people use "target-date funds" that automatically adjust this mix as you get closer to retirement.
5. Watch Out for Fees
High fees can eat away at your savings. For example:
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A fund with 0.5% fees vs. one with 1.5% fees
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On $100,000 over 30 years
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Could mean a difference of over $125,000 in your final balance
Choose investments with low fees to keep more of your money.
6. Avoid Early Withdrawals
Taking money out before retirement means:
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Paying penalties (usually 10%)
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Paying taxes
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Missing out on years of growth
If you change jobs, don't cash out your 401(k) - roll it over to your new employer's plan or an IRA.
Investment Tips for Your Retirement Accounts 
Once you have money in your retirement accounts, you need to invest it wisely:
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Always get your employer match: If your company offers to match your 401(k) contributions, contribute at least enough to get the full match. This is free money!
-
Consider low-fee index funds: These are simple investments that track the whole market. Look for funds with expense ratios below 0.2% if possible. If your 401(k) only offers funds with fees around 1%, that's still okay.
-
Think about this order for investing: First, put enough in your 401(k) to get the match. Then max out an IRA for more investment choices. Then go back to your 401(k) if you can save more.
7. Adjust Your Mix as You Age
As you get older, gradually shift to safer investments:
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In your 20s and 30s: Mostly stocks (maybe 80-90%)
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In your 40s: Still mostly stocks, but start adding more bonds
-
In your 50s and 60s: More balanced (maybe 50-60% stocks, 40-50% bonds)
-
In retirement: Even more conservative, but still keep some stocks for growth
8. Consider Tax Advantages
Think about whether traditional (tax break now) or Roth (tax break later) accounts make more sense for you:
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If you're in a high tax bracket now and expect to be in a lower one in retirement: Traditional might be better
-
If you're in a low tax bracket now or expect taxes to go up: Roth might be better
-
When in doubt, having some of each gives you flexibility
Think of the three types of accounts as:
-
Traditional: "Tax me later" (tax break now, pay taxes in retirement)
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Roth: "Tax me never" (on the growth and qualified withdrawals)
-
Regular brokerage: "Tax me as I go" (no special tax breaks)
Retirement Planning Timeline
In Your 20s and 30s
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Start saving in your workplace retirement plan or an IRA
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Take advantage of employer matching in your 401(k)
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Build an emergency fund (3-6 months of expenses)
-
Pay off high-interest debt like credit cards
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Invest mostly in stocks for long-term growth
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Learn the basics about investing and personal finance
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Aim to have about 1 times your yearly salary saved by age 30
In Your 40s
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Increase your savings rate if possible (aim for 10-15% of income)
-
Check your progress - aim for about 3 times your salary by age 40
-
Keep an investment mix that focuses on growth
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Work on paying off debts
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Make sure you have life and disability insurance if you have a family
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Start thinking about when you want to retire
-
By age 45, aim for 4-5 times your salary saved
In Your 50s and Early 60s
-
Make extra "catch-up" contributions after age 50
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Save as much as possible during these peak earning years
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Gradually reduce investment risk as retirement gets closer
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Plan your retirement age and lifestyle
-
Estimate your retirement expenses and income
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Consider when to claim Social Security
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Learn about Medicare before you turn 65
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Think about whether you want to downsize or relocate
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By age 60, aim for about 8 times your salary saved
At Retirement (Mid 60s)
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Sign up for Medicare at 65
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Decide when to start Social Security (by age 70 at the latest)
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Set up a plan for which accounts to withdraw from first
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Consider whether you need extra insurance (like Medigap)
-
Adjust to your new lifestyle and budget
-
Try living on your retirement budget for a year before retiring
In Later Retirement (70s and Beyond)
-
Start required withdrawals from retirement accounts at age 73
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Simplify your finances as you get older
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Plan for possible healthcare or long-term care needs
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Consider gifting to family or charity if you have extra
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Make sure your family knows where to find important documents
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Enjoy the retirement you've worked hard to save for!
Starting Late? Here's How to Catch Up
Many people worry that they started saving too late. Maybe you didn't know about investing in your 20s or 30s. Maybe you had other big expenses like raising a family. Whatever the reason, if you're in your 40s or 50s and feel behind, don't give up! You can still make a big difference in your retirement.
Starting later does make things harder. Here's why: If you invest $100 a month starting at age 25 and get a 10% return, you could have over a million dollars by age 65. But if you start at age 45 with the same $100 a month, you might only have about $100,000 by age 65.
This shows why starting early helps so much. But don't feel bad if you're starting late - you're not alone. Almost 28% of Americans have nothing saved for retirement. The important thing is to start now.
10 Ways to Catch Up if You're Starting Late
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Accept where you are and believe you can improve. Your mindset matters. Believe that you can still become financially secure.
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Take a close look at your money situation. If you're 45, you might have 20 years until retirement. If you're 55, you have 10 years. A lot can happen in that time with a good plan.
-
Track your money for 30 days. Write down everything you spend. This will show you where your money is going and where you can save.
-
Build an emergency fund. Try to save 3-6 months of expenses in a savings account. This keeps unexpected costs from ruining your plan.
-
Cut unnecessary spending. Your 30-day money tracking will show things you don't really need. Even small expenses like daily coffee add up over time.
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Give every dollar a job. Set up three bank accounts: one for spending, one for saving and one for investing. Try putting 75% of your money toward spending, 15% toward investing and saving and 10% toward your emergency fund.
-
Find ways to earn more money. Ask for a raise, work overtime or start a side job. More income means more money to save and invest.
-
Consider working longer. The old retirement age of 65 might not work if you start late. Working until 70 gives your money more time to grow. You might also consider part-time work in retirement.
-
Take care of your health. Being healthy lets you work longer, feel better and spend less on medical costs.
-
Protect yourself with insurance. Make sure you have life insurance and disability insurance to protect your finances if something happens to you.
Simple Steps to Get Started
If retirement planning feels overwhelming, start with these simple steps:
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Find out if your job offers a 401(k) or similar plan. Sign up and contribute at least enough to get any employer match.
-
If you don't have a retirement plan at work, open an IRA. You can do this at many banks or investment companies like Vanguard, Fidelity or Charles Schwab.
-
Set up automatic contributions from your paycheck or bank account so you save consistently.
-
Choose a simple investment like a target-date fund based on when you plan to retire (for example, a "2050 Fund" if you'll retire around 2050).
-
Increase your savings when you can, especially when you get a raise or bonus.
-
Check your Social Security statement online at ssa.gov to see your estimated benefits.
-
Create a simple retirement budget to estimate how much money you'll need each month.
-
Review your plan once a year to see if you're on track and make adjustments if needed.
A Simple Way to Figure Out How Much You Need
Some people find retirement planning confusing with all the numbers and calculations. Here's a simpler approach:
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Figure out how much you'll spend each year in retirement
-
Many people spend about 80% of what they spent while working
-
For example, if you bring home $50,000 after taxes now, you might need about $40,000 per year in retirement
-
-
Subtract other income sources
-
If you'll get $20,000 per year from Social Security, you'll need to get the other $20,000 from your savings
-
-
Use the 4% rule
-
This rule says you can safely take out about 4% of your savings each year without running out of money
-
To figure out how much you need to save, multiply your yearly need by 25
-
In our example: $20,000 × 25 = $500,000 needed in savings
-
Some people use 3% (multiply by 33) to be extra safe or 5% (multiply by 20) if they're okay with more risk
-
-
Don't forget taxes
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Remember that you'll still pay taxes in retirement
-
Having different types of accounts (traditional, Roth and regular) gives you more flexibility with taxes
-
This simple method isn't perfect, but it gives you a good starting point. For a more detailed plan, talking to a financial advisor can be helpful.
Confused about retirement planning? Our ultimate retirement guide for 2025 breaks down the essentials: Social Security, investments and creating a comfortable future.