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How to Plan For Retirement, How Much to Save & Invest: The Ultimate Guide

how to plan for retirement

There are about 78 million baby boomers in the United States and in the next 10 years, a lot are expected to reach the retirement age, or at least start thinking seriously regarding their retirement. Indeed, those months leading to your retirement could haunt you in every single day of your life. So here’s a comprehensive article that can help you in planning before you reach your golden years. Check out a specific section, or simply read the whole thing.


Older woman with a piggy bank

The first step that any upcoming retiree should consider is to prepare an income plan. Create a written budget. On your budget, you must look into your future and figure out your cash inflow or your income, as well as your cash outflows, or expenses. Then draw up a balance sheet that will list down your assets and your debts and determine how much your net worth is.

Since a lot of people may need to live off some parts of their savings, it’s important that you know the bottom line. Furthermore, you must also factor in the taxes you’re expected to pay into the retirement equation.

Next is to think about your social security. If you are eligible for the Social Security benefit, then you should get in touch with the Social Security Administration to request for an approximate estimate of your entitlement for about six months before the actual retirement period. As soon as you have obtained the estimate, review all of your current benefits associated with the retirement dates that you are considering. Once you have decided on your age for stepping back and stop working, you should immediately file your application about four months before your actually stop working.

As you think of not working anymore, you also need to consider your health insurances and how you want to pay for it. If you will retire early, then find out if you can still make use of the health insurance provided by your employer for you as well as for your spouse, if ever. If not, then you may need to seek private insurance to cover for your health insurances. Even in a normal retirement age, insurance could help out, however, you may have to pay for some portion of the bill.

If you are lucky enough to still qualify for your company’s pension plan, then you may want to get in touch with your administrator at least six months before your retirement for the payout options. One of the most difficult decisions to make is whether to take a single or a joint life payout, thus, you will need to think about this carefully enough.

If you are not receiving any pension, you may still need to think about your 401 rollover and other distribution options. If you’ve got a company stock option, consult with a financial professional so you will not end up with a hefty tax bill when the time comes that you cash out.

Another commonly overlooked area when it comes to life planning is the long-term care insurance in case you or your partner will require some specialized assistance or care. Think of the policies that have coverage that could help with your every day activities, assisted living services, adult day care, visiting nursing care or home nurses, etc.

It’s important that you also establish an emergency fund. This is the money you will use to get you through the hard times. This will basically serve as a safety net in the event that something unplanned will happen. This includes unexpected medical expenses, market downturns, expensive home repair, etc. During the normal economic condition, most of the retirees will have up to six months of cash reserves. This must be separate from the investment portfolio.

Don’t forget to update your estate documents. A lot of people thought that just because they only have a small estate or that they have a low net worth, they no longer need to plan their estate. This is actually farther from the truth. Retirement will require more life planning solutions than during your working years. Some other common items that you should consider are the healthcare surrogates, power of attorney, beneficiary updates, 401k plan and IRA.

Make sure to consolidate all of your assets. Retirement is the best time to take your finances by the horns and a great time to round up the necessary paperwork. Thus, consider consolidating all of your 401k plans to an individual IRA or by working only with one to two custodians. This is a good alternate where your spouse will pay the bill every once in a while to ensure that you understood all of the family investments, expenses, as well as insurance policies. If any of you will die, the other spouse must prepare himself or herself to take over with the responsibilities.

How to Prepare

Notebook on a table that says preparation is key

The key to planning for a retirement is to determine the things that you think will give you peace of mind. Thus, it is important that you know how you will get there financially.

First of all, you should define what your plan should be like. To do so, write down your objectives and goals. Be as descriptive as you can so you can focus more on a realistic set of goals, making each of them easily attainable.

Take a stock of all your assets. You sure know how much money you are bringing home each month and how much you currently have in the bank, but what about the other assets, such as your land, cars, houses, etc.? You need to consider all of these when planning.

Another important aspect in planning for your retirement is your health status. In order to get the most out of your situation, you should aim to be as healthy as possible. If possible, schedule your medical checkup and commit to staying healthy starting today. Staying healthy will benefit you in so many ways especially when the time comes that you stop working.

Another thing you need to do when planning is to figure out how much you are getting from your social security when you retire. Moreover, you need to decide how much you need to work in order for you to be able to reach all your goals.

Planning Checklist

Blank checklist

The last thing you probably want is to have to go back to work even after you have already called it quits. This usually happens because of the lack of planning. To prevent this from happening, here’s a retirement planning checklist that can serve as your guide.

  • Develop a retirement budget – start planning for your budget as early as possible. Consider what you’re currently spending as a person who is still working. Refer to your bank statements, utility bills, credit card statements, etc.
  • Design your retirement plan – decide on what age you want to stop working at and figure out how much you need to save so you can live the comfortable lifestyle you desire even when you stop working.
  • Figure out your income – consider what sources of income you will have after you stop working. This will include your pension, social security, etc.
  • Check your accounts each year – always be updated with your different accounts and make sure that you’ve saved enough in the past year, enough for you to be on track.
  • Get out of debt now – pay off all your debts and aim to live a debt free life.
  • Do not be too complacent – after you stop working, do not go on a cruise control with your investments. Evaluate these continuously and make sure to always maintain a diversified investment portfolio.
  • Find out what your health care needs upon not working anymore – for those who are retiring at 65 and older, you might be eligible for the Medicare. So think about your health care needs as part of your planning.
  • Learn the rules and regulations and laws that govern your accounts – retirement accounts are different from one another and if you’ve saved several accounts, it might be a bit confusing on how your withdrawals will work. So make sure you understand everything, especially the rules and regulations.

How Much Money Do You Need?

Piggy bank next to a calculator

In order to figure out how much money you should have in order to retire comfortably, you must first estimate your expenses currently. So here’s how to come up with an estimate.

  • Determine how much you are spending now – the best place to start is to figure out how much you are currently spending. Simply determine the expenses that come out of your pocket every month.
  • Find out how much tax you will pay – compute the estimated amount of tax that you need to pay out of your retirement income. Except if your only source of funds is the Social Security, there is a chance that you will end up paying taxes during your retirement.

Add up the figure that comes out of the two and multiply it to the number of years of the average life expectancy. The result will be the amount of money that you need to have in order for you to be able to live comfortably and live the same life quality as you have now.

Typical Budget and Costs to Include

Note block with the word budget on it

Based on the computation above, here is what you should include in your budget, and consider reading our guide on how to create a budget.

  • Monthly take home pay – determine how much you are earning each month, or the money that gets deposited into your account after taxes, insurances, retirement plans, etc.
  • Expenses – this is the amount that is being deducted off your paycheck, for instance, health insurance, etc.
  • Extra expenses – these are your extra expenses that you wanted to include on your retirement budget, such as extra money for health care services, travel expenses, etc.
  • Emergency fund – the amount of savings that you need to have in anticipation of unexpected expenses like expensive home repairs, etc.
  • Expenses that could decrease when you stop working – for instance, if you’ve got a long commute going to your work, then your cost of transportation will decrease when you retire.

After you add up all your monthly expenses, multiply this to 12 and you will arrive with the amount that you are expected to spend for each year come retirement. Thus, this is the amount that you should aim to save in order for you to live comfortably when you stop working.

When Should You Start Saving?

Piggy bank

When it comes to the question on when you should start saving, the answer is as soon as possible, and we’ve made an extensive guide on saving money for you to enjoy too. Ideally, you must start building your savings when you are in your twenties, when you have graduated from college and start earning. This is because the sooner that you start saving, the more time your money will be able to grow. The gain you earn for each year could generate gains in the following year. This is a powerful wealth-building platform, known as compounding.

For instance, you started saving when you are 25 years old and you have put aside $3,000 every year on a tax-deferred retirement account for ten years. Then you suddenly stop saving completely. When your each the age of 65, the $30,000 that you have put in investment will grow to about $338,000, with a 7% annual return, although you did not contribute anything after reaching 35 years old.

Now if you have put off saving until you reach 35 years old, then you save $3,000 each year for 30 years. When you reach 65 years old, you would have set aside $90,000 from your own money, but this will only grow to $303,000, which is such a huge difference if you have started saving when you were at 25.

Types of Retirement Accounts

Man typing into a calculator

There are actually lots of retirement savings accounts that you can consider in order to help with your plan. The IRS has their own set of rules for each of these types of accounts and it is important that you are aware of this. So here are the seven different types of savings that you should consider.

  • 401k or 403b offered by employer – this is by far the easiest and the most ideal way to start saving. The money will be withheld through deduction of payroll. If you decide to leave your job, you can choose to roll over the account to your own employer’s 401k or to your own IRA.
  • SEP IRA – this stands for the Simplified Employee Pension and this type of account is primarily used by small business owners and self-employed individuals. As employer, you may be able to contribute as much as 25 percent of the income you’re earning. This is much easier to set up unlike the 401k.
  • Simple IRA – this retirement plan will allow small employers to be able to set up IRAs without so much paperwork. This is applicable to employers with less than a hundred employees and it is important that employers will match their employee contributions.
  • IRA – anyone could contribute to as much as $5,500 for the IRA. The money will grow and it is tax-free. This allows individuals to contribute both for IRA and 401k. However, if you are covered with a plan in your work, you will not be able to deduct your IRA contributions off your income if you are earning more than $71,000 each year for singles and $118,000 for married individuals filing jointly.
  • Roth IRA – with Roth IRA, you will be contributing after tax, and you will not get any tax deduction for these contributions. The money that you will earn will grow tax-free and you will not be paying any tax on withdrawals when you reach 59 1/2.
  • Health savings account – those having high deductible insurance plans will be able to save money tax-free through the Health Savings Account or HSA. For this account, you will be able to contribute up to $3,350 each year for individual or $6,650 for family. If you are more than 55 years old, you are allowed to contribute $1,000 more.

Tips for Saving

Piggy bank standing on a calendar

Everyone knows that saving for retirement is necessary especially since company pensions are expected to become extinct in the coming generation. But then again, saving is not easy, whether it is for your golden years or for other things. So here are some tips to guide you in saving.

  • Start now – whatever your age is, you should make saving your number one priority. Those who start saving at their early twenties and thirties should put aside smaller amount in a regular basis because they will have several years to save and invest. But regardless of what age you are now, you should know what your financial situation is and start from there. As soon as you make the decision to know your financial situation, you can start acting now in order to change and improve your situation.
  • Make your savings automatic – those who accumulated wealth and made a decision to save some portions of what they are earning, have actually practiced such habit in over a period of time. Sure, saving is never easy, but if you make it a habit, then it should be much easier. To start with, think of an amount or percentage to get out of your paycheck and put into your savings and make sure that you stick with the plan.
  • Never touch your 401k until you stop working – one of the most common mistakes that people often make in terms of their retirement savings is taking a lump sum out of their pension. But even if you make such a mistake, you still have time to recover from this and live in the future. If you want to be one of those people who have enough money, then try to resist the urge to make use of savings like your own personal bank account.
  • Save outside of your retirement plan – if you max out your 401k plans, as well as other employer based savings, you should save even more on personal brokerage account or IRA. There are several brokerage firms that offer investment options so you may want to check that out.

How to Invest

Jar with coins in it

If you will invest your money for retirement, then there are mainly three options.

  1. First, you can put your money into a retirement account offered by your employer, like the 401K and the 403B. All these plans are good since the money will increase free from tax until such time that you withdraw it when you retire.
  1. Secondly, you can put your money to a tax advantage retirement account, like the IRA. IRA provides similar tax breaks to your 401k although the eligibility rules will usually differ.
  1. Third, you can place your money to a regular invest account that does not come with any tax advantages.

The first two options are actually better deals. However, there are also limits on how much money you are allowed to put for each of them per year. If you have placed all the money you are allowed into the tax-favored plans and you wanted to save even more, then you should go for the regular investment account.

Investing Mistakes to Avoid

Pencil erasing something

When it comes to making investments for your retirement, it is absolutely important that you make wise decisions or your money will go to waste. Unfortunately, a lot of people tend to make crucial investment mistakes. Here are some of the most common mistakes everyone should avoid when it comes to their investments.

  • Not taking advantage of the company’s retirement plan – it is actually the employee’s responsibility to take the initiative of participating in his or her company’s retirement plan, including preparing the paperwork. The process is not that hard, yet a lot of people tend to make the mistake of foregoing this plan.
  • Timing the market but not diversifying – for most of the average American, their main exposure to the stock and bond market of the country is through their employer’s retirement plan. A lot would consider this as opportunity to act as the hedge fund manager through their portfolio. But this is actually one mistake that must be avoided. Well-recognized investors would instead recommend index investing. Having a long-term focus has kept a lot of the 401k and 403b investors from cashing out at a bottom. As a matter of fact, a lot of people have continued to contribute, hence, lowering the average cost of holdings.
  • Borrowing money from your plan – certain things may be legal but not really wise. The most common perception is that if you borrow from your own plan, the interest will be paid back to you. But this may not be the case. Although you may be borrowing against your own account balance, you will end up incurring loan charge that will normally cost around $150, regardless of the amount of the loan. The rate charged on the loan could vary greatly.

What Should I Do with my 401k When I Stop Working?

 401k plan lying on table

The way that your 401k will work right after you stop working will basically depend on what you will do with it. Depending on your age when you decide not to work anymore, you might start taking qualified distributions. On the other hand, you can choose to let your account continue to accumulate earnings until such time that you will start taking distribution depending on the terms of your plan.

If you will retire after the age of 59 1/2, the IRS will allow you to start taking distributions from the 401k without having to pay for the ten percent withdrawal penalty. Depending on the rules set by the company, you might choose to take regular distributions in the form of annuity, either for a fixed period of time or over an anticipated lifetime.

If you take distributions off your 401k, the remaining account balance will remain invested depending on your previous allocation. What this means is that the amount of time in which the payments can be taken or the amount for each payment will depend in the overall performance of your investment’s portfolio.

What Is a Reverse Mortgage and How Does it Work?

Piggy bank with a house inside of it

A reverse mortgage is similar to a home equity loan but for the elder homeowners. This mortgage will not require any mortgage payment, but the loan will have to be repaid after the borrower will move out or died. This is also known as the HECM or Home Equity Conversion Mortgage.

The reverse mortgage is often considered as the last resort source of income for some people, however it has become a great tool for all cash strapped homeowners.

The very first reverse mortgage that’s FHA-insured was introduced in the year 1989. These loans allow seniors aged 62 and above to get access to a certain portion of their home equity without the need to move.

Reverse Mortgage Pros and Cons

Paper that says reverse mortgage on it

Below are the pros and cons of the reverse mortgage.


  • It will not require any monthly payment that the borrower will pay.
  • The proceeds can be possibly used to pay debts off or to settle any unexpected expenses.
  • The money can be used to pay for any existing mortgage.
  • The funds can help to improve your monthly cash flow.


  • The fees as well as other closing costs can be expensive.
  • The borrower should maintain the house and will pay for the property taxes as well as the homeowner’s insurance.
  • The reverse mortgage could complicate your desire to keep the house for the family.

Can I Retire at 62 and Still Work?

Cake with a candle in it

Waiting until you reach your full retirement age could provide you with a higher lifetime income. If you file for your social security at full retirement age, which is currently at 66, you will receive 100 percent of your benefits. But if you will take your benefit earlier, at the age of 62, then you will only receive 75 percent of the monthly benefit you are entitled to receive.

Every time you will delay taking it, your benefit will go up until the age of 70. If you delay it until then, you will have about 132 percent of the benefit. Initially, glance waiting will seem to be the best decision you will make.

Basically, if you will work and you reach your full retirement age, you can choose to keep all your benefits, regardless of how much you are earning. But if you are younger, then there is also a limit on how much you can earn and will still receive full social security benefits.

Will Social Security Be Around?

 social security administration building

A lot of people tend to be debating on the question whether the Social Security will still be around by the time they retire. It is true that Social Security will soon begin paying out for more benefits than it will receive in contribution since the bulk of the baby boom generation will soon face into retirement. The government’s position to this is that they have enough money saved to pay off the benefits at the current scheduled amounts until the year 2035.

The Social Security Administration has admitted on its website that the benefits will likely be lessened after that, and barring any changes that could improve the overall financial strength of the social security system.

The cash flow of the Social Security has in fact been negative since the year 2010 and this means that the program has actually paid more than is taking via tax. As of the moment, they are now covering such shortfall with interest on Treasuries, but this will not go on indefinitely. Although it is unlikely that the Congress will do away with the Social Security, in order to close the gap, it is going to need to scale back the benefits for the future recipients and will increase the tax or both.


Man holds hands over a family

If you’ve got a stable job, then it is likely that you have not given so much thought about your health insurance plan since it is a benefit that is offered by your employer through paycheck deductions. But with your retirement age approaching, it is important that you think of your health insurance when you retire.

The first thing that you can do is to learn everything regarding your existing insurance benefits and how all these will change when you stop working. Next, consider exploring your options. When you explore your choices, make sure that you come up with estimated health care costs for your budget. Find out how much you plan on spending, which will normally depend on your insurance coverage.

Consider reviewing your insurance plans each year. Whether you are more than the age of 65 or under, as soon as you have secured health insurance for retirement, you must be proactive in evaluating these choices by doing annual reviews of your coverage options upon every enrollment.

Health Insurance

Inside a hospital

Your health insurance may cost you a lot when you retire since you will no longer have any employer who will be picking some of your costs up. However, you might be able to qualify for other government subsidies by means of the Affordable Care Act. The exact amount that you will pay will vary greatly depending on certain factors.

Medicare will kick in as soon as you reach the age of 65. However, there are costs that you will pay for such coverage. A lot will choose to.

When you add it up then you will need to get serious on stashing away some cash in order to cover for your health insurance later on in life. Even if the Medicare as well as other health insurances will cover you, you are still going to pay for certain costs and this includes deductibles, premiums, co-pays and most of all, the prescription drugs.

What is Estate Planning?

Old couple writing in a book

Estate planning is basically the collection of the preparation tasks that will serve to manage each individual’s asset based on the event of their death or incapacitation, and this includes the bequest of assets to the heirs as well as the settlement of the estate taxes. Most of the estate plans are set up through the help of an attorney who has a wide experience on estate law:

Among the major planning tasks for estate planning are the following:

  • Creating or updating the beneficiaries, based on plans like IRAs, life insurance and 401k.
  • Coming up with a will.
  • Establish guardian for the living dependents.
  • Establish the annual gifting in order to minimize the taxable estate.
  • Limiting the estate taxes by creating trust accounts under the name of the beneficiaries.
  • Naming the executor of the estate who will oversee the terms of will.
  • Set up the funeral arrangements.
  • Set up a durable POA or power of attorney in order to direct all of the remaining assets and investments.

Estate Planning Checklist

Woman writing on a piece of paper

It is important that estate planning is done the right way. Below is a checklist that can help you with the estate planning and ensure that your family’s needs are taken cared of.

  • Come up with a will.
  • Consider getting a trust.
  • Write out your health care directives.
  • Prepare a financial POA (power of attorney).
  • Keep your children’s property protected.
  • File the necessary beneficiary forms.
  • Consider your life insurance.
  • Understand the estate taxes.
  • Cover the funeral expenses.
  • Make any final arrangements.

Where Should I Retire?

Airplane on top of a calculator

So you have saved enough and are now planning for your retirement. Now the question is – where should you go? If there is that one perfect spot that could match the needs of each and every retiree, coming up with a decision on where to go should be easy. However, no dream location is the same for everyone and there are indeed, lots of options available for you to choose from. But there are certain things that you should keep in mind when deciding where to retire.

The housing cost and the low cost of living are often the most important things that people consider. Thus, experts would highly recommend looking for those places having a population of more than 10,000, since the less densely populated places tend to have low level of human services and understandably, the cost of living is low.

But of course, you also need to think of the quality of living. Things to consider are the natural endowments, like recreational lands, famous landmarks, historical monuments, and most importantly, a vibrant economy, wherein people will not have a hard time looking for work. It is also important that the area has a low crime rate and should be close to various shopping outlets and markets.

Another important deciding factor is the taxes. Choosing a place that has smaller tax break but with lower cost of living and cheaper property taxes would be ideal. But whatever your choice is, you must put more focus on life planning over tax planning.

If several places seem appealing for you, then go out and see each of them, if possible. Begin years before you actually stop working, and visit the places you are thinking of moving to. As soon as you have narrowed down your choices, consider spending at least three weeks to each places and weigh in the pros and cons of living there.

We’ve made a guide to help you choose among the many places you can choose to retire.

Retiring In Another Country

Eiffel Tower

As mentioned, the answer to the question on whether you should retire to another country will mainly depend on certain factors. Here are some of them.

  • Taxes – a lot of countries have tax treaties with the United States and this helps in reducing any chances that you will get taxed twice. However, even if you are living out of the country full time, you still need to file a US tax return. If you will choose to work while you live overseas, you can choose to claim a Foreign Earned Income Tax Credit. This will allow you not to include your first earning of $101,300 from your tax. If you will earn more than this amount, then you can expect for the government to take their cut of earnings from your income. Pensions coming from US sources will also be taxed, regardless of where you are living in the world.
  • Healthcare system- this is an important issue and could be a potentially big problem. Despite of the downsides in the healthcare system of the United States, the quality of healthcare in the country is still the highest all over the world, while other countries are just below par. Sad to say, these are the countries that have the lowest cost of living and tend to have the worst quality of medical care.

Another important issue for expat retirees is that the Medicare coverage will not extend beyond the borders of the US. You will either need to return to the country if you need care or you may have to spend for insurance or car in the new country you are living in. Either way, this could turn out to be more expensive than what you have bargained for.

  • Exchange rates – if you will live out of the country, you could be subjected to currency risk. If your income will be in US dollars, then you could suffer if you are living in a country that sees its currency value to increase against the US dollar.
  • Bill paying – depending in the country you live in, you might find it almost impossible to open a bank account. And when you do, you might not be able to set it up to handle certain deposits, like Social Security checks in the US dollars.

A lot of expats will address this problem by keeping a US bank account and then paying through wire transfer in order to transfer money into a local currency. This could happen several times in a year and could eventually add up. The cost per transaction may be small, but through your retirement years, it could add up to a significant amount.

If you plant to rely on your US bank account alone, you could end up paying hefty ATM fees and other charges every time you will withdraw. This could often cost more than $5 for every transaction and a lot of countries tend to limit the amount that foreigners could withdraw from the ATM everyday. As such, you could get stuck with having to pay for nuisance fees if you make smaller withdrawals. Most of the people living overseas will still use their US based credit cards to pay for bills online that could generally help to keep costs down.

Things to Do in Retirement

Happy older couple outside walking

So you have spent your entire life saving. Now that the time has finally come, do you have a list of things to do to keep yourself busy? Read on to find out some of the best things to do while you are in fact in your golden years.

  • Find a decent job – this might sound ironic since you just left workforce and now you will consider going back. However, if you think you need more money and you believe that you are still capable of working, then why miss out on the opportunity to work? Moreover, retiring may be a great opportunity to start with a new career. In fact, a lot of people find it fulfilling and liberating to venture into a new career in life. Not only will you keep yourself busy but you get to earn money as well.
  • Volunteer – one of the most common things that new retirees often do is to volunteer. This is truly a rewarding experience, which includes mentoring kids, helping small businesses, assisting at the hospital or library, helping a local organization, and even joining the Peace Corps. Just think of the things that interest you and see if there are any organizations that could benefit from your talent, skills and time.
  • Take up a sport – now is the time to indulge in your favorite sports. For instance, if you love swimming, golfing, and other sports, then you can use most of your time in these. This can benefit you in a lot of ways. You will not only get bored, but you will end up improving your physical wellbeing too, which is important now that you are in your golden years. You can join a group of sports enthusiast in your area or you can ask your partner or some of your friends to join in.
  • Get a hobby – now that you have more time, you will have all the time in the world to do the things you love. Whether it is scrapbooking, quilting, gardening, playing music instruments, etc., now is the perfect time to do them. Having a hobby will give you something to look forward everyday as well as a chance to nourish your creativity.
  • Relax – of course, now’s a good time to reap the fruits of your labor. After decades of working, you can just choose to relax.

By now, you should have all of the things you need to know about preparing, saving, your different options and everything else. Regardless of what age you are now, it is important that you seriously consider planning for your retirement. No one knows what the future will hold, and if you do not plan now, you might have regrets at a later time. And remember, the earlier that you save for your retirement, the better.

If you still have lots of questions, it is a good idea to discuss with a financial expert who can give you advice on the best plan that is suitable to your current lifestyle, income, age, etc.

If you are considering retiring early, then we recommend watching this video.