Saving for Retirement: The Quest for Success

The main goal of a successful retirement plan is to ensure you will have sufficient financial resources to maintain or improve your lifestyle during your retirement years. If you want to travel and make more purchases in retirement, you will have to save more. How much you will need to save will depend on how you want to spend your retirement.

According to some financial planning experts, you will need to save enough so that your retirement income is in the range of 70% to 80% of your pre-retirement income. You will need a higher percentage if you plan to improve your standard of living. If you have more expenses in retirement than before retirement, your retirement income may have to be more than your pre-retirement income.

According to James B. Twining, CFP®, founder and CEO, Financial Plan, Inc., Bellingham, WA:

Some financial advisors believe that a retirement income of 70% to 80% of pre-retirement income is sufficient. While that may be true for some people, many will find that they are not happy with that level of income. Consider that, although it is easy to increase spending, it is quite another to reduce it. Retirees who take a 20% to 30% cut in pay will feel it in a reduced lifestyle.

Building up your savings requires careful planning, which includes assessing your current assets, the number of years left until you retire, and how much you'll be able to save during your pre-retirement years. In this article, we list some of the steps to take when implementing your retirement program.

Key Takeaways

  • Retirement planning can help ensure that an individual has the funds to maintain or improve their standard of living in retirement.
  • Some financial planners estimate that individuals will need 70% to 80% of pre-retirement income during retirement.
  • After determining retirement income needs, it's time to evaluate where things stand now and determine if additional savings are needed.
  • Sources of retirement income include qualified plans (IRAs and 401(k)s), Social Security, and savings.
  • Investing, including building a diversified portfolio, can help attain longer-term financial goals as well.

Determine What You Need

One popular approach to retirement planning starts with determining how much you'll need to finance your retirement years.

This is usually based on projected cost-of-living increases, the number of years you're likely to spend in retirement, and the lifestyle you plan to lead during retirement. But projecting an amount isn't an exact science. The years you spend in retirement may be more or less than your project, and the same may go for cost-of-living increases.

However, a comprehensive outlook and some thought will help to provide realistic projections. Here are some factors to consider:

  • Your projected everyday living expenses
  • Your life expectancy
  • Your projected costs
  • Your resources (other than your retirement savings) that can cover unplanned expenses; such resources may include long-term care insurance, annuity products, and health insurance
  • Your property (if you own your home, have no outstanding mortgage balance, or will own your home by the time you retire—you have the option of selling it or obtaining income through a reverse mortgage)
  • Your intended lifestyle during retirement, including whether you plan to lead a quiet retirement or engage in activities, like traveling around the world that may be expensive

Take Stock of What You Have

If you are not a financial planning expert or don't have the time necessary to implement and manage a retirement program, you may need the help of a competent financial planner. If you do seek professional guidance, your planner will assess your current financial status in order to design a realistic and successful retirement program. You will need to provide detailed information about your financial affairs.

Russ Blahetka, CFP®, managing director, Vestnomics Wealth Management, Schererville, Ind., has a few suggestions:

Planning for retirement is like planning for a trip. It is easier to plan for the journey if you know your starting point. While gaining insight on how clients see their retirement lifestyle is important, knowing their current financial status is [a key] part of the process. It helps determine the ongoing strategy for saving and protection.

Documents your financial planner may need generally include copies of your most recent account statements, including regular savings, checking, retirement savings, annuity products, credit cards, and other debts, as well as the following:

  • A copy of amortization schedules or summaries of any mortgages
  • Copies of your tax returns for the last few years
  • A copy of your most recent pay stub
  • Health and life insurance contracts
  • A list of your monthly expenses
  • Any other documents you think may be important to your financial planning process

Start Saving

Once you have factored in the above considerations, it's necessary to determine how much you will need to save on your own. First, consider the possible sources of income you will have during retirement.

A complete retirement income package is commonly referred to as a "three-legged stool," comprising of Social Security, employer-sponsored retirement plans (such as qualified retirement plans), and your personal savings. So, of course, the amount of personal savings you need to achieve depends on the contributions to retirement accounts by your employer and your projected income from Social Security.

Your next consideration is the type of savings vehicle you use for your personal savings–this will affect your required annual savings. The amount varies depending on whether your means of savings are in pre-tax, after-tax, tax-free, tax-deferred accounts, or a combination thereof. The type of savings account you choose depends on—among other things—whether it is better for you to pay tax on your savings before or after retirement.

Tax Benefits for Retirement Accounts

Saving in a tax-deferred vehicle, such as a traditional IRA or 401(k) plan, may reduce your current taxable income. If you have a 401(k), your taxable income is reduced by what income you defer to the plan, and if you have a traditional IRA, you may be able to claim your contributions as a tax deduction.

Earnings in such vehicles also accrue on a tax-deferred basis, but the assets are taxed when you distribute or withdraw them from the retirement account. You may pay less in income taxes on amounts saved on a pre-tax basis if you make withdrawals during retirement and your income tax rate is lower than it is in your pre-retirement years.

By using post-tax funds to save for retirement, you won't have to pay taxes again when you withdraw them during retirement; however, your earnings on post-tax funds are usually not tax-deferred. So when you withdraw these amounts, they may be taxed at your ordinary-income tax rate or a capital gains rate, depending on the type of income and the duration for which you held the investments.

If you are eligible for a Roth IRA, you may want to ask your financial planner whether it is beneficial for you to use one even for only part of your savings. Roth IRAs are funded with after-tax assets, earnings accrue on a tax-deferred basis, and distributions are tax-free if you meet certain requirements. According to Kristi Sullivan, CFP®, Sullivan Financial Planning, LLC, Denver, CO.:

There are two reasons it is important to have after-tax investments as part of your retirement plan. First, if you do such a great job saving that you can retire before age 59½, you need money you can access without a 10% early withdrawal penalty. Second, it’s nice to have some diversification of your tax bill in retirement so that every account withdrawal doesn’t get taxed at regular income tax rates.

Contribution Limits for Retirement Accounts

The Internal Revenue Service (IRS) has established limits as to how much can be contributed to an IRA each year. The contribution limit to a traditional and Roth IRA is $6,000 for 2022 (rising to $6,500 for 2023). Individuals aged 50 and over can deposit a catch-up contribution in the amount of $1,000 each year.

The contribution limit for employees enrolled in a 401(k) in 2022 is $20,500 (rising to $22,500 in 2023). Those who are aged 50 and older can contribute a catch-up contribution of $6,500 in 2022 and $7,500 in 2023.

Find Extra Money

It's one thing to figure out how much you need during retirement, how much you need to save, and what account you will use to do so. But the primary challenge is finding the extra funds to put toward savings, especially if your budget is already spread thin. For many, this means changing spending habits, re-budgeting, and redefining needs vs. wants.

“Separating your personal budget between discretionary and non-discretionary spending helps create a baseline in terms of what you need versus what you want," says Mark Hebner, founder and president, Index Fund Advisors, Inc., Irvine, CA, and author of Index Funds: The 12-Step Recovery Program for Active Investors.

"Seeing the life you want to live in detail," Hebner adds, "can incentivize you to save more in order to live that life."


Once you are able to allocate a part of your monthly income to your savings, you need to think about investing those amounts. Investing puts your money to work for you and usually gives you the benefits of compound interest. Investing is integral to ensuring your retirement program meets your goals. And the earlier you start, the easier it will be for you to do so.

Craig Israelsen, Ph.D., the designer of the 7Twelve Portfolio in Springville, UT, explains:

I suspect that many overthink the process of saving for retirement. Let me suggest three simple guidelines that can be started today by anyone. First, start setting aside some money each month. A good goal is 10% of your monthly income. It may take years to achieve that goal, but any amount of savings is better than none.

Israelsen adds:

Second, automate your saving and investing–that way, it happens without you having to remember, and the minimum needed to open a mutual fund is often lower if you automate your investments. And third, don’t over-manage your investments. When some of your mutual funds are not performing well, be patient and invest more. Buying low, being consistent, and exercising patience are the hallmarks of successful long-term investors.

The types of investments that are suitable for your portfolio will depend primarily on your risk tolerance. Generally, the closer you are to your targeted retirement date, the lower your risk tolerance will be. The idea is that those who have a long time until retirement have more opportunities to recoup any losses that may occur on investments.

People in their early 20s may have a portfolio that includes more high-risk investments such as stocks. People in their 60s, on the other hand, will have a higher concentration of investments with guaranteed rates of return, such as certificates of deposit or government securities.

Regardless of risk tolerance, it is important to achieve an appropriately diversified portfolio, one that maximizes return for its determined risk.

Finally, if you do not already have a competent financial planner, or you are looking for one, be sure to shop around and check the background of anyone you plan to interview.

How Much Money Do You Need to Save for Retirement?

The amount of money that a person needs to save for retirement will differ for every individual based on their current lifestyle, desired lifestyle in retirement, financial profile, and obligations. It is recommended that an individual have 10 to 12 times their annual income at retirement age. So, for example, if your annual income is $70,000, you should have $700,000 to $840,000 in savings for retirement. Another suggested metric is taking your desired annual income in retirement and dividing it by 4%. So if your desired annual income in retirement is $70,000, you would need 70,000 / 0.04 = $1.75 million for retirement.

How Much Money Should You Have Saved at Every Age?

The amount of money one should have saved at every age will differ for every individual based on a wide variety of circumstances. According to data from Fidelity, by age 30 you should have saved your annual salary, by 40, three times your income, by 50, six times your income, by 60, eight times your income, and by 67, 10 times your income.

What Are Good Retirement Plans?

One of the most popular retirement plans if your employer provides it, is a 401(k). Similar plans also include 403(b)s, 457s, and Thrift Savings Plans. These retirement plans have high contribution limits and a matching component from the employer. Another popular retirement plan is the individual retirement account (IRA), which comes in two forms: a traditional IRA and a Roth IRA.

The Bottom Line

This article discusses some of the fundamental groundwork for ensuring your retirement program is successful—but this is only an overview. The underlying details will take time and effort for you to determine and execute, and the steps outlined above do not make up a catch-all solution.

Your financial planner should be able to help ensure that all of the important factors are considered. In the meantime, don't be afraid to conduct some research on your own, by visiting websites, such as the U.S. Social Security Administration, which provides useful information and calculators for retirement planning.

Article Sources
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  2. Internal Revenue Service: "IRA Deduction Limits."

  3. U.S. Securities and Exchange Commission. "Traditional and Roth 401(k) Plans."

  4. U.S. Securities and Exchange Commission. "Individual Retirement Accounts."

  5. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  6. Internal Revenue Service. "Roth IRAs"

  7. Internal Revenue Service. "What If I Withdraw Money From My IRA?"

  8. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  9. Internal Revenue Service. "Retirement Topics - Catch-Up Contributions."

  10. Internal Revenue Service. "401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500."

  11. Fidelity. "How Much Do I Need to Retire?"

  12. Internal Revenue Service. "Types of Retirement Plans."

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