The goal of a retirement plan is to ensure you have enough financial resources to maintain—or improve—your lifestyle during retirement. If you want to travel and shop more in retirement, you will need to save more. The amount you must save depends on how you want to spend your retirement.

The accumulation stage—saving—requires discipline and careful planning, including evaluating current assets, establishing how many years remain until you decide to retire, and determining how much you can save during those years.

Determine what you need

A popular approach to retirement planning begins by determining how much you will need to fund your retirement years.

This is generally based on projected cost-of-living increases, the number of years you are likely to spend in retirement, and your intended retirement lifestyle. However, projecting an amount is not an exact science. You may spend more or fewer years in retirement than expected, and cost-of-living increases may also differ.

A comprehensive perspective and some reflection will help produce realistic projections. Factors to consider include:

• Your projected everyday living expenses
• Your life expectancy
• Your projected costs
• Your resources, apart from retirement savings, that can cover unplanned expenses; these may include long-term care insurance, annuity products, and health insurance
• Your property: if you own your home without an outstanding mortgage or will own it when you retire, you can sell it or receive income through a reverse mortgage
• Your intended retirement lifestyle, including whether you plan a quiet retirement or activities such as world travel that can be expensive.

Take stock of what you have

If you lack planning experience, specifically in financial planning, or do not have the time to implement and manage a retirement program, you may need help from a competent financial planner.

If you seek professional guidance, your planner will assess your current financial position to design a realistic, successful retirement program. You will need to provide detailed information about your finances.

Your financial planner may need copies of your most recent statements, including regular savings, checking, retirement savings, annuity products, credit cards, and other debts, as well as:

• A copy of amortization schedules or statements for any mortgage.
• Copies of tax returns from recent years.
• A copy of your most recent pay stub
• Life and health insurance contracts
• A list of monthly expenses.
• Any other document you think may be important to your financial planning process

Start saving

Once you have considered the points above, you need to determine how much you must save on your own.

First, consider the potential income sources you will have during retirement.

A complete retirement income package is commonly known as a "three-legged stool," comprising Social Security, employer-sponsored retirement plans, such as qualified retirement plans, and personal savings. Naturally, the amount of personal savings you need to accumulate depends on your employer's retirement account contributions and your projected Social Security income.

Your next consideration is the type of savings vehicle you use for personal savings.

The amount varies depending on whether your savings are held in pretax, after-tax, tax-free, tax-deferred accounts, or a combination. The type of savings account you choose depends, among other things, on whether paying taxes on savings before or after retirement is more advantageous.

Tax Benefits for Retirement Accounts

Saving in a tax-deferred vehicle, such as a traditional IRA or 401(k) plan, can reduce your current taxable income. With a 401(k), taxable income is reduced by the amount deferred into the plan. With a traditional IRA, you may be able to claim contributions as a tax deduction.1,2

Earnings in these vehicles also accumulate tax-deferred, but assets are taxed when distributed or withdrawn from the retirement account.

You may pay less income tax on pretax savings if you withdraw them during retirement and your income tax rate is lower than in your preretirement years.3,4

When you use after-tax funds to save for retirement, you will not pay tax on those funds again when you withdraw them in retirement. However, earnings on after-tax funds are generally not tax-deferred. Therefore, 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 how long you held the investments.5

If you are eligible for a Roth IRA, ask your financial planner whether using one would benefit you, even for only part of your savings. Roth IRAs are funded with after-tax assets, earnings accumulate tax-deferred, and distributions are tax-free if certain requirements are met.

Retirement account contribution limits

The Internal Revenue Service (IRS) has established limits on how much can be contributed to an IRA each year. The contribution limit for traditional and Roth IRAs is $6,000 for 2022, increasing to $6,500 for 2023.

People age 50 or older can make a catch-up contribution of $1,000 each year.8,9

The contribution limit for employees enrolled in a 401(k) in 2022 is $20,500, increasing to $22,500 in 2023. Those age 50 or older can make a catch-up contribution of $6,500 in 2022 and $7,500 in 2023.10, 9

Find extra money

It is one thing to determine how much you need during retirement, how much to save, and which account to use. The main challenge, however, is finding additional funds to save, especially if your budget is already tight.

For many, this means changing spending habits, revising the budget, and redefining needs versus wants.

Separating your personal budget into discretionary and nondiscretionary expenses establishes a baseline for what you need versus what you want.

Invest

Once you can set aside part of your monthly income as savings, you should think about investing those amounts.

Investing puts your money to work for you and generally provides the benefits of compound interest. It is fundamental to ensuring your retirement program meets your goals. The sooner you start, the easier it will be.

The investments suitable for your portfolio depend primarily on your risk tolerance. Generally, the closer your expected retirement date, the lower your risk tolerance. The idea is that people with a long time until retirement have more opportunities to recover any investment losses.

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

Regardless of risk tolerance, achieving an appropriately diversified portfolio that maximizes returns for a given level of risk is important.

How much money do you need to save for retirement?

The amount needed for retirement differs for each individual and changes according to current lifestyle, desired retirement lifestyle, financial profile, and obligations—not to mention that life expectancy has increased in recent years.

If you know you will live to 100 and retire at 65, you would know to save enough to support yourself for 35 years.

Many advisors generally recommend having 10 to 12 times your annual income by your retirement date.

How much should you have saved at each age?

The amount you should have saved at each age differs for each individual based on a wide variety of circumstances.

According to Fidelity, by age 30 you should have saved your annual salary; by 40, three times your income; by 50, six times; by 60, eight times; and by 67, 10 times your income.11

What are good retirement plans?

One of the most popular retirement plans, if your employer offers it, is a 401(k). Similar plans include 403(b), 457, and Thrift Savings Plans. These retirement plans have high contribution limits and an employer matching component. Another popular retirement plan is the individual retirement account (IRA), available in two forms: a traditional IRA and a Roth IRA.12

This article is only an overview. Determining and then implementing the underlying details requires time and effort, and the steps described are not a one-size-fits-all solution.

Your financial planner should help ensure that all important factors are considered. Meanwhile, do not hesitate to do your own research by visiting websites such as the U.S. Social Security Administration's, which provides useful information and retirement planning calculators.

Related Resources and Sources

1. Internal Revenue Service. "401(k) Plan Overview."
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."