A 5-Step Guide to Planning for Retirement… Even if It’s Decades Away

Reviewed by Molly Moorhead, CFP®
Mom figuring out finances with her daughter beside her.
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Some people are happy and healthy; they love their jobs, and they aren’t carrying much debt.

Others of us look at our student loan balance and wonder how we’ll ever retire.

Regardless of where you fall on the spectrum, knowing how to develop a retirement plan is crucial if you want to reach your financial goals.

5 Retirement Planning Steps You Need to Take

We can’t offer suggestions that will suit every reader’s needs. For that, you should speak with a financial adviser. But we can help you determine what steps to take to start your retirement planning.

Step One: Start Saving What You Can

The most foundational principle of retirement saving is compound growth. It works like this:

Say your investments earn average annual returns of 5%. Then each year, you’ll make 5% of what you’ve contributed to your fund. But you’ll also earn 5% on your earnings from previous years. In other words, your earnings earn even more money.

As years go by, this effect can have a profound difference on your retirement balance.

If you begin contributing $100 each month to a mutual fund when you’re 25 years old, by the time you’re 55, you would have contributed just over $36,000.

If your money grew by 5% each year over that time, your account balance would be more than $80,000. Over half your money would have come from earnings.

The moral of the story? Even if you can’t contribute much, it’s important to start as early as possible.

Even waiting two years until you’re 27 to begin those $100 monthly contributions would result in a balance that’s about $70,000 instead of $80,000 by the time you’re 55.

Step Two: Choose a Retirement Account

A vision board for paying off debt and saving for a goal, such as travel and retirement.
Chris Zuppa/The Penny Hoarder.

Once you’ve determined your monthly contribution, you’ll need to know your retirement account options for those contributions. Here are a few of the most common investment vehicles.


A 401(k) is an employer-sponsored retirement plan that allows participants to defer contributions on a pre-tax basis. That means that if you make $50,000 this year, and you contribute $5,000 to a 401(k), your taxable income would be $45,000.

You can direct your contributions into investments like exchange-traded funds, mutual funds and index funds. Your 401(k) provider probably provides tools to help you choose the right investments based on factors like your age and risk tolerance.

Earnings are tax-deferred, meaning you don’t pay taxes until you begin taking withdrawals. An exception is a Roth 401(k), which is funded with money you’ve already paid taxes on.

You can begin taking withdrawals tax-free at 59 ½. If you take withdrawals prior to 59 ½, you’ll usually pay a 10% penalty on the funds withdrawn.

Many employers offer a matching contribution up to a certain percentage of your contribution. If you have this option, you should contribute at least enough to receive your employer match. Free money is free money.

In 2020 and 2021, individuals under age 50 can contribute up to $19,500; if you’re over 50, you can contribute an extra $6,500. These limits don’t include employer contributions.


If you don’t have access to an employer-sponsored plan, or if you’re simply looking to find an additional investment vehicle, you can open an individual retirement account, or IRA.

There are two main types of IRAs: traditional IRAs and Roth IRAs.

Traditional IRAs: With this type of account, you contribute money on an after-tax basis, but you can deduct the amount of your contributions from your income taxes. (The only exception is if you participate in an employer-sponsored plan. If you make above a certain amount, your IRA contributions are not deductible.) Your account’s earnings are not taxed until you take withdrawals.

Roth IRAs: These involve contributing after-tax money. Since you have already paid taxes on the money, your withdrawals are not taxed as long as you can hold out until 59 ½.

For both IRA accounts, you’ll have to pay a 10% tax on any withdrawals from earnings prior to 59 ½.

For both traditional and Roth IRAs, the contribution limit for 2020 and 2021 is $6,000. If you’re over 50, you can put in another $1,000.


Health care costs are a major expense in retirement. One way to prepare is to open a health savings account, or HSA. If you’re enrolled in a high-deductible health plan, you can contribute up to $3,600 each year into these accounts in 2021. The family contribution limit is $7,200.

Your contributions are made with pre-tax money, and you will not pay taxes when you make withdrawals for qualified medical expenses.

That’s a double tax break, team.

Step Three: Calculate How Much You’ll Need to Save

At this point, you may be wondering how much you’ll need to have saved.

Conventional wisdom says that your retirement income needs to be able to replace 80% of your current income and that you need at least 10 times your annual salary saved by the time you’re 67.

Others say you shouldn’t rely on receiving any money from Social Security benefits, which can easily bring your target savings sum to seven figures.

Proponents of this approach might mention the 4% rule, which states that if you can live off of 4% of your savings, you’re ready to retire. If you want to spend $75,000 this year, for example, you’d need to have about $1.9 million in savings to retire.

Figures like that will make many Americans spit coffee at their screens. But note that with this plan, you use your portfolio’s annual earnings to fund your living as you preserve your principal balance. Most of us will not be able to reach that figure.

Ultimately, what you need to have saved is going to depend on your circumstances, including:

  • Your current age.
  • Your income.
  • Your target retirement age.
  • Your current standard of living.
  • Your desired standard of living in retirement.

You should use investment calculators and retirement calculators to get an idea of what you can realistically save and how much you’d like to have saved. Then you can get a better sense of when and how you’d like to retire — and whether your current contributions will get you there.

Step Four: Get Your Monthly Budget in Shape

A woman sits on her bed with her cat and envelopes for her cash envelop budgeting system
Sharon Steinmann/The Penny Hoarder

If you find during step three that your current monthly contributions aren’t going to get you to the savings number you’re after, you’ve got two options: make more money or cut back on your spending.

If you’re looking to find more room to save in your budget, consider adding savings plans into your budget.

If you need help making a budget, some options to try include the 50/30/20 method, zero-based budget or cash envelope system. Even a no-spend challenge, where you temporarily freeze spending on non-essentials, can highlight areas of your budget you can easily trim.

As you determine what you’re willing to sacrifice, keep our earlier calculations in mind: Even $100 per month can become a nice sum if you give it enough time.

If you’ve cut every dollar of spending you can and still come up short, it’s time to turn your attention to earning more.

Considering picking up a side hustle or extra shifts, or asking for a raise at work.

Step Five: Avoid Common Mistakes

As you continue to stash money away and watch that nest egg grow, watch for these common mistakes to avoid.

Not Preparing for Health Expenses

Even if you don’t have an HSA, you’ve got to plan for substantial health care costs in retirement. According to Fidelity Investments, a couple who were 65 in 2018 would need $280,000 on average just for health expenses in retirement.

If you’re younger, you may think of substantial out-of-pocket health expenses as a once-in-a-blue-moon occurrence. In retirement, they’re likely to be a monthly expense. And the costs of long-term care can quickly add up to staggering sums.

Pulling Money out When the Stock Market Drops

Some years, your retirement fund may actually lose money (looking at you, 2018). In these years, it’s important to remember that retirement investing is a long game. Historically, over time, the stock market has gone up and investors make money.

Don’t pull money out of your investments in reaction to market swings. Even if you’re close to retirement, keep in mind: If you retire at 67, you’re expected to live in retirement for about 20 years.

That’s more than enough time for the market to correct.

Not Paying Down Debt

If you’re making minimum payments on your debt, you’re likely costing yourself significant money in the long run.

If you have credit card debt, a quick look at your monthly statement will tell you just how difficult it can be to get out from under credit card debt paying the minimum balance.

But even debts with lower interest rates can put a significant burden on your finances. Consider how much more affordable your life would be without a car loan, student loan or mortgage payment.

Make extra payments to any debts you’re carrying. The sooner you can clear them out, the sooner you can redirect that money toward your future.

Waiting Too Long to Save

It takes time to build retirement savings. And the closer to retirement you begin, the more difficult it becomes.

Don’t make the mistake of putting off saving for another year. You’ll miss out on growth that puts you closer to your retirement goal.

Jake Bateman is a writer and editor in Florida.