Retirement Planning: Complete Guide & Resource Hub

The amount you need depends on your desired retirement lifestyle, expected expenses, and other income sources like Social Security. A common rule of thumb is to aim for 25 times your annual retirement expenses, which aligns with the 4% withdrawal rule. For example, if you expect to spend $60,000 per year in retirement, you would target a portfolio of $1.5 million. However, this is only a starting point. Factors like healthcare costs, inflation, longevity, and whether you plan to leave an inheritance all affect your actual target. Use a retirement calculator to model scenarios specific to your situation.

The best time to start saving for retirement is as early as possible. Thanks to compound growth, money invested in your 20s has significantly more time to grow than money invested in your 40s. For example, $10,000 invested at age 25 with an 8% average annual return would grow to approximately $217,000 by age 65, while the same $10,000 invested at age 45 would only grow to approximately $46,600. If you have not started yet, the second-best time is now. Even starting late, consistent contributions combined with catch-up contribution options after age 50 can help you build a meaningful retirement fund.

The recommended order is: first, contribute enough to your 401(k) to receive the full employer match, since the match is essentially free money with an immediate 50% to 100% return. Next, contribute to a Roth IRA up to the annual limit if you are eligible, as it offers tax-free growth and more investment flexibility than most 401(k) plans. After maxing out your Roth IRA, return to your 401(k) and increase contributions toward the annual maximum. If you still have money to invest after maxing both accounts, consider an HSA if eligible, or use a taxable brokerage account for additional investing.

The fundamental difference is when you pay taxes. With a traditional 401(k) or IRA, you contribute pre-tax dollars, reducing your taxable income today, but you pay income tax on withdrawals in retirement. With a Roth 401(k) or IRA, you contribute after-tax dollars with no immediate tax break, but qualified withdrawals in retirement are entirely tax-free. Generally, Roth accounts are more beneficial if you expect your tax rate to be higher in retirement than it is today, which is common for younger workers in lower tax brackets. Traditional accounts may be better if you are currently in a high tax bracket and expect to be in a lower one during retirement.

As you approach retirement, your portfolio should generally shift from growth-focused to preservation-focused. In your 20s and 30s, a portfolio heavily weighted toward stocks (80% to 90%) is appropriate because you have decades to recover from market downturns. In your 40s, begin gradually increasing bond allocation. By your 50s, a 60/40 or 70/30 stock-to-bond ratio may be appropriate. In retirement, many financial planners recommend keeping enough in bonds and cash equivalents to cover two to five years of expenses, with the remainder in stocks for continued growth. A target-date fund automates this transition for you. The key principle is that your asset allocation should reflect your time horizon and risk tolerance, not market conditions.