Retirement Planning 101

Learn the fundamentals of retirement planning and how to use our calculators effectively.

Getting Started

Retirement planning doesn't have to be complicated. Start by understanding these key concepts:

  • Compound Interest: Your money grows exponentially over time
  • The 4% Rule: A safe withdrawal rate in retirement
  • Tax-Advantaged Accounts: 401k, IRA, and Roth accounts
  • Asset Allocation: Balancing stocks and bonds

Key Retirement Concepts

Compound Interest

The most powerful force in retirement savings. When you invest money, you earn returns. Then those returns earn returns. Over decades, this creates exponential growth.

The 4% Rule

A guideline suggesting you can safely withdraw 4% of your retirement savings each year without running out of money. Based on historical market data over 30-year periods.

401k & Employer Match

Many employers match your 401k contributions (e.g., 50% up to 6% of salary). This is free money! Always contribute enough to capture the full match.

Roth vs Traditional

Traditional IRA/401k: Tax deduction now, pay taxes in retirement.
Roth IRA/401k: No tax deduction now, tax-free withdrawals in retirement.

Common Retirement Milestones

Age 30: 1x Your Salary Saved

Fidelity recommends having your annual salary saved by age 30

Age 40: 3x Your Salary Saved

Triple your annual income in retirement accounts

Age 50: 6x Your Salary Saved

Six times your annual income

Age 60: 8x Your Salary Saved

Eight times your annual income

Age 67: 10x Your Salary Saved

Ten times your annual income for a comfortable retirement

Social Security Strategies

When to Claim Social Security

You can claim Social Security as early as age 62, but your benefits are permanently reduced by about 30% if your full retirement age (FRA) is 67. Waiting until 70 increases benefits by 24% compared to claiming at FRA.

  • Age 62 (Early): Reduced benefits, good if you need income now or have health concerns
  • Age 67 (FRA): Full benefits, no penalties
  • Age 70 (Delayed): Maximum benefits, best for longevity and spousal protection

Spousal Benefits Strategy

Married couples can coordinate claiming strategies to maximize household benefits. The higher earner delaying to 70 protects the surviving spouse with larger survivor benefits. The lower earner might claim earlier to provide immediate income.

IRA Conversions & Tax Planning

Roth Conversion Basics

Converting Traditional IRA funds to a Roth IRA means paying taxes now for tax-free growth and withdrawals later. This can be strategic when:

  • You're in a lower tax bracket (early retirement, between jobs)
  • You expect higher taxes in retirement
  • You want to reduce future Required Minimum Distributions (RMDs)
  • You're leaving a tax-free inheritance to heirs

Backdoor Roth Strategy

High earners who exceed Roth IRA income limits can contribute to a Traditional IRA (non-deductible) and immediately convert to Roth. This legal workaround allows anyone to benefit from Roth IRA growth, regardless of income.

Required Minimum Distributions (RMDs)

Understanding RMDs

Starting at age 73 (as of 2024), the IRS requires you to withdraw minimum amounts from Traditional IRAs and 401(k)s annually. RMDs are calculated by dividing your account balance by your life expectancy factor.

Penalty for missing RMDs: 25% of the amount you should have withdrawn (reduced to 10% if corrected quickly).

  • Roth IRAs: No RMDs during owner's lifetime
  • Roth 401(k)s: RMDs required unless rolled to Roth IRA
  • Still working: May delay 401(k) RMDs if you don't own 5%+ of company

RMD Planning Strategies

Plan ahead to minimize RMD tax impact: Consider Roth conversions in your 60s before RMDs begin. Donate RMDs directly to charity (Qualified Charitable Distribution) to avoid taxable income. Coordinate withdrawals with Social Security and Medicare premium thresholds.

Healthcare in Retirement

Medicare Basics (Age 65+)

Medicare has four parts covering different healthcare needs:

  • Part A: Hospital insurance (usually premium-free)
  • Part B: Medical insurance (~$174/month in 2024)
  • Part D: Prescription drug coverage (varies by plan)
  • Medigap: Supplemental insurance to cover gaps (~$150-300/month)

Before Medicare: Ages 62-65

If you retire before 65, you'll need health insurance until Medicare eligibility. Options include COBRA (18 months of employer coverage), ACA marketplace plans (Healthcare.gov), or spouse's employer coverage. Budget $500-1,500/month per person for premiums.

Long-Term Care Planning

Medicare doesn't cover long-term care (nursing homes, assisted living). Average costs: $60,000-100,000/year. Consider long-term care insurance in your 50s, health savings accounts (HSA) for tax-free medical savings, or self-insuring with dedicated retirement savings.

Estate Planning Basics

Essential Estate Planning Documents

  • Will: Specifies who inherits your assets and guardianship for minor children
  • Revocable Living Trust: Avoids probate, provides privacy, allows asset management if incapacitated
  • Power of Attorney: Designates someone to manage finances if you're unable
  • Healthcare Directive: States medical wishes and names healthcare proxy
  • Beneficiary Designations: Update beneficiaries on IRAs, 401(k)s, life insurance

Retirement Account Inheritance

Spousal beneficiaries: Can treat inherited IRA as their own or take distributions over their lifetime.

Non-spousal beneficiaries: Most must withdraw entire inherited IRA within 10 years (SECURE Act 2.0). Exceptions for minor children, disabled/chronically ill beneficiaries.

Tax tip: Inheriting a Roth IRA is tax-free. Inheriting a Traditional IRA triggers income taxes on withdrawals. Consider Roth conversions to leave tax-free assets to heirs.

Ready to Plan?

Now that you understand the advanced concepts, use our calculators to create your personalized retirement plan.

Start Planning Your Retirement