Planning your retirement: a worked example
Retirement planning comes down to four questions: how long until you stop working, how long retirement will last, how much income you want, and what you have saved so far. Here is how those inputs fit together for a typical saver.
Assume a 30-year-old who plans to retire at 65 and to plan through age 85, earning $75,000 a year today, wanting 80% of that income in retirement, with $25,000 already saved, assuming a 7% annual return and 3% inflation.
Years to retirement
35
Age 30 to 65
Retirement duration
20 years
Age 65 to 85
Target annual income
$60,000
80% of current income
Monthly savings goal
$650
10.4% of current income
Required savings
- Total needed at retirement: $1,200,000
- Current savings value: $25,000
- Additional needed: $1,175,000
Getting there
- $650 per month for 35 years
- Roughly 10.4% of current income
- Includes an employer 401(k) match if one is available
The 4% rule and retirement planning
The 4% rule is a popular retirement planning guideline that suggests you can withdraw 4% of your retirement portfolio each year with a reasonable chance of not running out of money. That means you need roughly 25 times your annual expenses saved for retirement.
Retirement planning milestones
Milestones give you a way to check progress without recalculating everything each year.
Age-based savings goals
- Age 30: 1x annual salary
- Age 35: 2x annual salary
- Age 40: 3x annual salary
- Age 50: 6x annual salary
- Age 60: 8x annual salary
- Age 67: 10x annual salary
Savings rate recommendations
- Conservative: 10-15% - minimum for a comfortable retirement
- Recommended: 15-20% - includes employer match
- Aggressive: 20%+ - early retirement becomes possible
Retirement account types
Contribution limits below are for the 2024 tax year and are adjusted most years, so check the current figures before you plan around them.
401(k) - employer sponsored
- 2024 limit: $23,000 ($30,500 if 50+)
- Often includes an employer match
- Traditional or Roth options
- Limited investment choices
Traditional IRA
- 2024 limit: $7,000 ($8,000 if 50+)
- Tax-deductible contributions
- Taxed in retirement
- Required distributions at 73
Roth IRA
- 2024 limit: $7,000 ($8,000 if 50+)
- After-tax contributions
- Tax-free withdrawals in retirement
- No required distributions
Taxable investment account
- No contribution limits
- Flexible access to funds
- Capital gains tax rates
- Best for early retirement
The tax treatment of each account matters as much as the amount you put in. See tax-efficient investing and the tax rules where you live for the detail.
Retirement planning strategies
Maximise the employer match
Always contribute enough to your 401(k) to get the full employer match. It is free money with an immediate 100% return on the amount matched.
Use target-date funds
A simple, diversified option that automatically adjusts allocation as you approach retirement. Well suited to hands-off investors.
Increase contributions annually
Set up automatic increases of 1-2% each year, or whenever you get a raise. You will not miss what never reached your paycheck.
Consider Roth conversions
In low-income years, consider converting traditional IRA funds to Roth to diversify your tax situation in retirement.
Plan for healthcare costs
Healthcare can be a major retirement expense. Consider Health Savings Accounts (HSAs) as a triple tax-advantaged retirement vehicle.
Common retirement planning mistakes
Starting too late
Waiting until your 40s or 50s means missing decades of compound growth.
Underestimating expenses
Many retirees spend more than expected, especially on healthcare and travel.
Ignoring inflation
$50,000 today will have much less purchasing power in 30 years.
Cashing out early
Taking 401(k) loans or early withdrawals derails retirement savings.
Poor investment choices
High fees and overly conservative investments reduce long-term growth.
No backup plan
Having only one retirement account type limits flexibility.
Quick retirement checkup
Am I on track?
- Saving at least 10-15% of income
- Getting the full employer match
- Using low-cost index funds
- Increasing contributions annually
Next steps
- Calculate your exact retirement needs
- Optimise your investment allocation
- Consider a Roth IRA conversion
- Review and adjust annually