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Planning for Retirement

The plain answer

Section titled “The plain answer”

Plan for retirement in this order: estimate what retirement may cost, count the assets and dependable income you already have, measure the gap, then choose a contribution rate. A precise forecast is impossible, but a range gives you a useful direction. Start with a contribution you can maintain and update it as the estimate improves.

How it actually works

Section titled “How it actually works”

Begin with annual retirement spending in today’s purchasing power. Housing, food, transportation, health care, taxes, travel, and family support may change after work ends. Income is not a spending estimate because part of your current pay may go to payroll taxes, retirement contributions, commuting, or costs that disappear.

Next, inventory what you already have. Include workplace retirement plans, individual retirement arrangements (IRAs), pensions, expected Social Security benefits, and other assets intended for retirement. Record debts and any asset that is not readily available for spending, such as a home you do not plan to sell.

Dependable retirement income reduces the amount investments must provide. Subtract that income from expected annual spending to name the portfolio-supported gap. Then compare the assets you have with a range of possible future values based on time, contributions, investment risk, inflation, taxes, and fees.

Your contribution rate is the share of gross pay directed to retirement accounts. A higher rate improves the chance of closing the gap but leaves less money for current bills and near-term goals. An employer match is part of compensation, so try to receive the full match when your budget can support it before increasing unmatched contributions elsewhere.

For 2026, employee elective deferrals to covered workplace plans are generally limited to $24,500. The IRA contribution limit is $7,500. These limits show available account capacity, not the amount your plan requires, and eligibility or other plans can affect what you may contribute.

A 401(k) is a workplace retirement plan, while an IRA is an account you open for yourself. The accounts provide tax treatment and contribution rules, but they are not investments by themselves. Use how a 401(k) works and how an IRA works for their mechanics.

What this means for you

Section titled “What this means for you”

Follow the sequence without chasing a perfect forecast:

  1. Write a low, middle, and high estimate for annual retirement spending.
  2. Gather current balances and benefit estimates without counting the same asset twice.
  3. Subtract dependable income to find the amount investments must support.
  4. Project a range of outcomes using conservative assumptions.
  5. Set the contribution rate needed to move toward the gap, then test it against your current budget.

If the required rate makes today’s finances unstable, the plan needs another lever. You can increase contributions gradually, work longer, reduce future spending, build flexible income, or adjust the retirement date. Each choice has a cost, so use a combination that you can sustain rather than depending on one extreme change.

Automate the chosen contribution and confirm the money is invested. Review the rate after raises and major life changes. Also review the investment mix because taking too little risk can slow growth, while taking too much can expose a near-term retirement to a severe decline.

Common mistakes

Section titled “Common mistakes”

Do not use a generic percentage without estimating spending and current resources. A rule of thumb can start the conversation, but households with different ages, pensions, balances, and goals need different rates.

Another mistake is counting an account balance without checking its investments. Cash left uninvested inside a retirement account may not grow as the projection assumes.

Do not assume today’s health plan, tax bill, or housing cost continues unchanged. Build ranges for costs that can shift and update them as retirement approaches.

Finally, do not wait for certainty. Starting with an imperfect rate gives compounding time to work, and later reviews can correct the path. Waiting for a flawless number loses time without removing uncertainty.

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Educational content, not personalized financial, tax, or legal advice. No affiliate relationships. Figures are for tax year 2026 and change annually.Read the full disclaimer.