What is Retirement Planning: A Step-By-Step Guide For Beginners

You’re getting ready one morning, following your usual routine, until… 

You lean in… 

Was that… a gray hair? A tiny wrinkle that wasn’t there before? 

A shocking stab of fear and panic catches you off guard.

Even the smallest changes in your appearance seem like obvious signs of aging. 

Maybe your knees start making a weird sound each time you stand up too quickly.

Maybe you begin to experience minor memory lapses. 

It's easy to overlook these minor concerns now, but these are small reminders.

A reminder that time is moving so fast.

A reminder that retirement is just a few steps away. 

So, the real question is… are you ready for it?

What Is Retirement Planning?

Planning for retirement is like a journey, where each steps prepare you financially and mentally for life after you finish working full-time.

It's important to understand that retirement planning is not a one-time event.

The earlier you plan, the smoother your journey will be.

KEY TAKEAWAYS:

• It’s never too early or too late to begin saving for retirement; the most important thing is to get started.

• A retirement plan is a long-term strategy for saving and investing to support yourself financially after you stop working.

• Take advantage of retirement accounts like a 401(k) or IRA that offer tax benefits to retirement savers.

• A solid plan should consider your future costs, possible debts, and how long you expect to live, so you don’t outlive your money.

How to Start Saving?

An important aspect of retirement planning is determining "YOUR NUMBER" for retirement.

“The number” is how much money you will need to cover about 80% of your current annual income and cover additional expenses like healthcare.

You may be saving in a traditional employer-sponsored retirement plan, like a 401(k), but depending on your interests, needs, and retirement dreams, you may want to expand beyond that one method of saving.

In fact, according to Fidelity, an average couple can expect to pay approximately $330,000 (after tax) to cover healthcare costs in retirement, and that number does not include the cost of long-term care, if needed.

Without having enough emergency savings, you could drain your funds very quickly.

To take a more holistic approach to retirement planning, consider applying a budgeting rule to your current finances:

• Allocate 50% of your income to essential needs (e.g., rent, groceries, bills, and transportation).

• Spend 30% of your income on wants (e.g., luxuries and entertainment).

• Set aside 20% of your income for savings (e.g., emergency funds, big purchases, or retirement).

Types of Retirement Accounts

Planning for retirement starts with understanding the types of accounts available to you.

Each has its own rules, tax advantages, and benefits.

Here’s a quick breakdown

Employer-Sponsored Retirement Plans

1) 403(b)
403(b) is a retirement plan designed for employees in public schools, healthcare, some religious institutions, and other tax-exempt organizations. It lets you automatically save part of your paycheck for the future.

Most employees under age 50 may contribute up to $23,000 to a 403(b) in 2024, and up to $23,500 in 2025; based on age or years of service, they may be eligible to save more.

There are two main types of 403(b) plans with tax benefits:

• Traditional 403(b): Contributions are made before taxes, reducing your taxable income now.

• Roth 403(b): Contributions are made with after-tax dollars, so you don’t get a tax break now.

If you're not sure which version is best, you can compare the benefits or even split your contributions between traditional and Roth to get a mix of tax advantages now and later.

2) 401K

A 401(k) is a retirement savings plan offered by many employers to help you save money for the future while also giving you tax advantages.

Here’s how it works:
You decide how much of your paycheck you want to contribute, usually a percentage of your income.

That amount gets automatically taken out of each paycheck and deposited into your 401(k) account.

From there, the money is invested, giving it the chance to grow over time.

Most employers now offer two versions of the 401(k): the traditional and the Roth.

• Traditional 401(k)

  • It lowers your taxable income now, reducing your current tax bill.

  • Once you withdraw that money from your account in retirement, you’ll be paying taxes.

• Roth 401(k)

  • You pay taxes on the money before it goes into your account.

  • In retirement, your withdrawals are tax-free, as long as you meet the specified conditions.

So it’s a choice between saving on taxes now (traditional) or later (Roth).

Similar to 403(b), some people even split their contributions between both.

Traditional IRA

A Traditional Individual Retirement Account (IRA) is a personal retirement savings account that offers important tax advantages to help you save for the future.

Unlike employer-sponsored plans, you open and manage a Traditional IRA on your own through a bank or a brokerage.

When you contribute to a Traditional IRA, your money is typically invested in various assets to grow over time.

Since your contributions and earnings grow without you paying immediate taxes, when you retire and start taking distributions, those withdrawals are taxed as ordinary income at your current tax rate.

Ideally, many people expect to be in a lower tax bracket after they stop working, so they pay less tax on their withdrawals than they would have on the money while working.

KEY BENEFITS:

• Your investments grow tax-deferred. You don’t pay any taxes on the earnings, like interest, dividends, or capital gains, as long as the money stays in the account. The taxes only apply when you withdraw funds during retirement.

• The money you put into a Traditional IRA is deductible in the year you contribute. This reduces your taxable income for that year, which could lower your overall tax bill.

• You can begin withdrawing money from your Traditional IRA without penalty starting at age 59½. However, once you turn 73, you are required by law to start taking minimum distributions each year, known as Required Minimum Distributions (RMDs).

Roth IRA

A Roth IRA allows you to put in after-tax dollars, which means you pay taxes on the money before it goes into the account.

So how does it work?

Once you deposit your after-tax dollars into a Roth IRA, you can invest that money in a wide range of options like stocks, mutual funds, or bonds.

Over the years, your investments can grow significantly thanks to compound interest.

KEY BENEFITS:

• Tax-free withdrawals in retirement (if you're 59½+ and the account is 5+ years old).

• You can withdraw your contributions (not earnings) any time without penalty.

• Great option if you believe taxes will be higher in retirement. You pay lower taxes now and get tax-free income later..

• If you’re 50 or older, you can contribute extra money each year (currently $1,000 more) to help boost your savings as you get closer to retirement.

LIMITATIONS:

1. Contribution Limitations

For 2025, the standard contribution limit for a Roth IRA is:

- $7,000 for those under age 50

- $8,000 for those age 50 and older

2. Income Limitations

If your income is too high, you can’t contribute directly to a Roth IRA. As of 2025:

• Married couples earning less than $236,000 can contribute.

• Single earners earning less than $150,000 can contribute.

3. Not an Emergency Fund

You can withdraw your contributions penalty-free, but not from the growth, until two conditions are met:

• You’re at least 59½ years old

• The account has been open for at least 5 years

If you withdraw your earnings early, you will face taxes and penalties.

Remember, if you don’t meet these guidelines, there are alternatives, like the Backdoor Roth.

Backdoor Roth - So how does it work? Once you deposit your after-tax dollars into a Roth IRA, you can invest that money in a wide range of options like stocks, mutual funds, or bonds. Over the years, your investments can grow significantly thanks to compound interest.

Remember, timing is crucial:

• If you convert too quickly, you might find yourself in a higher tax bracket.

• If you convert too slowly, you may not complete the conversion before tax rates increase.

Which Retirement Plan Is Best for You?

While each type of retirement account offers its perks and benefits, some limitations may restrict access to certain policies.

So, to choose a retirement plan, you need to evaluate your current financial situation and envision where you would like to be in the future.

Retirement Plans for Self-Employed Individuals

Regardless of how big or small your business is or how much wealth you have, many unknowns lie ahead. So there is no excuse for you not to plan for retirement.

Unlike traditional employees, you don’t have access to employer-sponsored 401 (k) or 403(b) plans.

So, you're basically on your own.

1) Solo 401(k)

Best for: A business owner with no employees (Spouse may be applicable)

Eligibility rules: No age or income limitations, but you must be a business owner with no full-time employees.

You can, however, add your spouse to the plan so they, too, can invest funds up to the standard employee 401(k) contribution limit.

Contribution limit- As for 2025, the solo 401(k) contribution is $70,000.

There are also different additional catch-up contribution amounts depending on your age.

• Those 50 or older have an additional contribution of $7,500

• For those people ages 60 to 63, get a higher catch-up contribution of $11,250.

Tax advantages: Similar to the 401k program, you make pre-tax contributions. You can withdraw distribution penalty-free at the age of 59 ½; however, these distributions are taxed.

2) SEP IRA

Ideal for: Self-employed individuals, freelancers, and small business owners

How it works: Allows you to contribute towards your retirement savings and your employees' retirement. Employers must contribute an equal percentage of salary to each eligible employee. Employees, on the other hand, can’t invest.

Eligibility rules: To be eligible, you need to be self-employed or a business owner (with few or no employees).

However, in terms of employee eligibility, they need to meet the following conditions:

• Age: 21 or above

• Service: Worked for the business for at least 3 years.

• Income: Earned at least $750 in 2025

Contribution limit- The employer can contribute up to 25% of your income or $69,000 (whichever is less). NO MORE THAN $69,000!

Tax advantages: Contributions are tax-deductible and grow tax-deferred. Distributions are taxed once withdrawn. You will face a 10% percent penalty for early withdrawals.

3) SIMPLE IRA

Ideal for: Larger businesses with up to 100 employees.

How it works: Allows both the employers and the employees to contribute towards retirement savings, benefiting both with tax advantages.

Eligibility rules: No age requirement. Employers must have 100 or fewer employees. Employees are eligible if they earned at least $5,000 during any 2 years before the current year.

Contribution limit- Employees can contribute up to $16,000 annually with an additional catch-up contribution of $3,500 more if age 50+.

Those aged 60 to 63 also get a higher catch-up limit of $5,250.

Now, for the employers, they can either match up to 3% of an employee's salary or 2% of salary to each eligible employee.

Tax advantages: For both employees and employers, contributions are tax-deductible, meaning you will only pay taxes once you withdraw distributions.

Retirement Plans for Traditional Employees

Best options: 401(k), Roth IRA

1) 401(k)

Ideal for: High-income earners looking to reduce their taxable income or employees with access to employer-sponsored retirement plans.

What It Is: As previously mentioned, a 401(k) is an employer-sponsored retirement savings plan where funds are deducted directly from your paycheck.

Eligibility rules: No age or income restrictions. Must be employed by a company that offers a 401(k) plan or be self-employed for a Solo 401(k))

Contribution Limits (2025): $23,000 annually for employee contributions and $7,500 catch-up if age 50 or older.

Tax advantages: For a Traditional 401(k), contributions are made pre-tax, so you pay taxes only when you withdraw in retirement. On the other hand, for Roth 401(k), contributions are made with after-tax dollars, so withdrawals in retirement are 100% tax-free

2) ROTH IRA

Ideal for: High-income earners looking to reduce their taxable income or employees with access to employer-sponsored retirement plans.

What It Is: Allows you to invest after-tax money now, so your investments grow tax-free.

Eligibility rules: For single earners, can contribute no more than $161,000. For married couples, they can contribute no more than $240,000.

Contribution Limits (2025): If you are under the age of 50, you can contribute up to $7,000. If you are 50 and older, you can contribute up to $8,000.

Tax advantages: Withdrawals are 100% tax-free in retirement, as long as certain conditions are met.

Retirement Plan for High-Income Professionals

Best options: 401(k) ( previously explained) and Backdoor Roth IRA

1) Backdoor Roth IRA

Typically, if you earn too much, you can’t contribute to a Roth IRA.

For 2025, if you earn $165,000 or more as an individual, you can’t contribute to a Roth IRA. However, there is a rule that still allows you to contribute to a Roth IRA.

Backdoor Roth IRA allows high-income earners to enjoy tax-free growth, even if their income exceeds the normal Roth IRA limits.

Ideal for: High-income earners (doctors, entrepreneurs, lawyers…)

How it works: You first need to contribute to a Traditional IRA, then convert that money into a Roth IRA. Just like that, you’ve got Roth money growing tax-free for the future.

Eligibility rules: To open an account, you must have earned income. No age or income requirement.

Contribution limit- The maximum you contribute to a traditional Roth IRA is up to $7,000 in 2025. Individuals who are 50 or older can contribute $8,000.

Tax advantages: When you convert from a traditional IRA to a Roth IRA, you’ll owe taxes on that money. However, once converted, the money grows tax-free for the future.

Common Mistakes to Avoid

Waiting Too Long to Start Saving

One common mistake of retirement is simply putting it off till later.

Remember, "Time is your superpower."

The longer you wait, the harder it becomes to catch up, even if you earn a high income.

You’ll miss out on years of compound growth.

You may also have to work longer or reduce your retirement lifestyle.

Even small, consistent contributions can add up, allowing your money to grow for decades through compound interest.

For instance, if you save $10,000 at a 5% interest rate over 30 years, it can grow to $40,000.

Doing that each year builds the generational wealth you dreamed of all those years.

Underestimating How Much Money You’ll Need

People often make guesses or rely on rough estimates regarding their future. However, without a clear and solid plan, you risk jeopardizing your dreams.

So, create a plan that aligns with your future lifestyle, takes inflation into account, and addresses your health care needs.

An easy way to achieve this is by using a retirement calculator

This tool will allow you to estimate how much you’ll need based on:

• Your current age

• Planned retirement age

• Expected spending in retirement

• Social Security or pension income

• Investment returns and inflation

A popular retirement calculator is https://www.nerdwallet.com/calculator/retirement-calculator, as shown below

What This Tells You:

• You’re making good progress,

• You’ll need to save more to fully meet your retirement goal at the age 67.

• Tools like this help visually see the gap between what you have and what you’ll need.

We’re Here to Help

For any questions or concerns, feel free to reach out and fill out the form given below.