What is Retirement Planning: A Step-By-Step Guide For Beginners
You start your day with the usual routine, savoring a warm cup of coffee while doing a quick stretch.
As you bend down, your knee makes a loud creaking sound, but you shrug it off as usual.
A few moments later, a hasty glimpse of your reflection in the bathroom mirror sends a shocking wave of fear and panic racing through your mind.
“Is that… a gray hair? How come I never noticed?”
Even the smallest changes in your appearance begin to feel like obvious signs of aging.
“Am I aging? Is that why my knee has been creaking a lot lately?”
It's easy to overlook these minor concerns now, but these are just small reminders.
A reminder that retirement isn’t as far as it seems.
But, the main question is… are you ready for it?
What Is Retirement Planning?
Planning for retirement isn’t a one-time event; it’s more like a journey where each step prepares you both financially and mentally for life after you stop working full-time.
And the earlier you plan, the smoother your journey will be.
KEY TAKEAWAYS:
A retirement plan is a savings account that provides financial support after you retire.
Take advantage of retirement accounts, like a 401(k) or an IRA, which offer tax benefits to savers.
A solid plan should account for all your future expenses and debts to ensure you don’t run out of your savings.
It’s never too early or too late to start saving for retirement, just begin when you can.
How to Start Saving?
A simple hack to retirement planning is to determine "YOUR NUMBER" for retirement.
“The number” is how much money you will need to cover about 80% of your current annual income, and any other additional expenses.
You may already be saving in a traditional employer-sponsored retirement plan, like a 401(k). However, depending on your retirement goals, you might want to explore additional methods of saving beyond that single option.
In fact, according to Fidelity, an average couple can expect to pay approximately $330,000 (after tax) to cover healthcare costs in retirement, not including the cost of long-term care, if needed.
Without having enough emergency savings, you can easily drain your funds.
A holistic approach to prevent such situations is to apply the 50/30/20 budgeting rule, where you
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 or retirement).
Types of Retirement Accounts
To determine which account to allocate your money to, you need to understand the rules, tax advantages, and benefits of each account.
Employer-Sponsored Retirement Plans
1) 403(b)
403(b) is a retirement plan designed for employees in public schools, healthcare, religious institutions, and other tax-exempt organizations.
With 403(b), you can automatically save part of your paycheck for the future. Most employees under the age of 50 can contribute up to $23,500 in 2025. However, based on your age or years of service, you may even be eligible to save more.
You can choose between two types of 403(b) plans:
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.
You decide how much of your paycheck you want to contribute. That amount gets automatically deducted from 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 obligated to pay 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 where your money is 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, most people aim to be in a lower tax bracket after they stop working, so they pay less in taxes on their withdrawals than they would’ve 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 contribute with after-tax dollars. You can then invest that money in various options, including stocks, mutual funds, or bonds. In a few 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.
If you wish to transfer your savings from a traditional IRA to a Roth IRA, you can do so through a Backdoor Roth IRA.
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 the best 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.
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, to be eligible as an employee, individuals must be 21 years or older, have provided service to the business for at least three years, and have 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. As 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.
Retirement Plans for Traditional Employees
Best options: 401(k) and 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 directly 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 an alternative way to contribute to a Roth IRA, which is through a Backdoor Roth IRA.
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 have 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.
And you don’t want to miss out on years of compound growth.
Even small, consistent contributions can add up, allowing your money to grow for decades.
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 can build the generational wealth you’ve always dreamed of.
Underestimating How Much Money You’ll Need
People often tend to make guesses or rely on rough estimates regarding their future. However, without a clear and solid plan, you risk jeopardizing your dreams.
Your first step should be to create a solid plan that aligns with your future lifestyle, takes inflation into account, and addresses your health care needs.
An easy way to get this done is through a retirement calculator.
A retirement calculator can give out an estimate of 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
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.
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