Understanding Retirement Planning
Retirement planning is one of the most important financial decisions you will make. The earlier you start, the more time compound interest has to work in your favor. Our retirement planning software helps you project your savings growth, estimate your retirement income, and identify any gaps between your current trajectory and your retirement goals.
The foundation of retirement planning is understanding how much you need to save. A common benchmark is to accumulate 10-15 times your annual salary by retirement age. With a 4% withdrawal rate, a $1 million nest egg supports approximately $40,000 per year in retirement income. Social Security may add $20,000-$40,000 annually depending on your earnings history.
Starting to save $500/month at age 25 at 7% returns produces $1.2 million by age 65. Waiting until 35 produces only $567,000 with the same contributions. Starting 10 years earlier more than doubles the outcome due to compound growth.
Retirement Planning Formula
- 1Years: 30, Months: 360
- 2Monthly rate: 0.583%
- 3Current savings growth: $100K x (1.00583)^360 = $811,000
- 4Contributions growth: $1,500 x [((1.00583)^360-1)/0.00583] = $1,830,000
- 5Total at 65: $2,641,000
- 6Monthly income (4%): $8,803
Retirement Account Types
| Account | 2026 Limit | Tax Treatment | Best For |
|---|---|---|---|
| 401(k) | $23,500 (+$7,500 catch-up) | Pre-tax contributions, taxed on withdrawal | Employees with employer match |
| Roth IRA | $7,000 (+$1,000 catch-up) | After-tax contributions, tax-free withdrawal | Young investors expecting higher future taxes |
| Traditional IRA | $7,000 (+$1,000 catch-up) | Pre-tax (if eligible), taxed on withdrawal | Self-employed, no 401(k) access |
| SEP-IRA | 25% of comp, max $69,000 | Pre-tax, taxed on withdrawal | Self-employed, small business owners |
| HSA | $4,150 individual | Pre-tax in, tax-free out for medical | Anyone with HDHP, triple tax advantage |
Common Retirement Planning Mistakes
- Not starting early enough: each decade of delay roughly doubles the monthly savings needed to reach the same goal.
- Underestimating healthcare costs: the average retired couple needs $315,000+ for healthcare expenses in retirement.
- Ignoring inflation: $1 million today will have the purchasing power of approximately $550,000 in 20 years at 3% inflation.
- Withdrawing too aggressively: withdrawing more than 4-5% annually significantly increases the risk of running out of money.
- Not accounting for Social Security: the average benefit is approximately $1,900/month, which covers a meaningful portion of expenses.
- Failing to diversify: holding too much company stock in your 401(k) concentrates risk in a single investment.
Retirement Withdrawal Strategies
The 4% rule is the most well-known withdrawal strategy, but several alternatives exist. The bucket strategy divides savings into three time-horizon buckets (1-3 years in cash, 3-10 years in bonds, 10+ years in stocks). The dynamic withdrawal method adjusts spending based on portfolio performance. The guardrails approach sets upper and lower spending limits that trigger adjustments. Each strategy has trade-offs between simplicity, flexibility, and sustainability.