Complete guide to retirement planning

Retirement planning overview

Retirement planning is a cornerstone of financial planning. Creating a secure future for your golden years means you’ll have enough money to cover your expenses, support your desired lifestyle, and afford potential medical costs or health insurance premiums.

As lifespans lengthen, it’s increasingly important to plan ahead for when you leave the workforce or want to be work optional. Though there’s no one-size-fits-all approach to retirement planning, using certain tax-advantaged accounts, meeting certain savings benchmarks as you progress in your career, and employing particular rules of thumb can help you keep your retirement planning on track.

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‍Key takeaways:

Importance of retirement planning: Retirement planning is essential for ensuring a secure future. It helps cover expenses, support your desired lifestyle, and afford potential medical costs as you age.

Types of retirement plans: Various accounts like an IRA, or your employer plan (i.e 401k, 403b, 457 plans, etc) offer tax advantages... and are essential tools for saving and growing money for the future.

Contribution limits and tax advantages: Different accounts have specific contribution limits and tax benefits. Most employer sponsored plans have limits of $23,000 in 2024. And the contribution limit for a traditional or Roth IRA in 2024 is $7,000 (with an additional $1,000 catch-up for those 50+).

Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, allowing for tax-free growth and withdrawals in retirement. However, there are income limits for contributions.

Mega backdoor Roth: This strategy allows employees with this benefit to bypass current income limits on direct Roth IRA contributions by making after-tax contributions to a 401(k) and rolling them into a Roth IRA or Roth 401(k).

401(k) plans: These employer-sponsored plans allow pre-tax contributions, reducing taxable income, and often include employer matching. The contribution limit for 2024 is $23,000, with an additional $7,500 catch-up for those 50+. Any employer contributions from matching or profit sharing are not included in the employee contribution limit. The employer contributions are in addition to the employee contribution and can go up to $69,000 in 2024 for all contributions into this type of plan.

403(b) and 457 plans: Similar to 401(k)s but specifically for employees of certain tax-exempt organizations, 403(b) plans offer tax advantages and have the same contribution limits as 401(k)s.

Starting early: Beginning retirement savings as early as possible maximizes the benefits of compound interest and long-term growth.

Diversified investment strategy: A good retirement plan includes a diversified mix of investments tailored to your risk tolerance and retirement timeline, adjusting asset allocation as you age.

What types of retirement accounts are there?

There are a number of different retirement accounts that allow workers to contribute their hard-earned cash to save for retirement and grow for the future. Putting money in an individual retirement account (IRA), a 401(k), or a 403(b) can offer the saver significant tax advantages while also safeguarding the money for future use in investments that prioritize long-term growth.

Each type of retirement account has distinct differences and offers unique benefits for investors. Before investing, it’s important to understand how account types differ so investors can make the best choice for their circumstances and have the right amount of cash once they hit retirement age.

Here’s a breakdown of the main types of retirement accounts.

Individual retirement account (IRA)

Individual Retirement Accounts or IRAs, are retirement investment accounts that investors can open without having to go through their employer.

Though IRAs were created with individual workers in mind who may not have access to a company 401(k) plan, it is possible for retirement savers who contribute to a 401(k) to supplement those retirement savings with IRA contributions.

There are several types of IRA, each with its own advantages and disadvantages.

Traditional IRA

A traditional IRA is a retirement account that lets you save for retirement by deferring taxes on the growth of their investments. Your contributions may be tax-deductible if you meet certain conditions.

The contribution limit for tax 2024 is $7,000.

People 50 and older are allowed to add another $1,000 as a catch-up contribution, bringing the contribution limit to $8,000 for 2024.

If you’re single and contributing to an employer-sponsored retirement savings program like a 401(k), you can receive the full deduction for your contributions if your modified adjusted gross income (MAGI) is $77,000 or below for 2024.

That MAGI limit is $123,000 for married couples filing jointly.

For tax year 2024, the IRS doesn’t permit deductions for MAGIs of $87,000 for singles and $143,000 for married couples.

If your MAGI falls between the full-deduction MAGI limit and the no-deduction MAGI limit, you can receive a phased-out deduction.

Simplified Employee Pension (SEP) IRA

A SEP IRA is a specific type of IRA that an employer or independent worker can set up to make tax-deductible retirement contributions. SEP IRAs, notably, have a much larger contribution limit: for 2024, contributors can sock away $69,000 a year in a SEP IRA (not to exceed 25% of the employee’s earnings).

Thanks to the SECURE Act, small businesses that start a SIMPLE IRA with auto-enrollment can receive a tax credit.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

A retirement plan for those who work at a business with 100 or fewer employees. The main advantage over other IRAs is that a SIMPLE IRA allows employers to make a non-elective contribution of 2% of the employee’s salary or dollar-for-dollar match on an employee’s contribution up to 3% of their salary.

The annual contribution limit is $16,000 for 2024. Employers get a $500 tax credit annually if they have a SIMPLE IRA available with automatic enrollment. On the downside, contribution limits are lower than with a SEP IRA or a 401(k) plan.

Roth IRA

A Roth IRA lets you contribute after-tax earnings to this retirement vehicle. Though you don’t get a deduction on your contributions, your earnings grow tax-free and can be withdrawn tax-free at age 59.5 (provided that you’ve had the account for five years or more).

This is to say, you pay taxes on the seeds with a Roth IRA but not the crops you harvest in retirement.

For tax year 2024, you can contribute up to $7,000 to a Roth IRA, with the option for another $1,000 if you are aged 50 and older.

If you are filing singly, you can’t invest directly into a Roth IRA if your MAGI is more than $161,000, and if you are married filing jointly, your MAGI has to be below $240,000 to be able to contribute to a Roth IRA.

Investors are potentially able to circumvent the IRS income limitations if you were to utilize a Backdoor Roth Conversion. Consult a Certified Financial Planner: This strategy can be complex, so consider consulting a tax advisor or financial professional.

Roth IRA pros:

Roth IRAs allow for tax free growth, and because retirement savers participating in a Roth have already paid taxes on their contributions, they can draw down on their Roth IRA funds in retirement completely tax free at age 59.5 or later.

Because growth of these funds can be robust, it can be a major advantage to have paid the taxes upfront and then avoid taxes on distributions from a larger pool of money in retirement. Unlike traditional IRAs, a Roth IRA doesn’t require minimum distributions at age 73. This means you can let the money grow without obligatory withdrawals that could eat away at your future financial security.

Roth IRA cons:

It’s not possible to deduct Roth IRA contributions from your taxes; contributions are made with after-tax dollars. Roth participants, thus, lose out on that upfront tax benefit.

There are annual income limits for Roth contributors; if you have a MAGI of $161,000 or more as a single tax-filer or $240,000 as a married person filing jointly, you can’t contribute to a Roth IRA. However, you can get around these limitations using a Backdoor Roth conversion.

Roth IRA limits

Every year the IRS establishes new contribution limits and eligibility requirements. Eligibility is determined by modified adjusted gross income. In 2024, single filers must earn less than $161,000 per year, and joint filers must earn less than $240,000 per year to be eligible to contribute to a Roth IRA.
Investors under the age of 50 can invest up to $7,000 in a Roth IRA in 2024. Those 51 and older have a limit of $8,000, allowing them to gain ground as they near retirement age. These limits are in place to prevent high-wage earners from benefiting more than regular workers.

How to open a Roth IRA

Retirement savers typically open a Roth IRA through investment platforms or brokers, but they can also use federally insured credit unions, along with savings and loan associations.

It is important to consider the investment options at different institutions, as some may have access to a wide swath of ETFs, mutual funds, stocks, bonds, and money market funds whereas others may have more limited options.

It’s also important to consider your appetite for risk when choosing a provider. If, for instance, you plan on being an active trader and altering your positions more frequently, consider a Roth IRA provider with more palatable trading costs and investment options.

Mega backdoor Roth

A mega backdoor Roth allows high earners to circumvent both the income limits imposed on Roth IRAs and the contribution limits of $7,000.

A typical backdoor Roth lets folks contribute non-deductible contributions to traditional IRA and then roll those contributions over to a Roth IRA. This mega backdoor Roth strategy allows people with an employer-sponsored 401(k) plan to contribute up to $46,000 in post-tax dollars to their 401(k) and then roll that money into a Roth IRA or Roth 401(k). Maneuvering a mega backdoor Roth can be complex. For additional hands-on guidance, consider scheduling a meeting with a financial advisor

Pros of mega backdoor Roth

Allows investors to avoid established contribution limits set for a typical Roth IRA by contributing non-deductible contributions to a 401k account and then rolling over those funds into a Roth IRA.
Since funds are contributed post-tax, once they’ve been rolled over, they continue to grow tax-free.
As long as the investor meets the minimum age requirement of 59 ½ when funds are withdrawn from a mega backdoor Roth in retirement, they are not subject to tax.

Cons of mega backdoor Roth

Limited Availability: Not all employer plans allow after-tax contributions and in-service rollovers, which are essential for the mega backdoor Roth strategy.
Tax Implications: The pro-rata rule can tax earnings on pre-tax contributions in your 401(k) when converting after-tax money to a Roth account. You might owe taxes if you haven't separated pre-tax and after-tax contributions clearly.
Reduced Employer Match: Reaching the total contribution limit for your 401(k) with after-tax contributions could prevent you from maximizing your employer's matching contribution, which is essentially free retirement savings.
Five-Year Waiting Period: Similar to a traditional Roth IRA, funds in a mega backdoor Roth generally need to be in the account for at least five years before qualified withdrawals can be made tax- and penalty-free.

Limits of mega backdoor Roth in 2024

The limit for contributions to a mega backdoor Roth in 20204 is $46,000. This is the annual IRS 401(k) contribution limit ($69,000) minus your pre-tax contributions, assuming you hit the ceiling of $23,000. You will also need to deduct any employer match.

How to open

Before moving forward with a mega backdoor Roth, you’ll need to make sure your employer-sponsored 401(k) allows post-tax contributions and that your plan allows this type of rollover. Your HR team should be able to answer these questions
Consult with a financial advisor to determine if this type of account is appropriate for your financial situation and to learn more about the ins and outs and complexities of a mega backdoor Roth.
After meeting with an advisor, you decide to move forward, make periodic post-tax contributions to your 401(k), and roll them over to a Roth IRA.

The mega backdoor Roth isn't actually about opening a new account but rather utilizing features of your existing workplace retirement plan. Here's a simplified breakdown of the process:

Consult a Certified Financial Planner: This strategy can be complex, so consider consulting a tax advisor or financial professional to ensure it aligns with your financial goals and risk tolerance.

401(k)

A tax-advantaged, employer-sponsored retirement savings plan that allows employees to defer a percentage of their paycheck to the plan. An employer may match some or all of those contributions. Contributions are made with both pre-tax dollars or Roth contributions and have a limit of $23,000 in 2024 – with another $7,500 catch-up contribution permissible if you are 50 or older. Together with employer matching, total employer-employee contributions to a 401(k) cannot exceed $69,000 or, for those 50 and older, $76,500.

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Pros of 401(k) plans

Tax advantages: You can choose between pre-tax contributions that lower your taxable income now or Roth contributions that grow tax-free and allow for tax-free qualified withdrawals in retirement.
Pre-tax contributions grow tax deferred and capital gains are not subject to taxes while the money is growing, however you will pay taxes upon withdrawal of the assets in retirement. Roth contributions are made on an after tax basis but are subject not taxes when they are growing nor when they are withdrawn in retirement.
Possibility of employer-match. Some employers offer to match employee contributions up to a certain percentage of their salary. For example, if your employer offers a full match up to five percent match and you earn $100,000 per year, they will contribute up to $5,000 to your 401(k) on an annual basis if you invest five percent of your earnings into the account. There are several other match options, including tiered matching.
Higher contribution limits than other retirement plans. The max yearly 401(k) contribution is $23,000 compared to $7,000 for a Roth IRA.
Employer sponsored plans, like 401(k) accounts, make it easy to save on a consistent basis as the money is taken out of your paycheck before you can spend it.

Cons of 401(k) plans

Withdrawals are subject to a 10% penalty if they are taken before the age of 59 ½.
There are mandatory age-based withdrawals. The law requires that you take the required minimum distribution (RMD) by April 1, the year you turn 73. The requirement is waived for your current employer-sponsored account if you are still working but not for previous employer-sponsored accounts.
There can be a limited number of investment options available.

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401(k) limits in 2024

There are two main limits to consider when contributing to a 401k plan in 2024. The first is the employee contribution limit set by the IRS. If you're under 50 years old, the maximum you can contribute to your 401k in a year is $23,000. If you're 50 or older, you can take advantage of "catch-up" contributions, allowing you to contribute an additional $7,500 for a total of $30,500.

The second limit is the total contribution limit, which refers to the combined amount you and your employer can contribute to your 401k each year. This total cannot exceed your annual earnings from the employer sponsoring the 401k plan. It's important to note that employer contributions do not count towards your employee contribution limit. There's no set limit on how much your employer can contribute, but it's typically less than the employee contribution limit. Remember, these limits apply to 2024 and may change in future years.

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How to open a 401(k)

While some employers automatically enroll you in a 401k, here's how to open one if you need to initiate the process yourself:

Contact HR: Your Human Resources department will have information and enrollment forms for the company's 401k plan.
Decide on Contribution: Choose how much you want to contribute from each paycheck. Consider maximizing any employer match (free money towards your retirement!).
Pick Your Investments: Review the investment options available in the plan and select your desired allocation based on your risk tolerance and retirement timeline. If you are unsure, most plans have an automatic investment selection that will be chosen for you based on your age.
Complete Enrollment Forms: Fill out and submit the necessary paperwork to HR to officially open your 401k account.

Your employer will handle the account setup and payroll deductions. They might also offer resources or guidance during enrollment.

Consider speaking with a financial advisor to get the lay of the land, or use our retirement calculator to determine which options are best for you and how much of your income you can safely invest.

403(b)

A 403(b) is a tax-advantaged retirement plan specifically for those who work at certain tax-exempt organizations. Possible participants include public school teachers, nurses, clergy, and government employees. As with 401(k) plans, employers can choose to match contributions. Contribution limits total $23,000 for 2024, with an additional $7,500 allowed for catch-up contributions for those 50 and older. A more complex set of catch-up contributions exists for employees with 15 years of service or more. That means contributions can increase by the lesser of

$3,000
$15,000, trimmed down by other elective deferrals previously made or
$5,000 multiplied by the number of years the employee has served at the employer – then subtracted by elective deferrals made in previous years.

There are two types of 403(b) plans: a tax-deferred 403(b), which allows you to make contributions with pre-tax dollars, and a Roth 403(b), which allows post-tax contributions. A tax-deferred 403(b) allows you to lower your taxable income for the year, but you will pay taxes on withdrawals in retirement. Since contributions to a Roth 403(b) are made with money you’ve already paid taxes on, your investment grows tax-free.

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Pros of 403(b) plans

Tax advantages: You can choose between pre-tax contributions that lower your taxable income now or Roth contributions that grow tax-free and allow for tax-free qualified withdrawals in retirement.
High contribution limits: The contribution limits for 403(b) plans are the same as 401(k) plans, allowing you to save a significant amount for retirement.
Potential for employer matching: Some employers offer matching contributions on your 403(b) deferrals, essentially giving you free money for your retirement.
Employer sponsored plans like 403(b) accounts make it easier for investors to save on a consistent basis as the money is taken out of your paycheck before you can spend it.

Cons of 403(b) plans

High fees: Some 403(b) plans can have higher administrative and expense fees compared to other retirement plans.
Not always ERISA-protected: While some are, 403(b) plans may not be subject to ERISA (Employee Retirement Income Security Act) regulations, which offer certain protections for participants.
Limited investment options: inside 403b plans there is a set list of funds options available to you.

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403(b) limits in 2024

There are two main limits to consider when contributing to a 403(b) plan. The first is the annual employee contribution limit set by the IRS. In 2024, this limit is $23,000 for those under 50 and increases to $30,500 for those 50 or older who can make "catch-up" contributions.

The second limit is the total salary you earn from the employer offering the 403(b) plan. Your contributions cannot exceed your annual earnings from that specific employer. It's important to be aware of both limits to ensure you're saving for retirement efficiently and within the IRS regulations.

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How to open

You can't directly open a 403(b) account yourself since it's offered by your employer. Here's the typical process:

Check eligibility: Confirm your employer offers a 403(b) plan (public schools and certain nonprofits are common).
Enroll through employer: Your employer's benefits office will have information and enrollment materials.
Choose investments: Review the investment options available in the plan and select your desired allocation.
Set up contributions: Decide how much you want to contribute per paycheck and choose pre-tax or Roth contributions (if offered).

Your employer will handle the account setup and payroll deductions. They might also provide resources or guidance throughout the process.

How much retirement savings do you need?

There’s no one-size-fits-all answer to how much money you will need in retirement. The answer may depend on what sort of lifestyle you want to have and what financial commitments you may have for your spouse or spousal benefits, your greater family, and yourself once you leave the workforce. It is, of course, important to consider the effects of inflation and increased medical costs you may incur as you age, especially as life expectancy continues to increase.

It becomes additionally nuanced when you factor in your anticipated Social Security benefits. Click through to our retirement calculator to figure out how large your nest egg should be in addition to your monthly benefit amount to support you through retirement. Also, consider connecting with a trusted financial advisor from Domain Money to walk you through the retirement planning process and help you determine an accurate estimate of your retirement spending goals.

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When do you need to start planning for retirement?

You should start taking steps for retirement planning as early as possible. When you earn your first paycheck, you should contribute to a 401(k) if offered, or open an IRA through a bank, brokerage, or other financial institution. Due to the time value of money and the power of compound interest, your retirement contribution strategy should mirror the tongue-in-cheek adage about voting: early and often.

What is the average retirement age?

The average retirement age in the U.S. is 64. For most people, full retirement benefits from the Social Security Administration come at 67, but there are added benefits to deferring drawdowns on Social Security until age 70, with increased payouts to reward retirees for the delay. Medicare eligibility begins at 65. As people live longer, they are working longer to ensure they can comfortably afford their post-work life.

How to build a retirement plan

Building a solid retirement plan is essential for your future. Start saving as early as possible to take advantage of the time value of money and compound interest in your retirement investments. If you have access to a 401(k), start making contributions there – at least up to the company match to avoid leaving money on the table.

Assess and prioritize your retirement spending goals to see how much money you might need to retire and how much you can sock away given current obligations such as credit card debt or student loans. In addition to a 401(k), you can then build out your retirement savings with an IRA.

As a young adult, being comfortable with more risk and having your retirement savings in a more aggressive asset allocation can help build growth, but as you near retirement, it can be prudent to taper your retirement portfolio and move away from stocks toward more conservative bonds. A Certified Financial Planner™ can help walk you through the steps for retirement planning to ensure your needs are met and help you determine accurate retirement spending goals.

Elements of a good retirement plan

A good retirement plan takes into account your tax liability, investment strategy, income planning, and anticipated retirement spending needs to ensure a comfortable retirement

Making contributions to your accounts can have significant short-term benefits for retirement savers. Of course, for those who intend to build up more money as their career progresses, the benefits of a Roth IRA may be much delayed but preferred with tax-free withdrawals after age 59.5.

Choosing investments wisely and creating the right mix of assets in your retirement portfolio and across your accounts is the lifeblood of a leak-proof retirement plan. Determining an accurate retirement budget allows you to work backward to determine how much you need to save for retirement in order to have your desired income distributions from your funds after you leave the workforce.

FAQs

What is a good monthly retirement income?

A good monthly retirement income varies based on individual circumstances, including lifestyle, location, and health needs. Generally, financial experts suggest that retirees need about 70-80% of their pre-retirement income to maintain their standard of living.

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How do I begin to plan for retirement?

Assess Your Current Financial Situation: Review your annual income, living expenses, savings, and debts.
Set Retirement Goals: Determine your desired retirement age, lifestyle, and income needs.
Create a Savings Plan: Develop a strategy to save and invest for retirement, considering retirement accounts and other investment vehicles.
Maximize Employer Benefits: Take advantage of employer-sponsored retirement plans and matching contributions.
Consult a Financial Advisor: Seek professional advice to create a comprehensive retirement plan tailored to your financial needs.

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What is the 10 30 60 rule for retirement?

The 10 30 60 rule is a guideline for asset allocation based on age:

10% in cash or cash equivalents.
30% in bonds or other fixed-income securities.
60% in stocks or equity investments.

This rule suggests that younger investors can take on riskier investments (higher stock allocation), while older investors should be more conservative (higher bond allocation).

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What is the 4% Rule?

This retirement withdrawal strategy rule of thumb stipulates that retirees should withdraw 4% of their retirement nest egg during the first year they retire and then make adjustments to account for inflation in subsequent years.

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What are the 5 things you should do when it comes to retirement planning?

Start Retirement Planning Early: Begin saving and investing for retirement as soon as possible to take advantage of compound interest.
Set Clear Financial Goals: Define your retirement goals, including your desired lifestyle and age of retirement.
Understand Your Retirement Needs: Calculate how much money you will need to maintain your lifestyle in retirement.
Maximize Contributions: Contribute to accounts such as 401(k)s and IRAs to benefit from tax advantages and employer matches.
Diversify Investments: Spread your investments across different asset classes to reduce risk and improve potential returns.

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