Retirement planning
is the process of building enough income and savings to support your living
expenses after you stop working. It typically combines three sources: personal
savings and investments, such as a 401(k), IRA, or brokerage account; Social
Security; and any pension or annuity income.
Most retirement plans are built around two numbers: how much income you'll
have, and how much income you'll need. Retirement income commonly needs to
replace 70% to 80% of pre-retirement income, since some costs, such as retirement
account contributions and commuting, go away once you stop working.
The two biggest levers in a retirement plan are how much you save and how long you
save it. Additional years of contributions give your investments more time to
compound.
Retirement accounts fall into two tax categories. Traditional accounts use pre-tax
contributions and taxable withdrawals. Roth accounts use after-tax contributions and
tax-free withdrawals.
Once you reach
RMD
age, 73 or 75 depending on your birth year, the IRS requires minimum
withdrawals from most pre-tax retirement accounts.