Retirement planning is the process of estimating how much money you’ll need when you retire and then developing a strategy for saving and investing your money so you’ll have enough income when you’re ready to stop working. Whether or not you have a dollar figure in your head already, the reality is there’s no magic number — and the amount of money you need will depend on your goals for retirement and your financial situation.

If you’re not sure how to start planning — or if you have been contributing money to retirement accounts and want to make the most of your savings — you’re in the right place. This step-by-step guide will provide a roadmap on how to save for retirement.

What is retirement planning?

For many people, retirement planning is a multi-decade process of preparing for the day when you no longer get a paycheck from your job. The earlier you start thinking about and planning for retirement, the more likely you are to have built up enough savings to live comfortably after you stop working. However, even if you’re already in your 50s and can set aside only a small amount periodically, it’s important to remember that even small amounts help. Consider the following questions as part of your retirement planning process:

• How much money should you contribute to retirement accounts?

• How much money do you think you need to retire?

• What sources of income will you have?

• When should you take Social Security benefits?

• Where do you want to live?

• At what age will you retire?

• What kind of lifestyle do you want?

If these questions feel hard to answer now, don’t worry, they’ll get easier as you go through the process of retirement planning. In the early stages, your goal may be to simply retire some day, so your efforts can focus on setting aside savings and investing that money appropriately — and that’s true no matter how much money you’re able to save.

As retirement draws closer, you’ll be in a better position to make specific plans, such as deciding where you want to live, when you’ll quit working, and when you’ll start receiving Social Security benefits.

How much money do you need to retire?

Retirement planning is personal, and the amount of money you need will depend on the factors listed above, along with some you have less control over, including your healthcare needs and how long you live.

So, how much do you need? You may not need as much as an often-cited piece of conventional wisdom indicates — that you should plan to replace up to 80% of your pre-retirement income once you’ve retired.

More-recent studies have suggested many retirees are likely to need as little as 55% of their pre-retirement income to maintain their lifestyle. That means if you earn $80,000 per year when you retire, you might need somewhere in the range of $44,000 to $64,000 in annual retirement income.

Common sources of retirement income include:

• Distributions from retirement accounts, including a 401(k) and individual retirement account (IRA)

• Social Security benefits

• Pension

• Investment income from dividends or real estate

• Earnings from a part-time job

Recommendations can provide an estimate for planning purposes, but the actual amount you need to retire is personal to you and depends on many factors, including your lifestyle and where you want to live after you stop working. For example, if you live frugally and retire debt-free, you’ll need less money than if you plan to travel extensively or own multiple residences.

Your targeted retirement age is another important consideration. The earlier you retire, the more money you’ll need since your nest egg will need to last longer — though you don’t know exactly how long.

How to plan for retirement in 6 steps

The sooner you start planning and saving, the better your odds of achieving a comfortable retirement. Remember: Every dollar counts, so even if you can only save a few hundred dollars initially, that money will have time to grow and benefit you down the road. Get started with these six retirement planning steps.

1. Budget 15% of your pre-tax salary for retirement savings

A good guideline is to save at least 15% of your pre-tax income in a tax-advantaged retirement account. If your employer matches a portion of your retirement contributions, their contribution counts toward the 15%. That 15% figure isn’t etched in stone, however, and you may need to adjust your savings rate based on your situation and your goals. Even if you can’t save 15% initially, you can work your way up to that level over time. The important thing is to get started no matter how small the amount you can afford to save.

The IRS sets annual limits on how much you can contribute to retirement accounts. You can contribute more money, known as catch-up contributions, when you’re 50 or older. Here are the limits for 2023 and 2024:

• 401(k)s, 403(b)s, and 457s are all types of retirement plans that are sponsored by an employer. The contribution limit for most of these plans is $22,500 in 2023. The limit is rising to $23,000 in 2024.

• Individual retirement accounts (IRAs) are retirement accounts that you set up on your own. The contribution limit for 2023 is $6,500, but is increasing to $7,000 in 2024.

Don’t worry if you can’t afford to contribute the maximum amounts. Focus instead on what you can afford. What’s more, aiming to save 15% isn’t appropriate for everyone.

You may need to save more than 15% if:

• You’re getting a late start on saving for retirement.

• You’re planning on early retirement.

In either scenario, you may need to save more aggressively because you don’t have as much time to benefit from what’s known as compounding. This refers to how the value of your investment grows even faster because your earnings get reinvested to generate additional earnings on both the initial investment and your prior earnings. When you have less time to save, your money has less time to compound, so you may need to save more to reach your retirement goals.

You may want to save less than 15% if:

• You have high-interest debt, like a credit card balance. Credit card interest rates are substantially higher than the returns that you are likely to earn from your investment accounts in an average year. Paying down credit card debt first may save you more money than you’d typically earn from investing returns.

• You don’t have an emergency fund. Try to build a three-month fund that you keep in a high-yield savings account. If you don’t have emergency savings, you could be forced to withdraw retirement funds if you lose your job or get sick. That can be costly because barring special circumstances, you will likely owe taxes and a 10% penalty on early withdrawals before the age of 59½. The long-term impact is even worse when you consider the compounding and other earnings you’ll lose. Your money has less time to grow when you withdraw from investments early.

In either of these scenarios, you should still try to take full advantage of your employer’s 401(k) match, which we’ll cover more in the next step.

2. Pick your retirement accounts

Your savings need a home, and here’s a breakdown of options for your retirement savings.

Employer-sponsored accounts

The most common type of employer-sponsored retirement plan is the 401(k). However, if you work for the government or a nonprofit, you may have another type of retirement plan, like a 403(b) or a 457(b) plan.

Many employers match a portion of employee contributions to these retirement accounts. For example, your company may match 50% of your contributions up to 3% of your salary, which would mean you need to contribute at least 6% to get the full match.

If your employer matches some of your contributions to a 401(k) or another retirement account, make it a priority to get the entire match — even if you’re not in a position to save 15% of your income yet. Otherwise you’re passing up free money.

Individual retirement accounts (IRAs)

An IRA is a retirement account that you open on your own that isn’t tied to an employer. You can open an IRA regardless of whether you have a workplace plan. You’ll need income from working (like a salary, hourly wages, tips, commissions, or self-employment income) during the tax year to contribute.

IRAs have virtually unlimited investment options and usually have lower fees than 401(k)s. If you don’t have access to a workplace plan or your employer doesn’t match contributions, an IRA can be a good way to start saving.

Self-employed retirement plans

If you’re self-employed, you have options to save for retirement beyond an IRA. There are several retirement plans for self-employed people, such as a Simplified Employee Pension (SEP), SIMPLE IRA, and Solo 401(k).

Roth vs. traditional accounts

When opening an IRA, you have the option to choose between a so-called traditional and a Roth option. Many workplace retirement plans also offer these two options. The difference boils down to how you’re taxed and eligibility.

With both a traditional 401(k) and traditional IRA, your contributions are made with pre-tax dollars, meaning that the money you set aside for retirement in these accounts will often lower your taxes for the current year. However, you will owe taxes once you begin taking your distributions in retirement.

With a Roth 401(k) or Roth IRA, your contributions are made with after-tax dollars. There’s no upfront tax break, but if you wait until you’re 59½ and you’ve had the account for five years, your distributions will be tax-free.

Roth IRAs also give you the flexibility to withdraw all of your contributions (but not the earnings) at any time without paying taxes or a penalty. This is best avoided, though, unless you’re facing a financial crisis. Note that income limits apply to Roth IRAs, so you may not be eligible to contribute if your earnings are high.

3. Decide how to prioritize contributions to retirement accounts

Once you’ve selected your retirement accounts, you’ll have to decide how to allocate your money. Here’s a good way to prioritize:

• Contribute enough to get your employer’s match on your 401(k) contributions.

• If you have extra money to save, aim to max out a Roth IRA, if you meet the income requirements, or a traditional IRA. If you don’t qualify for an employer-sponsored plan with a match, start with the Roth IRA.

• After you’ve maxed out your Roth IRA, use extra money to make unmatched 401(k) contributions. Or if you want to pick your own stocks, you could invest extra money in a brokerage account, but you won’t get a tax break for doing so.

Your contributions then need to be invested. Many employer plans have a relatively limited number of investment options, which are usually mutual funds. One easy option is to go with a target-date fund, which bases your investments on your estimated retirement date.

If you have an IRA, you’ll need to decide how to invest your money. Many brokerages offer robo-adviser services, which use algorithms to decide how to invest the money in your IRA.

4. Give your Social Security account a checkup

Social Security is another important part of your retirement plan. To see an estimate of your future retirement benefit and verify that Social Security’s record of your earnings is accurate, create a Social Security account at ssa.gov.

While you’re at it, brush up on the basic Social Security rules:

• You’re eligible for 100% of your benefit at full retirement age, which is 67 if you were born in 1960 or later.

• You can claim retirement benefits as early as 62, but you’ll receive a reduced benefit.

• You can hold out for a larger benefit until age 70, at which point your benefit maxes out.

• Your benefit is based on your 35 highest-earning years.

5. Increase your savings over time

When you’re beginning your career, you may not have much money to save for retirement. Focus on getting your employer’s 401(k) match when you’re starting out. But make it your goal to save more as your income increases or you pay down debt.

Budgeting for future financial milestones can help you achieve this step. Try layering in a bit more savings whenever your income increases or you cut an expense. For example, you could decide that you’ll allocate 25% of your next pay bump to your retirement accounts or that once you pay off your credit card or car loan, you’ll put the money that went toward monthly payments into your 401(k) or IRA.

6. Work with a financial adviser, as needed

Once you’ve been saving for a while, working with a financial adviser may be worthwhile. A financial adviser can help you determine whether you’re saving enough money to retire comfortably and whether your investments are appropriate. Advisers can also discuss your retirement goals and help you determine whether you’re on track.

Retirement planning is a long-term process. The first step is to start saving, even if you can only afford a minimal amount. The sooner you start, the less you’ll have to save over time, thanks to the power of compounding.

Expect your retirement goals to evolve over time. Your plans will probably be vague when you’re in your 20s and 30s. But over time, you’ll get a better sense of what your retirement needs will be.