How to Create a Retirement Plan: 7 Simple Steps for Your Dream Future
Posted: Thu May 01, 2025 8:44 am
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Step 1: You’ve got to imagine your retirement life. So you need to
Ask yourself:
- Where will I live? Will I live in the City, village or abroad? It's very so crucial to have this at the back of our mind
- How much will I spend monthly? You should be able to determine the amount you will spend on a monthly basis
- When do I want to retire? People need to decide their retirement age between 55 and 65 and 70. Having a specific answer about retirement age is an essential factor.
Step 2: Calculate How Much You Need
Use the 25x Rule:
1. You need to multiply your yearly expenses by 25. For instance, Maria earns $3,000/month, that means she earns $36,000/year. So, applying the rules, gives you - $36,000 x 25 = $900,000. It means, you needed $900,000
Free Tool: Use this free retirement plan calculator to calculate the amount you needed NerdWallet Retirement Calculator
Step 3: Choose the Right Accounts
Choosing a retirement account will definitely help you save a significant amount of money and it will also reduce taxes. Here’s how to choose:
1. 401(k) (For Company Workers)
- What it is: It is a retirement account that is offered by your employer.
- Best for: It's best for people that are have full-time jobs.
For instance, If you earn $60,000/year and save 10% ($6,000) in your 401(k), it means your taxable income will drop to $54,000, which is great. So, if you save enough more in the account, it means you’ll have more free money.
2. IRA (Individual Retirement Account)
- What it is: This is a personal retirement account you open by yourself, not through your job.
- Best for: It's the best account for freelancers, part-timers, or anyone wanting extra savings.
- 202t Contribution Limit: It's advisable to save up to $7,000/year or $8,000 if you’re 50+
- Tax Benefit: Your contributions may lower your taxable income depending on your income.
3. Roth IRA (Tax-Free Growth)
- What it is: It's a retirement account where you pay taxes now and then withdraw tax-free later.
- Best for: This is suitable for young earners or those who are expecting higher taxes in their retirement.
- 2025 Contribution Limit: Save up to $7,000/year or $8,000 if you are 50 and above.
Step 4: Invest Smartly
- People below fifty can split their investment between 80% stocks (through VOO ETFs) and 20% bonds.
-People who have reached the 50-year mark and beyond should distribute their investments as 60% stocks and 40% bonds and cash.
Step 5 : Plan for Surprises
- Healthcare : It's crucial to save an extra $300/month or probably get long-term care insurance.
- Inflation: You need to get yourself prepared for inflation and plan towards it as well.
- Social Security: It's important to check the estimated benefits in your Social Security.
Step 6: Pay Off Debt Before Retirement
Step 7: Review Every Year
It's very important to check the following:
- Are your investments growing?
- Did your goals change?
- Did new laws affect taxes?
Putting all of these into consideration will keep you on track.
3 Big Mistakes to Avoid
Starting Too Late: Even if you start with $100/month at 25, it’ll grow to $500,000 by 65 (7% return). Ignoring Taxes All Cash Savings: If you put all your cash in savings, it will lose value to inflation. So, you need to invest in stocks/bonds.