How to Plan for Retirement: Start at the End

The best way to plan for retirement is to start with the end in mind. Why? There are psychological reasons and practical reasons.

First, the psychological: if you start with the big picture in mind, it will be easier to do the hard work that’s required to make your goal a reality. When you get overwhelmed with numbers and everything starts getting fuzzy, you’ll have that picture of your ideal retirement in the back of your mind, and it will help you stay on track. If you just start crunching numbers, you’ll quickly lose interest and find something else to do.

There’s also a very practical reason for starting at the end when you plan for retirement: you need to know where you’re going before you set off on the journey. If you don’t have a goal in mind, how are you supposed to know how much to save? Starting at the end and systematically working your way towards today gives you a much better chance of reaching your goals.

To plan for retirement, start at the end, and work your way backwards


Imagine Your Retirement

First, visualize. It may seem weird, but it will come in handy later when we start crunching numbers – so just play along for a moment. To successfully plan for retirement, you need to know what you want out of it. Imagine how you hope your life will be once you stop working – this is your chance to design it. If you just use “rules of thumb” and “conventional wisdom,” you’ll wind up with somebody else’s retirement.

The traditional vision of retirement is a few years of doing anything but work: taking cruises, sitting on the front porch, gardening, and so on. There’s nothing wrong with that type of retirement (doesn’t sound bad, actually), but it’s what the people before you have done, and it might not be exactly what you want. So close your eyes for a moment and imagine your own retirement.

How Much Will That Cost?

Now that you know what you want, it’s time to estimate some costs. There’s no easy way to do this. Some people create a budget and assume they’ll spend a certain amount on certain expenses every month in retirement. Others just pick a level of income that they think will support the kind of lifestyle they want in retirement. Since the future is uncertain, the best you can do is make some educated guesses. Just do your best, and make adjustments as time goes on.

Estimate costs in today’s dollars, because you’ll adjust for inflation later. So, if it would cost you $X per month to reach your goals today (or you’d spend $X per month on groceries), start with that number. If you’re totally at a loss and don’t know what number to use, then you’re being honest – it’s hard. Although rules of thumb are full of problems, you can use them for guidance if you like: some people start with the assumption that they’ll need 75% to 100% of their pre-retirement income in retirement.

At this point, you have an important piece of information for planning your retirement: you know what kind of income stream you’ll need. Next, you’ll figure out how much money it takes to generate that income stream.

Crunch Some Numbers

Now that you know what you’ll need, it’s time for some math. Don’t worry if you haven’t done math since high school – you can use a computer to do the grunt work. There are plenty of calculators that help you plan for retirement, but here are two that do a pretty good job:

  • has a simple one-page input form with a nice chart and cash flow summary
  • has a more sophisticated version with a lot of information about the assumptions used. Schwab also provides a few ideas on how you can improve your chances if it looks like you’ll fall short.

It’s a good idea to use a few different calculators as you plan for retirement. Each calculator will use different assumptions (such as investment returns, tax rates, and inflation rates), so you’ll have a better shot at success if your retirement savings are sufficient under several different scenarios. If one calculator says you’re fine while another says that you need to save a lot more, figure out what the differences are between the calculators and decide which one you think is more accurate.

If you want a more customized calculation, you can use specialized software or build your own spreadsheet. Financial planners can also help you plan for retirement, since they typically already own software programs with features that allow for fairly sophisticated retirement projections.

At this point, you should know how much you need to save each year to plan for retirement. If that number is excessively high, there are a few ways you can adjust your retirement plan (and it’s a good thing you found out about this now, as opposed to after you quit working):

  • Save more each month
  • Earn more on investments (if possible)
  • Plan to live on less in retirement
  • Delay your retirement date

None of those options may look appealing, and some may seem impossible. However, if you can do a little bit of each (save just a little bit more, plan to retire just a few years later, and reduce your retirement spending budget by 10%) you might see nice results. You probably can’t overcome a shortfall by just saving more each month – it’s best to combine several strategies.

Save and Invest

Now that you know how much you need to save, get to it. Set up automatic contributions to your retirement accounts and any other accounts that need funding. Automatic contributions make it easier to save for retirement because you can avoid any temptation that might arise when you see that money sitting in your bank account (you’ll have to decide whether to spend it on something fun, or save it for something boring like retirement). Set something up with your employer’s payroll department – perhaps through 401k contributions – or open an IRA and have contributions drawn from your bank account every month.

Be sure to use any available retirement accounts (401k, 403b, IRA, etc) as you plan for retirement. These accounts provide tax benefits that can help you reach your goals. Even if you’re worried about rising tax rates you can get some benefit from using a Roth account. If you’re self-employed, investigate SEP-IRAs and Solo 401k plans.

The sooner you start, the better off you’ll be. Due to the miracles of math, early saving and investing means that you don’t have to try as hard as those who wait to invest. Stay disciplined, and remember your retirement goal (the “ideal” retirement that you imagined earlier) whenever you’re tempted to stray from your retirement plan.

Monitor Your Plan

Now you know what you need to do to live the life you want in retirement. And you’ve also put things in place to make your goals a reality. Congratulations – most people never make it to this point. Be sure to reward yourself for doing the important work of planning for retirement.

But there’s still more to do. Now that you have a plan, you need to stick to it and make sure that things are going according to plan (note: things almost certainly won’t go according to plan, but the important thing is to keep things moving in more or less the right direction). Check in on your plan from time to time. If you’ve got 20 years or more until retirement, you can probably review things every two or three years. Do it more often if you’re within 10 years. Remember that the markets go up and down (and your retirement savings go along for the ride) so any given year might look great or horrible. Try to keep a long term perspective.

This is a topic for another time, but it’s worth mentioning: you’ll probably want to reduce the amount of risk you take as you approach retirement. That is, most people reduce their exposure to stock market investments, and shift money to more conservative investments like bonds and cash. However, keep in mind that you may live for a long time in retirement, so some exposure to stocks should help you keep pace with inflation.

Ask for Help if Needed

If any of this is confusing (or you just don’t want to do it for whatever reason) you can always get help. Talk to a financial planner who can help you plan for retirement. They do it every day, and they have tools to make it easy. Look for a Certified Financial Planner who will charge you simply to plan for retirement – either by the hour or as a flat fee. Your retirement is important, and a second set of eyes never hurts.