Retirement Planning Guide
How much you need · The 25x rule · Income sources · Withdrawal order · Healthcare · Common mistakes
Retirement planning boils down to one question: will my money last as long as I do? Answering it requires understanding your target savings number, where your income will come from, in what order to draw down your accounts, and how to handle the biggest wildcards — healthcare costs, inflation, and sequence-of-returns risk. This guide walks through each step.
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Step 1: How much do you need to retire?
The most widely used starting point is the 25x rule: multiply your expected annual retirement spending by 25. This is derived from the 4% safe withdrawal rate — if you can withdraw 4% of your portfolio per year, you need 25— your annual spending saved.
| Annual spending in retirement | 25x target (portfolio only) | With $24,000 SS/yr |
|---|---|---|
| $40,000 | $1,000,000 | $400,000 |
| $60,000 | $1,500,000 | $900,000 |
| $80,000 | $2,000,000 | $1,400,000 |
| $100,000 | $2,500,000 | $1,900,000 |
| $120,000 | $3,000,000 | $2,400,000 |
Key insight: Guaranteed income (Social Security, pension, annuity) reduces how much your portfolio needs to cover. Every $1,000/month in Social Security reduces your required portfolio by ~$300,000 at a 4% withdrawal rate.
The 25x rule is a starting point, not a finish line. It assumes a 30-year retirement, historical US market returns, and flexible spending. If you retire early, expect higher-than-average healthcare costs, or have a conservative portfolio, consider 28x—33x (3—3.5% withdrawal rate).
The two phases of retirement planning
Accumulation phase (working years)
Building wealth through saving and investing. The goal is to maximize contributions to tax-advantaged accounts (401k, IRA, HSA), invest early and consistently, and let compound growth do the heavy lifting. The savings rate — what percentage of income you save — is the most controllable variable.
Decumulation phase (retirement years)
Converting savings into sustainable income. The challenges flip: instead of worrying about growth, you manage sequence-of-returns risk, tax efficiency of withdrawals, required minimum distributions, and ensuring your portfolio lasts 25—35 years while keeping pace with inflation.
Most retirement guides focus entirely on accumulation. The harder and less-discussed problem is decumulation — and the decisions made in the first 5—10 years of retirement have a disproportionate impact on whether your money lasts.
Step 2: Stack your income sources
A resilient retirement income plan layers multiple sources. Think of it as a pyramid — guaranteed income at the base, portfolio withdrawals layered on top:
Layer 1 — Guaranteed income (cover essential expenses)
- Social Security (inflation-adjusted for life)
- Pension (if applicable)
- Annuity income (if purchased)
Layer 2 — Portfolio withdrawals (cover remaining spending gap)
- Traditional 401(k) / IRA withdrawals (taxed as ordinary income)
- Roth IRA withdrawals (tax-free)
- Taxable brokerage (capital gains rates)
Layer 3 — Flexible/discretionary
- Part-time work / consulting (especially in early retirement)
- Rental income
- Home equity (last resort / legacy planning)
The more of your essential expenses covered by Layer 1 (guaranteed income), the more resilient your plan is to market downturns. Maximizing Social Security by delaying to 70 is one of the highest-impact moves in retirement planning.
Step 3: Withdrawal order — which accounts first?
The order you draw down your accounts dramatically affects your lifetime tax bill. The conventional wisdom and the nuanced reality:
Taxable brokerage accounts
Withdrawals taxed at favorable long-term capital gains rates (0%, 15%, 20%). Drawing these down first keeps tax-deferred balances growing and avoids triggering RMDs on larger balances later.
Traditional 401(k) / IRA
Taxed as ordinary income. The goal is to draw these down enough to avoid massive RMDs at 73, while not pushing into a higher bracket. Roth conversions (see below) are often the right tool here.
Roth IRA (last)
Tax-free growth and withdrawals, no RMDs. Let it compound as long as possible. Ideal for covering large expenses late in retirement or as a tax-free legacy for heirs.
Strategic exception: In low-income years between retirement and age 73, it often makes sense to withdraw from traditional accounts (or do Roth conversions) to fill up lower tax brackets — even if you don't need the money for spending. This prevents larger mandatory RMDs later and reduces lifetime taxes.
The biggest risk: sequence of returns
Two retirees with identical portfolios and identical average returns can have very different outcomes depending on when bad years occur. A major market downturn in the first 5 years of retirement — while you are withdrawing — permanently impairs your portfolio. A downturn in year 20 matters far less because the portfolio had 20 years to grow before it was hit.
Example: $1M portfolio, $50,000/yr withdrawals, 7% average return
| Scenario | Returns years 1—5 | Balance at year 30 |
|---|---|---|
| Good early returns | +15%, +12%, +10%, +8%, +6% | ~$1.8M |
| Bad early returns | -15%, -12%, -10%, +8%, +15% | Depleted ~year 18 |
How to mitigate sequence risk:
- Build a cash buffer (1—2 years of spending in cash/short-term bonds) so you don't have to sell equities during a downturn
- Flexible spending: reduce discretionary spending by 10—15% in down years
- Bucket strategy: divide assets into short-term (cash), medium-term (bonds), and long-term (stocks) buckets
- Delay Social Security: a higher guaranteed income floor reduces your dependency on portfolio withdrawals in early retirement
Healthcare: the largest underestimated cost
Fidelity estimates a 65-year-old couple retiring today will need approximately $330,000 for healthcare costs in retirement (excluding long-term care). Healthcare inflation historically runs at 5—6% annually — faster than general inflation.
The gap before Medicare (ages 60—64)
If you retire before 65, you must arrange your own health insurance. ACA marketplace plans can cost $800—$1,500+/month for a couple in their early 60s. However, income-based ACA subsidies can dramatically reduce this — keeping income below 400% of the federal poverty level (via careful Roth conversion and withdrawal planning) is a major strategy for early retirees.
Medicare at 65+ and IRMAA
Medicare Part B and Part D premiums are income-based. High RMDs or large Roth conversions can trigger IRMAA surcharges of hundreds of dollars per month. Plan your income carefully in the 2 years before Medicare and each year after.
Long-term care
About 70% of people turning 65 today will need some form of long-term care. The average nursing home costs ~$100,000/year; home health aides run $50,000—$70,000/year. Medicare does not cover custodial long-term care. Options: long-term care insurance (buy before age 60 for best rates), hybrid life/LTC policies, or self-insuring with a dedicated reserve.
Common retirement planning mistakes
Taking Social Security too early
Claiming at 62 locks in a 30% permanent reduction vs. full retirement age. Delaying to 70 increases your benefit by 76% over age 62. For most people in good health, waiting pays off — it's longevity insurance with an 8%/year guaranteed return for each year of delay past FRA.
Going too conservative too early
Shifting to 80—100% bonds at 65 feels safe but is a real risk. At 3% bonds vs. 7% stocks over 25 years, a $1M portfolio grows to $2M vs. $5.4M. Inflation erodes fixed-income returns. Most retirees need significant equity exposure throughout retirement.
Ignoring the Roth conversion window
The years between retirement and age 73 (before RMDs start and possibly before Social Security) are often the lowest-income years of your adult life. Not doing Roth conversions in this window means paying higher rates on forced RMDs later — and potentially triggering IRMAA surcharges for life.
Planning for average life expectancy, not maximum
Average life expectancy at 65 is ~85 (male) and ~87 (female) — but “average” means half live longer. A 65-year-old couple has a 50% chance at least one spouse lives to 92. Plan for a 30-year retirement as the base case, not a 20-year one.
Underestimating spending in early retirement
The “go-go, slow-go, no-go” pattern of retirement spending is real — but early retirement (60—75) is often the most expensive phase: travel, hobbies, home improvements, helping adult children. Don't base your target on the spending of an 80-year-old.
Go deeper with our topic guides
Social Security Guide
When to claim, spousal benefits, break-even analysis
Roth Conversion Guide
When to convert, tax brackets, the conversion window
RMD Guide
Required minimum distributions, QCDs, penalties
Safe Withdrawal Guide
The 4% rule, Trinity Study, guardrail strategies
Inflation Guide
Purchasing power erosion, TIPS, I-bonds, COLA
Medicare Guide
Parts A, B, C, D — enrollment windows and costs
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Open Retirement Calculator →🏛️ Official Government Resources
- SSA: Retirement Benefits ↗ — Official Social Security Administration page for estimating your retirement benefit.
- DOL: Top 10 Ways to Prepare for Retirement ↗ — U.S. Department of Labor guidance on building retirement savings.
- IRS: Retirement Plans ↗ — IRS guidance on 401(k), IRA, contribution limits, and tax rules.