Planning for Retirement: Income, Expenses & Investment Options

You may have an idealistic vision of retirement. Traveling the world. Taking art classes. Doing all the things that you never seem to have the time for right now.
 
But how can you turn that vision into reality? The benefit you get from Social Security when you retire may not provide enough income for your retirement years. And only about 18% of employees today have access to a traditional pension plan that guarantees a specific income at retirement. On top of that, people are now living longer and must find ways to fund their Golden Years. To meet your goals, proper planning is critical.
 
Here’s the good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.

Determine your retirement income

How much money will you need in retirement? There are different approaches you can take to arrive at an answer.

Determine the percentage of your current income

One simple method is to aim for an annual retirement income that is a percentage of your current income. Some experts suggest using the 80% Rule: save enough so that, in retirement, you can replace 80% of your current annual income. This rule might not work for everyone, however. If you plan to take up an expensive hobby or travel extensively, you may need to aim higher.

Estimate your annual retirement expenses

Use your current expenses as a starting point but note that your expenses may change dramatically by the time you retire. If you’re nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more challenging.
 
Consider your potential healthcare expenses. Medicare will certainly help cover them, but it wasn’t designed to cover everything. After retirement, a 65-year-old may need $172,500 to cover premiums and other health care expenses, according to the 2025 Fidelity Retiree Health Care Cost Estimate.
 
Meanwhile, the Employee Benefit Research Institute reports that a couple with especially high prescription drug expenses may need $469,000 to have a 90% chance of being able to cover their health care costs in retirement.
 
If you eventually need long-term care in a nursing home, the estimated cost is now $100,000 per year, an expense that isn’t covered by Medicare (but is covered by long-term care insurance).

Don’t forget inflation

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been about 2%.
 
Keep in mind that your annual expenses may fluctuate throughout retirement. If you are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. Also, rising health care costs are generally outpacing inflation.
 
A realistic estimate of your future expenses will tell you about how much yearly income you’ll need to live comfortably.

Semi-retirement

Today, many people are either delaying retirement or transitioning into semi-retirement.
 
About 36% of employed people plan to retire at age 70 or later – or not at all – according to the Transamerica Center for Retirement Studies’ Retirement in the USA: The Outlook of the Workforce. And upon reaching retirement age, 53% of workers simply plan to scale back their hours.
 
Among those who choose semi-retirement, some continue working part-time for their current employer, while others seek part-time work elsewhere. Yet others do consulting work or start their own business.
 
Semi-retirement may allow you to delay collecting Social Security, leading to bigger Social Security checks when you do start collecting. And if you choose to collect Social Security earlier, working provides additional income to supplement it. (Be aware that continuing to work while collecting Social Security before full retirement age could reduce your Social Security benefits.)

Calculate the gap between retirement income and expenses

Take stock of your retirement income estimates and add in estimates from future assets. Then subtract your expected expenses. If there is a gap, you’ll need to save.
 
As you calculate your retirement income, include:

• Social Security. These benefits are adjusted based on the Consumer Price Index but may not keep up with the pace of inflation. You can choose to start collecting benefits as early as age 62. (Full retirement age is between 66 and 67 years of age, depending on your birthdate.) If you get benefits early, you’ll receive them for more years but may get as little as 70% of the amount you would have gotten had you waited.
• a retirement plan at work. An investment account may or may not keep pace with inflation, depending on your investments. To protect yourself, it’s best to diversify. A pension will keep pace with inflation if it has a cost-of-living adjustment (COLA).
• a part-time job.
• rental income. If you’re able to increase the rent regularly, a rental property can provide income that rises over time.

If estimates show that your future assets and income will fall short of what you need, the rest will need to come from additional personal retirement savings.

Figure out how much you’ll need to save

By the time you retire, you’ll need a nest egg that provides you with enough income to fill the gap left by your current income sources. But exactly how much is enough?
 
The following questions may help you find the answer:

• What rate of growth can you expect from your savings, now and during retirement? Be conservative when projecting rates of return.
• Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.
• At what age do you plan to retire? The younger you are when you retire, the longer your retirement will be, and the more money you’ll need to carry you through it.
• What is your life expectancy? The longer you live, the more years of retirement you’ll need to fund.

Downsize Before Retirement

The sooner you move to a smaller home, or to a more affordable city, the more money you’ll be able to sock away for retirement.

Build your retirement savings fund: save, save, save

When you know roughly how much money you’ll need, your next goal is to save that amount.
 
First, map out a retirement savings plan that works for you. Assume a conservative rate of return (e.g., 5% to 6%), then determine approximately how much you’ll need to save every year between now and retirement to reach your goal.
 
The next step is to put your savings plan into action. It’s never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice, such as 401(k) plans or payroll deduction savings. This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan – out of sight, out of mind.
 
If possible, save more than you think you’ll need to provide a cushion. If you’re 50 or older, you can make catch-up contributions to 401(k)s or IRAs. In 2026, you can make a catch-up contribution to 401(k)s of up to $8,000, and if you’re 60 to 63, you can make a super catch-up contribution of as much as $11,250. The catch-up contribution for IRAs is $1,100.

Understand your investment options

Make sure you understand the types of investments available, and decide which ones are right for you. If you don’t have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the available options and help you choose investments that are appropriate for your goals, risk tolerance, and time horizon. Note that many investments may involve the risk of loss of principal.

Know the types of retirement plans – and then use the right savings tools

Following are among the most common retirement plans and savings tools, but others are also available.

Employer-sponsored retirement plans

Employer-sponsored retirement plans that allow employee deferrals – like 401(k), 403(b), and 457(b) plans – are powerful savings tools.

• You choose from a selection of investment options.
• You enjoy tax savings. Your contributions come out of your salary as pre-tax dollars (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn.
• Your employer may provide “free” money. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement.
• You can make after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, you may be able to withdraw funds tax-free during retirement.

Individual retirement accounts (IRAs)

Traditional IRAs allow you to save for retirement on your own, outside of an employer’s plan.

• You can make all kinds of investments including annuities, mutual funds, and real estate.
• You enjoy tax advantages now. Traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you’ve made nondeductible contributions, in which case that portion of the withdrawals will not be taxable).

Roth IRAs

Roth IRAs are similar to traditional IRAs with differences in when you pay tax.

• You can invest in various assets like stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
• You enjoy tax advantages later. Roth IRAs don’t allow tax-deductible contributions but withdrawals during retirement are completely tax-free under certain conditions.

Annuities

Annuities are two-phase contracts issued by insurance companies.
 
During the accumulation phase, you purchase an annuity, generally funded with after-tax dollars. You can either make regular payments or pay a lump sum. That money then earns either fixed or variable interest over time, depending on the contract.
 
Then, in retirement, you enter the payout phase and begin receiving payments.

• Earnings grow tax-deferred. You don’t owe any taxes until you withdraw funds. Tax considerations can be complicated, so speak to a financial advisor or your tax advisor.
• The type of annuity determines how long payments last. Annuity payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (typically between 5 and 30 years).
• You may pay certain fees and charges, so make sure you understand them before purchasing an annuity.

Patelco can help you with retirement planning

Retirement planning can be complex, but you’re not alone. At Patelco, you can get personalized financial advice from one of our Certified Financial Specialists. We have also partnered to offer Financial Solutions Advisors who can create a retirement plan that sets you up for success.