Published: December 13, 2024

Step-by-Step Guide to Building a Retirement Plan That Fits Your Budget

Retirement planning can feel overwhelming, especially when you're trying to balance it with your current financial responsibilities. The good news is that with the right approach, you can create a plan that aligns with your goals without overextending your budget. In this step-by-step guide, I’ll walk you through practical strategies to take control of your financial future with confidence and clarity.
Close-up of a person using a calculator and pen for financial work at a desk.

Set Clear Retirement Goals

The first step in building a retirement plan that fits your budget is defining what retirement looks like for you. Do you envision traveling the world, downsizing to a cozy home, or simply maintaining your current lifestyle? Your goals will directly influence how much money you need to save. Without clear objectives, it’s easy to either save too little or stress yourself by overestimating.

Start by estimating your annual expenses in retirement. Include essentials like housing, utilities, food, and healthcare, as well as discretionary spending for hobbies, travel, or entertainment. A common rule of thumb is that retirees need about 70-80% of their pre-retirement income annually1. However, this percentage can vary depending on your personal circumstances and goals.

Once you’ve outlined your retirement vision, calculate how long you expect to be retired. While no one can predict the future, using average life expectancy data as a guide can help. For instance, if you plan to retire at 65 and expect to live until 85, you’ll need to fund 20 years of expenses. This planning horizon is crucial for determining your savings target.

Don’t forget to factor in inflation. What costs $50,000 a year today will likely cost much more 20 years from now. By setting clear, realistic goals, you create a roadmap for your retirement plan that feels achievable, even on a modest budget.

Assess Your Current Financial Situation

Before you can build a retirement plan, you need a thorough understanding of your current financial standing. Start by reviewing your income, expenses, savings, and debt. Knowing where your money is going each month allows you to identify areas where you can cut back to redirect funds toward retirement savings.

Take inventory of any existing retirement accounts, such as a 401(k) or IRA. Assess how much you’ve saved so far and whether you’re taking full advantage of employer-sponsored options. For instance, many employers offer 401(k) matching programs, which essentially provide free money for your retirement. If you’re not contributing enough to receive the full match, you’re leaving money on the table.

  • Evaluate your debts, especially high-interest ones like credit cards. Learn how to tackle high-interest debt effectively.
  • Set up an emergency fund with three to six months’ worth of living expenses to avoid dipping into your retirement savings.
  • Review discretionary spending to identify potential savings opportunities.

By gaining a clear picture of your financial landscape, you can identify the steps needed to align your current budget with your future retirement goals.

Choose the Right Retirement Accounts

Not all retirement accounts are created equal, and selecting the right ones is critical to maximizing your savings. Each type of account offers unique tax advantages and contribution limits, so it’s important to choose options that align with your financial situation and goals.

Employer-sponsored plans, like 401(k)s, are an excellent starting point. Contributions are made with pre-tax dollars, which reduces your taxable income for the year. Additionally, investment growth within the account is tax-deferred until you withdraw funds during retirement. If your employer offers a match, prioritize contributing enough to take full advantage—it’s essentially a 100% return on your investment.

Traditional and Roth IRAs are another popular choice. With a Traditional IRA, contributions may be tax-deductible, and earnings grow tax-deferred. Roth IRAs, on the other hand, are funded with after-tax dollars, but qualified withdrawals are tax-free. The right choice depends on factors like your current income and anticipated tax bracket in retirement2. For more details on making tax-efficient decisions, learn how to optimize your retirement contributions.

Develop a Realistic Savings Plan

Now that you’ve set goals, assessed your finances, and chosen your accounts, it’s time to create a savings plan. The key to success is starting small and increasing contributions over time. Even if your budget is tight, contributing something—no matter how small—gets the ball rolling and takes advantage of compound growth.

Steps to Build a Realistic Savings Plan:

  1. Save at least 15% of your annual income for retirement. If this isn’t feasible, start with a smaller percentage and increase it annually.
  2. Automate your contributions to stay consistent.
  3. Take advantage of “catch-up contributions” if you’re 50 or older to maximize savings opportunities.
  4. Redirect windfalls like bonuses or tax refunds into retirement accounts.

Additionally, find creative ways to boost your savings. For example, reduce everyday expenses to free up more funds for retirement.

Monitor and Adjust Your Plan Regularly

Retirement planning isn’t a one-and-done process. Life circumstances, financial markets, and personal goals can change, so it’s essential to review your plan regularly and make adjustments as needed. Aim to revisit your plan at least once a year or whenever you experience a major life event, such as a job change, marriage, or the birth of a child.

Start by reviewing your retirement account balances and investment performance. Are you on track to meet your savings goals? If not, consider increasing your contributions or re-evaluating your investment strategy. Diversification is key to managing risk, especially as you approach retirement age. As you near your target date, gradually shift your portfolio toward more conservative investments to protect your savings.

Keep an eye on external factors like changes in tax laws, Social Security policies, or inflation rates. These variables can impact your retirement plan and may require you to adjust your strategy. Staying informed ensures that your plan remains aligned with your long-term objectives. To better understand how to navigate such changes, explore tips for a secure retirement budget.

Finally, don’t hesitate to seek professional advice if you’re unsure about certain aspects of your plan. A financial advisor can provide personalized guidance and help you navigate complex decisions. By regularly monitoring and fine-tuning your plan, you can stay on track to achieve a comfortable, financially secure retirement.

1How Much Money Do You Need to Retire Comfortably? from Investopedia

2Roth IRA vs. Traditional IRA: What’s the Difference? published on April 5, 2023, from NerdWallet

3Retirement Topics - Catch-Up Contributions from IRS.gov

Frequently Asked Questions

  • How much should I save for retirement? Aim for at least 15% of your annual income, but adjust based on your goals and budget.
  • What’s the difference between a Roth IRA and a Traditional IRA? Roth IRAs are funded with after-tax dollars and offer tax-free withdrawals, while Traditional IRAs provide tax deductions for contributions but tax withdrawals.
  • What is the best way to start saving for retirement? Start small, automate contributions, and increase savings annually while taking advantage of employer match programs.
Daniel Kim
By Daniel Kim

Daniel Kim is a financial advisor who writes approachable content aimed at helping individuals manage their personal finances. His tips and tricks are backed by years of experience in the field.