Retirement Planning FAQ

A common rule of thumb is to aim for 70–80% of your pre-retirement annual income, though this varies based on your lifestyle, healthcare needs, and whether your mortgage is paid off.

More precisely, financial planners often recommend the "25× rule": multiply your desired annual retirement spending by 25. For example, if you need $60,000/year, aim for a $1.5 million nest egg.

Use our Nest Egg Planner to get a personalized projection based on your current savings, contribution rate, and expected returns.

The 4% rule suggests that in your first year of retirement, you can withdraw 4% of your total savings, then adjust that amount for inflation each year. This strategy has historically survived 30+ years in most market conditions.

Example: $1 million nest egg → $40,000 first-year withdrawal, then inflation-adjusted annually.

With today's higher stock valuations and longer life expectancies, some planners now recommend a 3.5% or 3% rule for more safety. Use our Monte Carlo simulation in the Nest Egg Planner to test different withdrawal rates.

According to Vanguard's 2025 data:

• Ages 25–34: Median 401(k) balance ~$13,000
• Ages 35–44: Median ~$38,000
• Ages 45–54: Median ~$77,000
• Ages 55–64: Median ~$142,000
• Ages 65+: Median ~$212,000

Use these as benchmarks, but remember that your personal goals may differ from the average. Our Nest Egg Planner includes a "How Do You Compare?" section with up-to-date Vanguard data.

This depends on your mortgage rate vs. expected investment returns:

• Mortgage rate < 4%: Prioritize retirement savings (market returns historically beat mortgage rates)
• Mortgage rate > 6%: Consider paying down mortgage (guaranteed return = mortgage rate)
• Always: Contribute enough to get your full employer 401(k) match first — that's free money

It depends on your health, marital status, and other income sources:

• Age 62: Benefits reduced by up to 30%. Choose if you have serious health issues or need income immediately.
• Age 67 (FRA): 100% of your calculated benefit (for people born 1960+).
• Age 70: Benefits increased by 24% from FRA due to delayed retirement credits. Maximizes lifetime payout if you live past ~80.

Use our Social Security Estimator to compare total payouts at different claiming ages.

Yes, Social Security benefits can be taxed at the federal level if your "combined income" exceeds certain thresholds:

• Single: Combined income > $25,000 → up to 50% of benefits taxable; > $34,000 → up to 85% taxable
• Married filing jointly: > $32,000 → up to 50% taxable; > $44,000 → up to 85% taxable

Some states also tax Social Security benefits. Check our 📍 State Tax Guide for details on all 50 states.

The Social Security benefit formula uses three "bend points" — income ranges with different replacement percentages:

• First ~$1,226 (2026): 90% replacement rate
• Next ~$7,392: 32% replacement rate
• Above ~$7,392: 15% replacement rate

This is why Social Security is progressive — low earners get a higher percentage of their pre-retirement income replaced. Use our Social Security Estimator with your actual earnings record for an accurate estimate.

Traditional accounts: Give you a tax deduction now, but withdrawals in retirement are taxed as ordinary income.

Roth accounts: Use after-tax contributions, but qualified withdrawals (after age 59½ and account open 5+ years) are completely tax-free, including all earnings.

General rule: If you expect to be in a higher tax bracket in retirement, Roth is better. If you expect a lower bracket, Traditional may be better. Many retirees benefit from having both types.

Use our Roth Conversion Calculator to model the optimal conversion strategy over time.

401(k) / 403(b) / 457(b) limits (2026):

• Employee contribution limit: $23,500
• Catch-up (age 50+): $7,500
• Total with employer match: up to $69,000

IRA limits (2026):

• Contribution limit: $7,000
• Catch-up (age 50+): $1,000

Use our 401k vs IRA Calculator to compare account types and model contribution growth.

When you leave your employer, you have several options:

1. Leave it in your former employer's plan (if balance > $7,000)
2. Roll it over to your new employer's 401(k)
3. Roll it into a Traditional IRA (more investment choices)
4. Convert to a Roth IRA (pay taxes now, tax-free growth)
5. Cash out (NOT recommended — 10% penalty + income tax)

A Spousal IRA allows a working spouse to contribute to an IRA in the name of a non-working spouse (or a spouse with low earnings). This effectively doubles the household's IRA contribution limit.

2026 limits: Up to $7,000 each (or $8,000 if 50+), for a total of up to $14,000/$16,000 per couple.

Income limits for deductible Traditional IRAs and contributory Roth IRAs still apply based on your combined MAGI.

An RMD is the minimum amount you must withdraw each year from certain retirement accounts once you reach age 73 (SECURE 2.0 Act, for those born 1951+).

Accounts subject to RMD: Traditional 401(k), Traditional IRA, 403(b), 457(b), and inherited accounts.

Accounts NOT subject to RMD: Roth IRAs (during owner's lifetime), Roth 401(k)s (if no longer working).

The penalty for missing an RMD is 25% of the amount that should have been withdrawn (reduced to 10% if corrected timely). Use our RMD Calculator to estimate your distributions.

Yes, there are several IRS-approved exceptions to the 10% early withdrawal penalty:

• Rule of 55: Separate from employer in or after the year you turn 55 (401k only, not IRA)
• 72(t) SEPP: Substantially Equal Periodic Payments for 5+ years
• First-time home purchase: Up to $10,000 from IRA (not 401k)
• Higher education expenses: For you, spouse, children, or grandchildren (IRA only)
• Medical expenses: Exceeding 7.5% of AGI
• Disability: Permanent and total disability

Use our Early Withdrawal Calculator and 72(t) SEPP Calculator to explore these options.

Section 72(t) allows penalty-free early withdrawals from retirement accounts via Substantially Equal Periodic Payments (SEPP):

• Payments must continue for 5 years or until age 59½, whichever is longer
• Three IRS-approved methods: RMD method, Fixed Amortization, Fixed Annuitization
• Changing the payment schedule triggers the 10% penalty retroactively (with limited exceptions)

Use our 72(t) SEPP Calculator to compare the three methods and find your optimal payment amount.

A Roth conversion moves money from a Traditional IRA/401(k) to a Roth account. You pay income tax on the converted amount now, but enjoy tax-free growth and withdrawals in retirement.

It makes sense if:

• You expect to be in a higher tax bracket in retirement
• You have low-income years (e.g., before starting Social Security) to "fill" lower tax brackets
• You want to avoid future RMDs (Roth IRAs have no RMD during owner's lifetime)
• You want to leave tax-free assets to heirs

Use our Roth Conversion Calculator to model multi-year conversion strategies.

Since 2018, you can NO longer recharacterize (undo) a Roth conversion. Once converted, the tax is due. This makes it important to model the conversion carefully before executing it.

However, you can still recharacterize a regular IRA contribution from Roth to Traditional (or vice versa) before the tax filing deadline.

9 states have NO state income tax at all (2026): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. In these states, 401(k) distributions, IRA withdrawals, pension income, and Social Security are all free from state tax.

Additional states that don't tax Social Security: Many states that do have income tax still exempt Social Security benefits fully or partially (e.g., Illinois, Iowa, Louisiana, Mississippi, New York, Ohio, Oklahoma).

State tax treatment can make a significant difference — a $50,000 annual retirement distribution could cost anywhere from $0 to $5,000+ in state taxes depending on where you live. Check our 📍 State Tax Guide for detailed comparisons of all 50 states.

Best (no state income tax): Florida, Texas, Nevada, Wyoming, South Dakota, Tennessee, Washington, Alaska, New Hampshire

Also excellent: Illinois (no tax on 401k/IRA/pension), Mississippi (exempts retirement up to certain ages), Pennsylvania (pension/IRA partially exempt)

Worst (fully tax retirement income): California, Vermont, and several others that tax Social Security + pension + 401k distributions.

Also consider: cost of living, property taxes, sales taxes, and healthcare quality — not just income tax. Our 📍 State Tax Guide covers all 50 states with cost-of-living data.

Fidelity estimates that a 65-year-old couple retiring in 2026 will need approximately $315,000 in today's dollars for healthcare costs in retirement (excluding long-term care).

Key components:

• Medicare Part B premium: ~$174.70/month (2026 standard, income-adjusted IRMAA applies above $103,000 single / $206,000 married)
• Medicare Part D (drugs): ~$30-50/month, plus donut hole
• Medigap (supplemental): $100-300/month depending on plan
• Long-term care: $8,000-12,000/month for nursing home (not covered by Medicare)

Our Nest Egg Planner includes a healthcare cost estimator that models Medicare premiums, IRMAA surcharges, and pre-Medicare private insurance costs.

FIRE = Financial Independence, Retire Early. The movement uses a safe withdrawal rate (typically 4%) to determine your "number":

Formula: Annual expenses × 25 = Target nest egg

FIRE variants:

• Lean FIRE: Living on $30-40k/year, retiring on ~$750k-1M
• Standard FIRE: $50-80k/year, retiring on ~$1.25M-2M
• Fat FIRE: $100k+/year, retiring on $2.5M+

Use our FIRE Calculator to calculate your Financial Independence date based on savings rate and withdrawal strategy.

If you retire before 65 (Medicare eligibility), you'll need private health insurance. The Affordable Care Act (ACA) marketplace is the main option:

• Premium subsidies: Available if your MAGI is below 400% of the Federal Poverty Level (~$62,000 for single in 2026)
• Roth conversion strategy: Some early retirees use low-income years before starting Social Security to do Roth conversions and "fill" the 0%/10% tax brackets while keeping ACA subsidies
• COBRA: Temporary (18 months) continuation of employer coverage, but expensive (you pay full premium + 2%)

This depends on several factors:

• Lump sum pros: You control the money, can leave remaining balance to heirs, potential for higher returns if invested well
• Lump sum cons: You bear all investment risk, could outlive the money
• Monthly payment pros: Guaranteed income for life (like an annuity), often includes COLA (cost-of-living adjustment)
• Monthly payment cons: No leftover for heirs (usually), inflation can erode purchasing power if no COLA

Key question: Can you invest the lump sum to generate returns higher than the pension's implied rate? Use our Pension vs Lump Sum Calculator to run a break-even analysis.