Retirement Planning: Steps and 401(k) Contribution Limits for 2025

Retirement planning is a key step in building financial security for your later years. While starting early can give you ample time to plan how to grow your savings, it’s never too late to take action on your retirement goals.

As you save for retirement, key details such as IRS limits on annual contributions to 401(k) plans and individual retirement accounts (IRAs) are essential to build a robust nest egg. The 2025 retirement plan contribution limits have increased, giving you opportunities to boost your savings.

Whatever your age or retirement planning stage, a clear strategy can help you prepare for a financially secure retirement.

What is retirement planning?

Retirement planning involves creating a strategy for covering expenses after you stop working. When you leave the workforce, you’ll need money to pay for living expenses, and a retirement plan lays out how you’ll do that.

A retirement plan considers how you’ll use savings, investments and retirement income sources to maintain your lifestyle.

It’s never too early to start saving for your retirement.

“The earlier you begin saving, the more time your investments have to grow through compound interest,” says Charles Petitjean, financial planner and wealth adviser with Barker Wealth Management. “Even small contributions can make a significant difference over decades.”

But even if you begin retirement planning after 50, you can make catch-up contributions to maximize your savings.

Retirement planning isn’t a one-and-done task. You’ll need to update your plan at least annually as your earnings, expenses and goals evolve.

Petitjean recommends reviewing and updating your retirement plan when significant life events occur, such as:

• Marriage, divorce or the birth of a child
• Job changes or significant changes in income
• Major health events or changes in health care costs
• Changes in financial goals, such as planning to buy a home or travel in retirement
• Legislative changes that affect contribution limits or tax policies

What are the steps to retirement planning?

Retirement planning requires thoughtful consideration of your financial present and future. These five steps can help you prepare:

1. Figure out when you may have enough money to retire. First, assess your earnings, expenses and savings to understand your baseline. How much do you think you’ll need in retirement? What will be your sources of income? Get a good idea of where you stand; a retirement income calculator can help you plan how to reach your goals. Check online for free retirement income calculators.
2. Consider expenses, especially medical costs. Day-to-day expenses may be about the same in retirement, but one big change can be the cost of health care. Aging can mean spending more on medical expenses, and some costs are out of your control. For example, you can’t control whether your employer offers retiree health benefits.
3. Determine when to start collecting Social Security benefits. Yes, you can begin taking Social Security payments as early as age 62, but that may not be the best choice. Your benefits can be affected by factors such as marital status and plans to work during retirement. Just keep in mind that for everyone, the longer you wait to start Social Security benefits, the more you will receive.
4. Plan to pay off high-interest debts. Credit cards, personal loans and auto loans can eat into your savings and reduce your standard of living. Pay these off before retirement if possible.
5. Make sure your savings will get you to your goal. Invest in your 401(k) plan and IRA, and make sure your contributions are keeping you on track with your goal. Consider making catch-up contributions if you’re eligible. Your money should be working as hard as possible for you the closer you get to retirement.

How much do you need to retire?

There is no one-size-fits-all answer to how much you need to retire. We don’t all have the same expenses in our working years, and retirement expenses won’t all look the same either.

Whatever you do, plan for a longer lifespan than you expect to ensure you don’t outlive your savings, Petitjean says. “Many experts recommend planning for 20 to 30 years of retirement,” he says.

You’ll need to think about your expected retirement lifestyle, including needs, wants and goals, and evaluate a few savings guidelines. Here are a few ways to estimate how much you’ll need:

• 10 to 12 times your annual income at retirement age. If you plan to retire at 70 and your annual income is $150,000, then you should aim to save between $1.5 million and $1.8 million for retirement.
• A multiple of your annual income at your current age. You may set a few different goals. Maybe by age 30, you want to save the equivalent of your current annual income; or by age 40, you aim to accumulate three times your current income for retirement.
• About 80% of your preretirement income. This is based on a withdrawal rate of about 4% of your retirement accounts annually to ensure you have retirement income for roughly 25 years.
• Aim for a net worth of at least $1 million. When combined with Social Security, a savings of $1 million to $1.5 million can make sure you have enough to meet your needs in retirement.

What are the common types of retirement plans?

Generally, you may have access to two types of retirement plans through an employer: a defined benefit plan or a defined contribution plan.

A defined contribution plan, also known as a 401(k), allows you to direct a percentage of your pretax income toward your retirement savings. Your employer may also match some or all of your contributions.

A defined benefit plan, or pension, on the other hand, is funded entirely by your employer. Contributions aren’t required, though some plans may allow them. A pension pays out a prescribed amount for the entire length of your retirement.

Defined contribution plans are more widely available to workers in private industries. According to the Bureau of Labor Statistics, 67% of respondents had access to contribution plans and 49% chose to participate in them in March 2023. Just 15% of private industry workers had access to a defined benefit plan.

Another example of a defined contribution plan is a 403(b). It is similar to a 401(k) plan and may be offered by public schools and some 501(c)(3) tax-exempt organizations.

If you don’t have a workplace retirement plan, you still have some tax-advantaged savings options, including:

1. Individual retirement accounts (IRAs). Choose from a Roth or traditional IRA. You can make Roth IRA contributions with after-tax dollars and take tax-free qualified withdrawals. With a traditional IRA, contributions are typically tax-deductible and earnings grow tax-free until you withdraw them.
2. Simplified Employee Pension (SEP) IRAs: These are for self-employed individuals and small business owners to access tax-deferred benefits when saving for retirement.
3. Simple IRAs: Accounts are designed for small businesses and can include employer contributions.
4. Health Savings Accounts (HSAs): They can be used for short-term health care expenses, but you can also save for retirement health care expenses in an HSA. An HSA has triple tax savings because you contribute pretax dollars, avoid taxes on earnings and withdraw the money tax-free.

What are 401(k) contribution limits for 2025?

The IRS sets 401(k) contribution limits annually, adjusting the limits to reflect inflation. The 401(k) employee contribution limit is $23,500 in 2025, up from $23,000 in 2024.

If you’re 50 or older, the catch-up contribution limit is $7,500 for most 401(k) plans in 2025. An $11,250 catch-up limit applies for people ages 60 to 63.

The limit for IRA contributions in 2025 is $7,000 for people under age 50 and $8,000 for those age 50 and older. These limits are unchanged from 2024.

How to choose the best retirement plan for you

Selecting the right retirement plan is essential to your future financial security. The best retirement planning option depends on your goals, needs and other factors, including:

• Tax strategy: Think about whether you’d prefer to pay taxes now or later. You’ll contribute after-tax funds to a Roth IRA but have tax-free withdrawals. With a traditional IRA, you’ll invest pretax or after-tax dollars that may be tax-deductible. The money grows without being taxed until you make withdrawals in retirement.
• 401(k) matching: If your employer offers to match 401(k) contributions, you can claim what’s essentially free money by contributing at least enough to get the full match. For instance, if your employer matches up to 3% of your pay, aim to contribute at least 3% of each paycheck to your 401(k).
• Contribution flexibility: Compare each plan’s contribution limits with your savings goals. A 401(k) plan can give you a higher contribution limit, but an IRA can offer more flexibility.

Combining plans can help you optimize your savings and take advantage of tax benefits. For example, you can contribute to a 401(k) at work up to your maximum contribution and then contribute to an IRA for additional savings.