Retirement Planning 101: What your 401(k) can do for you

For many people, retirement may be one of the largest financial planning priorities of their lifetime. Yet many people spend more time planning a vacation than planning for their retirement years. No matter where you are in your career, understanding how your retirement plan works and how your contribution choices may affect your long-term savings can help you make more informed decisions.

What you’ll learn*:

• How does a traditional 401(k) work, and why does it matter?
• How can you find extra money to contribute to retirement?
• How much should you save for retirement by age?
• What role does Social Security play in retirement income?
• Why does starting early matter so much in retirement investing?
• What are the basics of investing within a 401(k)?
• Why you should start now and adjust as you go

How does a traditional 401(k) work, and why does it matter?

Your 401(k) is an employer-sponsored retirement savings plan with three features that set it apart from a regular savings account.ⁱ

Automatic payroll contributions mean the money comes out of your paycheck before you even see it. This “pay yourself first” approach can make saving more consistent by reducing the need to manually set money aside each month.

Pre-tax savings power reduces your taxable income today. For example, what if Amanda and Jake each earn $25,000 per year and both save 6% of that. Amanda contributes through her 401(k), while Jake saves in an after-tax bank account. Amanda saves $225 in federal taxes annually, meaning she puts away $1,500 each year vs. Jake’s $1,275.

This example is hypothetical and for illustrative purposes only. It assumes annual beginning-of-year contributions, an 8% annual return, a 15% federal tax rate, and simplified tax treatment. It does not account for state taxes, payroll taxes, plan fees, investment expenses, inflation, future tax-law changes, or individual circumstances. Actual results will vary.

Tax-deferred growth may allow earnings to compound over time without being taxed annually, although taxes are generally due when traditional 401(k) assets are withdrawn.

Over time, the combination of pre-tax contributions and tax-deferred compounding may create a larger retirement balance than saving the same percentage in a taxable account, depending on taxes, fees, investment returns, and withdrawal decisions.

How can you find extra money to contribute to retirement?

This is the question most people avoid. Life is expensive—childcare, mortgages, aging parents, student debt. It can feel like there's nothing left to save. But small spending shifts add up faster than most people realize.

Start with a spending journal. Track every dollar for two to four weeks. Then look for ways to save. For example, setting aside an extra $20 per month and investing it for 25 years at a hypothetical 8% annual return could grow to roughly $19,000. Increasing that amount to about $50 per month could grow to nearly $48,000 over the same period. These examples are hypothetical and do not reflect taxes, fees, inflation, or actual investment performance.

For larger savings, consider:

• Refinancing your mortgage at a lower rate
• Consolidating credit card debt to the lowest rate available
• Shopping for less expensive car insurance
• Directing a raise or bonus directly into your 401(k)

Some people may find opportunities to adjust spending once they review where their money is going.

How much should you save for retirement by age?

While there is no single right answer, these age-based retirement savings benchmarks can help you understand whether you're on track for your goals.

• In your 20s: Save 7% of your salary
• In your 30s: Save 10% of your salary
• In your 40s: Save 15% of your salary
• In your 50s: Save 20% of your salary

(Source: Kmotion Research, 2025)

For 2025, the IRS contribution limit for a 401(k) was $23,500. For 2026, that limit increased to $24,500. Participants age 50 and older may be eligible for catch-up contributions of up to $7,500 in 2025 and $8,000 in 2026. Under SECURE 2.0, a higher catch-up contribution limit of $11,250 applies for eligible participants ages 60 to 63 in 2025 and 2026, subject to plan rules. ⁱⁱ

What role does Social Security play in retirement income?

Social Security can be an important source of retirement income, but it is generally intended to replace only a portion of pre-retirement earnings. Replacement rates vary based on earnings history, claiming age, and how pre-retirement income is measured. ⁱⁱⁱ

Timing matters too. Full retirement age is 67 for anyone born in 1960 or later. Claiming as early as age 62 generally reduces the worker retirement benefit to 70% of the full retirement age amount, a 30% reduction that generally continues for life. For example, a $1,253 monthly benefit at full retirement age would be reduced to about $877 if claimed at age 62, before considering other factors that may affect a person’s actual benefit. ^vi

The 2025 Social Security Trustees Report also projects that if no changes are made to the program, trust fund reserves could be depleted by 2034, at which point continuing income would cover only 81% of scheduled benefits. ^v

For many retirees, Social Security is best considered one part of a broader retirement income plan.

Why does starting early matter so much in retirement investing?

“The Rule of 72” can help explain why when it comes to saving for retirement, the earlier the better. Divide 72 by your expected rate of return, and you get the number of years it takes for your investment to double. At 8%, that's nine years.

Here's the real cost of waiting, based on a hypothetical $2,500 investment at 8%.

• Start at 22: Doubles five times by age 67 → $80,000
• Start at 31: Misses one doubling period → $40,000
• Start at 40: Misses two doubling periods → $20,000

In this hypothetical example, starting later reduces the ending value because there are fewer compounding periods. That is why starting earlier, when possible, may provide more time for savings to grow.

These examples are hypothetical and for illustrative purposes only. It assumes a constant 8% annual return. It does not account for state taxes, payroll taxes, plan fees, investment expenses, inflation, future tax-law changes, or individual circumstances. Actual results will vary.

What are the basics of investing within a 401(k)?

Many 401(k) plans offer investment options that can be grouped into broad categories, including stock funds, bond funds, target-date or asset allocation funds, and capital preservation options.

• Stocks: Generally, offer higher long-term growth potential than bonds or cash equivalents, but they also involve greater volatility and risk of loss. Historically, the S&P 500 delivered an average annual return of 14.1% from January 2010 through December 2025.^vi
• Bonds Bonds are generally considered less volatile than stocks, but they still carry risks, including interest rate risk, inflation risk, and credit risk. The Bloomberg U.S. Aggregate Bond Index averaged 2.7% over the same period. ^vii
• Stable assets/cash equivalents: Cash equivalents are generally lower-volatility investments, but they may not keep pace with inflation over time. Averaging about 1.4% annually—below the 2.58% inflation average over the same timeframe.^viii
• Mutual funds: Common investment options in many 401(k) plans. They pool money from many investors to buy a portfolio of securities and may be actively or passively managed, depending on the fund.

Mutual funds are common investment options in many 401(k) plans. They pool money from many investors to buy a portfolio of securities and may be actively or passively managed, depending on the fund.

Historical index returns are provided for educational purposes only and do not represent the performance of any specific investment. Indexes are unmanaged and cannot be invested in directly. Past performance does not guarantee future results. Actual returns will vary and may be affected by fees, taxes, inflation, market conditions, and investment selection.

Diversification is the strategy of spreading money across different investment types to reduce overall risk. It does not guarantee a profit or protect against loss, but it may reduce reliance on any single investment type.

Your personal risk tolerance—conservative, moderate, or aggressive—should factor in your allocation. So should your time horizon. The longer you have until retirement, the more time you may have to recover from short-term market volatility, though risk tolerance and personal circumstances still matter.

Why you should start now and adjust as you go

Retirement planning isn't a one-time decision. It's an ongoing process that shifts as your income, expenses, and goals change. The most important step is simply to begin.

If you're not enrolled in your employer's 401(k) plan yet, that's a starting point. If you are, consider increasing your contribution by just 1–2% today. Review your investment allocation annually. Keep an eye on your Social Security projections at ssa.gov.

For educational support, Alliant Retirement and Investment Services is available to help members review retirement planning topics, evaluate available options, and make informed decisions based on their goals, risk tolerance, time horizon, and circumstances. To learn more, connect with an Alliant Retirement and Investment Services Financial Consultant to discuss your situation and evaluate available options. You can also watch the full webinar on this topic on YouTube - Alliant Retirement and Investment Services. You can also view all our investment services on our website Alliant Retirement and Investment Services.