Retirement Planning in 2025: Important Things You Need to Know

October 4, 2024

If you’re planning to retire soon or you’re already retired, 2025 will bring some important changes that you need to know about. Social Security benefits, retirement age, and employer retirement plans are all set to change, and these updates could affect your financial future. Whether you’re receiving benefits or just starting to think about retirement, staying informed is essential.

This article will help guide you through the key updates for 2025. You’ll learn about changes to Social Security, new rules for retirement accounts, and what to watch out for if you’re retiring soon. By understanding these shifts, you can better prepare for what’s ahead and make the ideal decisions for your retirement.

August 2024 Social Security Data

In August 2024, Social Security continued to be a crucial financial lifeline for millions of Americans. Around 72.6 million people received some form of Social Security benefits, including retirees, disabled workers, and surviving family members. These payments are essential for many individuals, making up a significant portion of their monthly income.

For retirees, Social Security often provides the stability needed to cover living expenses, especially in uncertain times. As inflation and the cost of living rise, these benefits play an even more important role in helping you manage your finances. In fact, Social Security is not just for retirees—disabled individuals, widows, and children also rely on these payments to meet their daily needs.

While the system is a dependable source of income, it’s important to keep up with annual adjustments like the cost-of-living adjustment (COLA), which is designed to help your benefits keep pace with inflation. The COLA can impact your monthly payments and directly affect how much support you’re receiving.

Read: How Often Should You Revisit Your Retirement Plan

As we move into 2025, knowing how these benefits might change can help you plan for the future. Whether you’re currently receiving Social Security or planning to claim it soon, understanding the latest data helps ensure you’re prepared to navigate the financial decisions ahead.

Some Retired Seniors Likely to Return to Work in 2025

A growing number of retired seniors are considering rejoining the workforce in 2025, with 1 in 8 retirees planning to go back to work. The increasing cost of living is one of the primary reasons pushing retirees to seek employment again. Many are looking for part-time opportunities, with some preferring remote work to accommodate personal needs like caregiving or physical limitations. For others, the desire to stay active and avoid boredom is a motivating factor. These retirees often look for new industries or flexible job roles that fit their lifestyle.

Though financial reasons dominate the decision, many also miss the social interactions that come with working. This trend shows how retirement is evolving, with more seniors redefining this phase of life by balancing work, personal interests, and financial security.

Read: How to Protect Your Retirement Assets from Scams and Fraud

Important Things Retirees and People Who are About to Retire Need to Know in 2025

Here are the important things retirees and people who are about to retire need to know in 2025

• Social Security benefits are expected to receive a cost-of-living adjustment (COLA) in 2025.
• Certain retired workers under the full retirement age (FRA) will have benefits withheld in 2025.
• Social Security’s full retirement age will increase in 2025.
• Automatic 401(k) enrollment is in place.
• IRAs and Roth IRAs remain front and center in 2025.
• Employer matching may now be tax-free.
• Older workers have higher catch-up contributions.
• It’s easier to convert school savings to retirement savings.
• Emergency Withdrawals May Be Easier

Let’s take a look at each of them.

Social Security benefits are expected to receive a cost-of-living adjustment (COLA) in 2025

In 2025, Social Security recipients can expect an increase in their benefits thanks to the annual cost-of-living adjustment (COLA). This adjustment is designed to help your income keep up with inflation, and help make sure that your purchasing power isn’t eroded by rising prices. The COLA is determined by the percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of 2024, which includes the months of July, August, and September.

The Senior Citizens League (TSCL) has estimated a 2.5% increase for 2025, which would give you a modest boost to your monthly payments. This adjustment is vital for many retirees who rely on Social Security as a primary source of income. It can help offset the higher costs of everyday essentials like groceries, utilities, and healthcare, which tend to rise with inflation.

Knowing about the COLA helps you better prepare for your financial situation in the upcoming year. You can estimate how much more you’ll receive and plan accordingly, making sure you have the resources to cover increasing expenses. While the adjustment is aimed at keeping your benefits in line with inflation, it’s wise to monitor how the actual increase affects your budget in 2025.

COLA increases for 2025

Certain retired workers under the full retirement age (FRA) will have benefits withheld in 2025

If you’re claiming Social Security before reaching full retirement age (FRA) and you’re still working, your benefits may be reduced based on how much income you earn. This happens because of the retirement earnings test (RET), which limits the amount you can earn without affecting your benefits. In 2025, the Social Security Administration is expected to raise these limits, allowing you to earn more before seeing reductions.

For those who are under FRA for the full year, you’ll have $1 withheld from your benefits for every $2 you earn above the estimated lower limit of $23,280. However, if you will reach FRA during the year, the earnings threshold is higher—$1 is withheld for every $3 earned above the upper limit, which is projected to be $61,800.

Once you reach your full retirement age, you can earn any amount without worrying about reductions to your Social Security benefits. Any benefits that were withheld because of your earnings will be added back to your monthly payments after reaching FRA, so you won’t lose out on this money. This means that while some of your benefits may be withheld temporarily, they are not permanently lost. Over time, you are likely to recover these withheld amounts. It’s important to understand how these limits work so you can plan your retirement income strategy effectively, especially if you’re still working while receiving benefits.

Social Security’s full retirement age will increase in 2025

Starting in 2025, Social Security’s full retirement age (FRA) will increase, impacting when you can claim your full benefits. Workers born in the last eight months of 1958 will reach their FRA at 66 and 8 months, while those born in early 1959 will reach it at 66 and 10 months. This change means that individuals turning 62 in 2025 will have to wait longer to claim their full benefits compared to earlier retirees.

It’s important to remember that while you can start claiming benefits as early as age 62, doing so comes with a reduction in your monthly payments. Those who claim early will receive less than their full primary insurance amount (PIA), which is the amount you’re eligible for if you wait until FRA. On the other hand, delaying your claim until after FRA can increase your benefits, with the max increase being reached at age 70.

The change to the FRA reflects adjustments for longer life expectancies, helping to ensure that Social Security remains sustainable for future retirees. This gradual shift also highlights the importance of considering your retirement timeline carefully. By understanding how claiming earlier or later impacts your benefit amounts, you can better plan for a financially secure retirement.

These changes are part of ongoing efforts to manage Social Security’s long-term solvency, and future retirees may see additional adjustments as policymakers address challenges related to increasing life expectancy and funding shortfalls.

Automatic 401(k) enrollment is in place

Starting in 2025, a lot of companies with more than ten employees will be required to automatically enroll eligible workers into their 401(k) or 403(b) plans, thanks to the SECURE Act 2.0. Employees will start with a minimum contribution rate of 3%, though they can choose to opt out or adjust their contribution. This new rule makes it easier for you to save for retirement, especially if you’re someone who might not have enrolled on your own.

Automatic enrollment is designed to encourage more workers to participate in employer-sponsored retirement plans, helping you build your retirement savings without the hassle of having to sign up manually. The contribution rate is set to increase annually by 1% until it reaches at least 10%, boosting your savings potential over time.

For employees, automatic enrollment provides tax advantages by allowing pre-tax contributions to be made, lowering your taxable income. For small businesses, this rule can also be a valuable tool to attract and retain employees, offering a meaningful benefit that supports long-term financial security. Although small businesses may have some exceptions, the overall goal is to make retirement saving more accessible for a larger portion of the workforce.

By being automatically enrolled, you’ll benefit from the simplicity of saving regularly without needing to take extra steps, which can help you accumulate more savings over time.

Read: The Essential Guide to Alternative Investments for Retirees

IRAs and Roth IRAs remain front and center in 2025

In 2025, IRAs (Individual Retirement Accounts) and Roth IRAs continue to be central components of retirement planning for many Americans. These accounts offer significant tax advantages, helping you grow your retirement savings more effectively. Traditional IRAs allow you to contribute pre-tax income, meaning you don’t pay taxes until you withdraw funds in retirement, which can reduce your tax burden while you’re working.

Roth IRAs, on the other hand, provide tax-free withdrawals in retirement as contributions are made with after-tax income. This can be a strategic choice if you expect to be in a higher tax bracket during retirement. Contribution limits for both types of IRAs are expected to rise slightly in 2025, allowing you to save even more.

One key advantage of Roth IRAs in particular is their flexibility. You can withdraw your contributions (but not earnings) tax-free at any time, which offers some financial security if you need access to funds before retirement. Additionally, Roth IRAs are not subject to required minimum distributions (RMDs), which makes them a great option for those who want more control over when and how they withdraw their savings.

Both IRAs and Roth IRAs play a crucial role in helping you build a well-rounded retirement plan. Depending on your financial goals and current tax situation, choosing the right type of account—or even a combination of both—can help maximize your savings.

Employer matching may now be tax-free

Under the SECURE Act 2.0 Section 604, a new option allows employers to match contributions to Roth 401(k) accounts on a tax-free basis, providing greater flexibility for both companies and employees. In the past, employer matches were typically directed into pre tax accounts like traditional 401(k)s, where employees would eventually pay taxes upon withdrawal. Now, under Section 604, employers can choose to match contributions directly into an employee’s Roth 401(k), where the match grows tax-free.

This change is significant because it allows you to enjoy tax-free growth on both your contributions and the employer match within your Roth 401(k). By choosing this option, you’ll pay taxes upfront on contributions but avoid paying taxes on withdrawals during retirement, giving you more predictability in your long-term planning. This feature is particularly useful for those who expect to be in a higher tax bracket in retirement or who want to minimize their future tax liabilities.

For employers, offering Roth matching can make their retirement benefits more attractive, helping to retain and recruit talent while giving employees more control over their tax strategies. It’s an important option to consider when deciding how to structure your retirement savings, as it could lead to significant tax advantages in the long run.

Older workers have higher catch-up contributions

In 2025, workers aged 50 and older can continue to take advantage of catch-up contributions to boost their retirement savings. Currently, those aged 50 and over can contribute an extra $7,500 annually to their workplace retirement plans like 401(k)s. For workers between the ages of 60 and 63, this catch-up contribution increases to $10,000, allowing them to accelerate their savings during the critical years before retirement.

One key feature is that after 2025, these catch-up limits will be indexed for inflation, helping to ensure that your ability to contribute keeps pace with rising costs over time. Additionally, although Roth catch-up rules were originally set to take effect in 2024 for high-income earners, the IRS has delayed their implementation until 2026. This delay means that, for the next few years, workers can continue using traditional catch-up contributions without immediate tax implications.

These higher contribution limits offer older workers a valuable opportunity to maximize their retirement savings during their peak earning years, making it easier to close any gaps in savings before retirement.

Learn more about this under Section 109 of SECURE Act 2.0.

It’s easier to convert school savings to retirement savings

With the changes introduced in SECURE Act 2.0, repurposing unused 529 college savings funds for retirement has become simpler and more efficient. Previously, if you had excess funds in a 529 plan and wanted to use them for non-educational purposes, you’d face penalties and taxes. Now, under certain conditions, you can roll over leftover funds into a Roth IRA for the beneficiary without penalties, provided the 529 account has been open for at least 15 years.

The annual rollover amount cannot exceed the yearly IRA contribution limit, and the total lifetime rollover limit is $35,000. This adjustment offers families more flexibility, allowing them to safeguard education savings and use them for retirement if education expenses turn out lower than anticipated. For students who receive scholarships or don’t need the full 529 savings, this provides an additional financial planning tool, helping to ensure the funds remain useful over the long term.

It also makes 529 plans more attractive, even for those uncertain about future education costs, as the savings can eventually contribute to retirement security without tax penalties. This rule creates a bridge between education and retirement planning, helping families maximize their savings while still benefiting from the tax advantages of both 529s and Roth IRAs.

Learn more: SECURE 2.0, Section 126

Emergency withdrawals may be easier

In 2025, accessing funds for emergencies from your retirement plan may be easier, thanks to the SECURE 2.0 Act. Under Section 127, employers can now offer you an emergency savings account linked to your retirement plan. If you’re not a highly compensated employee, you can contribute up to $2,500 annually (or a lower limit set by your employer) to this account. The good part is that you’re allowed to make up to four withdrawals per year without facing taxes or penalties.

This feature is particularly useful if you’re worried about unexpected expenses like medical emergencies, car repairs, or home maintenance. By having an emergency fund tied to your retirement plan, you don’t have to withdraw from your main retirement account, which often comes with significant penalties. Instead, you’re able to cover urgent costs without disrupting your long-term savings goals.

If you’re wondering how this impacts your retirement savings, rest assured that this feature encourages continued contributions to your retirement while providing a safety net for short-term needs. This option makes it easier to avoid using high-interest loans or credit cards in a financial emergency.

Employers also benefit from offering this emergency savings feature, as it can boost employee retention and satisfaction. By providing you with financial flexibility, your employer helps you stay on track for retirement while reducing the stress of handling unexpected costs.

This addition reflects a more holistic approach to financial planning, where you’re encouraged to save for both the long term and any short-term surprises that may come your way.

What to consider if you are planning to retire?

When planning for retirement, it’s essential to keep key factors in mind to help ensure your financial stability. Based on the changes expected in 2025, here are some important points to consider:

1. Social Security Timing: Deciding when to claim Social Security can greatly impact your benefits. Claiming before your full retirement age (FRA) results in reduced benefits, while delaying until after FRA increases them. In 2025, the FRA is rising for some individuals, so be sure to understand how that impacts your timeline. Also, be aware of the cost-of-living adjustment (COLA), which is expected to increase by around 2.5%, slightly boosting your monthly payments.
2. Working After Retirement: If you plan to continue working after retiring, be cautious about how much you earn. For those below FRA, your Social Security benefits might be temporarily reduced if your income exceeds the retirement earnings test (RET) limits. In 2025, these limits are projected to increase, allowing you to earn more before your benefits are withheld.
3. Employer-Sponsored Retirement Plans: With automatic 401(k) enrollment in place for a lot of companies, make sure you’re taking advantage of employer matches, especially if they’re now tax-free in Roth accounts. The automatic enrollment helps you save consistently without having to take any extra steps, and employer matches can significantly boost your retirement savings.
4. Catch-Up Contributions: If you’re 50 or older, you have the opportunity to make additional catch-up contributions. In 2025, those aged 60 to 63 will be able to contribute even more—up to $10,000 annually. This is a great way to boost your retirement savings as you get closer to retirement age.
5. Emergency Savings: Consider linking your retirement plan to an emergency savings account if your employer offers this option. It allows you to access funds for unexpected expenses without penalties, helping to ensure that you’re financially covered in emergencies without tapping into your retirement savings.

These are just a few of the important factors to consider as you plan for retirement in 2025. By staying informed and adjusting your plan accordingly, you can help ensure a smoother transition into retirement.

If you are a retiree, what are the things you need to know?

If you’re already retired, staying informed about changes in 2025 is essential for managing your financial well-being. Here are key updates to keep in mind:

1. Social Security Adjustments: Expect a 2.5% increase in Social Security benefits due to the cost-of-living adjustment (COLA). This increase will help your benefits keep pace with inflation, but it’s important to watch for any official announcements to confirm the exact amount.
2. Working After Retirement: If you plan on working while receiving Social Security benefits and you haven’t reached full retirement age (FRA), your earnings could reduce your benefits temporarily. In 2025, earnings limits are expected to increase, allowing you to earn more before reductions kick in. Once you reach FRA, you can earn any amount without it affecting your benefits.
3. Emergency Savings Access: With the SECURE Act 2.0, it may be easier for you to access emergency savings without penalties. Employers are now able to link retirement plans to emergency savings accounts, allowing for penalty-free withdrawals in certain situations. This feature provides more flexibility when managing unexpected expenses while keeping your long-term savings intact.
4. Tax-Free Employer Matching: If you have a Roth 401(k), your employer can now make matching contributions that are tax-free. This allows you to enjoy tax-free growth on both your contributions and your employer’s match, helping your retirement savings grow more efficiently over time.
5. Catch-Up Contributions: If you’re 50 or older, you can make additional catch-up contributions to your retirement plan. Starting in 2025, workers aged 60 to 63 will be able to contribute up to $10,000 annually, giving you an opportunity to further strengthen your financial position during retirement.

Staying on top of these changes will help you adjust your retirement plan, helping to ensure that your financial strategy is aligned with the latest updates and opportunities.

Conclusion

As retirement approaches or continues into 2025, staying informed about changes like Social Security adjustments, catch-up contributions, and new savings options is key to making smart financial decisions. These updates can make a big difference in how much you save and what you can spend, so it’s worth keeping an eye on them.

Talking to your financial advisor is a great way to make sure you’re on the right track. They can help you figure out how these changes affect you and adjust your plan so you’re set for the future. Whether it’s planning when to claim Social Security, taking advantage of new contribution limits, or managing your savings, your advisor will guide you through it all.

By staying on top of these updates and checking in with your advisor, you’ll be better prepared to make the right decisions for your retirement. It’s all about planning ahead so you can enjoy a secure and comfortable retirement.