When do you envision retiring? Do you want to retire the traditional age of 65, when you can collect full Social Security benefits? Or do you dream of retiring earlier?
If your spouse is older than you, do you want to retire when he or she turns 65? Or better yet, do you both want to retire when the eldest between you turns 60 or 62?
Perhaps the better question is: when will you be ready to retire?
No doubt most of us would prefer to retire sooner rather than later, but whether our current retirement plan has us on path to do so is another matter entirely.
Your ability to retire at your target age, whenever that is, depends on many factors. It depends on how long you’ve been in the workforce, how much you’ve put aside to date, how aggressive your rate of savings is, how well you allocate your assets in order to maximize the chance of gains while minimizing risk, and the type of lifestyle you want during retirement.
Let’s break it down with a couple of case studies to show you what these factors look like in action.
Case Study #1
John is at the beginning of his career. He’s not fresh out of college, but he is in his first entry-level job, and he’s realized it’s time to start thinking about retirement planning. He’s read that the suggested rate of investment is 10-15% of your income, so he’s decided to err on the side of caution and stick with the higher end of that spectrum.
Ideally, John would love to retire at 62 so he’s got a few extra years to travel and pursue his hobbies. But he’s not sure if that’s feasible.
Here’s what his numbers look like in action:
Current age: 25
Current income: $30,000/year
Starting amount: $0
Savings rate: 15% of income
Retirement age: 62
We assume that John’s salary grows at 3.5 percent annually, and that he wants to replace 85 percent of his final pre-retirement salary as income during retirement. We also assume that his savings grow at a long-term annualized average of 6 percent per year.
If he plans to retire at 62, John will need $1.2 million (in 2051 dollars)—a total investment on his part of $535,649 (in today’s dollars). Unfortunately, he’s not on-track. At his current rate of savings, he’ll only have around $953,000 in 2046 dollars.
That means he’s either got to delay his retirement a few years — if he retires at 65, he’ll have his target number — or he has to increase his rate of savings, especially since he’s just starting now and doesn’t have anything in his portfolio yet.
If he bumps up his contribution amount to 19% of his income, he’ll be right on track to retire at 62. In other words, by increasing his retirement contributions by only 4 percent per year, he can retire three years early.
Case Study #2
Mary has already spent a number of years in the workforce. She’s making a mid-range salary for her industry and has been aggressive about putting as much towards retirement as she can.
Here’s how Mary’s numbers break down:
Current age: 40
Current income: $100,000/per year
Amount saved so far: $350,000
Savings rate: 20% of income
Retirement age: 62
We assume Mary’s salary grows at 3.5 percent annually, she wants to replace 85 percent of his final pre-retirement salary during retirement, and her savings grow at a long-term annualized average of 6 percent per year.
If she decides she wants to retire early at 62, Mary will need $3 million (in 2036 dollars)—a total investment on her part of $1.8 million (in today’s dollars). At her current rate of savings, she’ll only have around $2.5 million in 2046 dollars, so that’s probably not feasible.
Mary has a few options when it comes to making up this gap. She’ll either need to delay her retirement—by age 65 she’ll have enough—or she’ll need to find ways to put aside more money faster. She could cut her current budget, take on a second job or make a lifestyle change like downsizing to a smaller home to free up some extra funds.
She could also revisit how much money she’ll need for her retirement. Bear in mind your ideal retirement number hinges on a number of factors. When you retire, you may be losing some of your current expenses. Your mortgage should be paid off, you won’t be paying for your children’s education anymore, and you’ll no longer be paying to commute to and from work. However, you will also take on new expenses like medical bills, paying for help around the house and yard, and traveling or pursuing hobbies.
Before you start playing around with the numbers to decide when you can retire, you first need to get clear on precisely how much you’ll need to live comfortably. Being realistic about this is the basis for any solid retirement planning strategy.
Conclusion
If you want to retire early, you’ll have to be proactive. Start saving at an early age (or as soon as possible), focus on saving as much as you can, and use an online retirement-planning tool like Jemstep to make sure you’re properly investing in your 401k and other savings.
When in doubt, speaking with a trusted financial advisor and using online tools such as Jemstep can help you work out the numbers for your own individualized strategy.
** Note: Figures include estimated Social Security payment but do not factor for other sources of income such as pensions, passive income and side income. Figures assume lifespan to age 92.