When can I retire?
Determining "when you can retire" is a complex and highly personal question, as it depends on many factors specific to your individual circumstances, financial situation, and retirement goals. There's no single magic age or amount of money that applies to everyone.
Here's a breakdown of the key factors to consider and how to approach figuring out your own retirement timeline:
Key Factors That Determine Your Retirement Age:
Your Desired Retirement Lifestyle and Expenses:
How much will you spend? This is the most crucial question. Will you travel extensively, pursue expensive hobbies, or live a more modest lifestyle? Your projected annual expenses in retirement are the foundation of your retirement savings goal.
"Rule of Thumb": Many financial planners suggest you'll need 70-90% of your pre-retirement income to maintain your lifestyle. However, this is just a starting point. Some people find they spend less in retirement (e.g., no commuting costs, work clothes, or saving for retirement), while others spend more (e.g., on travel or healthcare).
Healthcare Costs: This is a significant and often underestimated expense. Medicare generally starts at age 65. If you plan to retire before then, you'll need to factor in the cost of health insurance until you're Medicare-eligible (e.g., through an employer retiree plan, COBRA, or the Affordable Care Act marketplace). An HSA (Health Savings Account) can be a valuable tool for these costs.
Your Savings and Investments:
Current Savings: How much do you have saved in your 401(k), IRA, HSA, brokerage accounts, and other investments?
Contribution Rate: How much are you currently saving each month/year? The more you save, the faster you can reach your goal.
Investment Returns: The assumed rate of return on your investments plays a significant role. Higher returns can accelerate your timeline, but also come with higher risk.
Compounding: The longer your money has to grow, the more powerful compounding becomes. Starting early is a huge advantage for young investors.
Sources of Retirement Income:
Retirement Accounts (401(k), IRA, etc.): These will likely be your primary source of income.
Social Security Benefits:
Full Retirement Age (FRA): This is the age at which you are eligible to receive 100% of your Social Security benefits. It depends on your birth year:
Born 1943-1954: FRA is 66.
Born 1955: FRA is 66 and 2 months.
Born 1956: FRA is 66 and 4 months.
Born 1957: FRA is 66 and 6 months.
Born 1958: FRA is 66 and 8 months.
Born 1959: FRA is 66 and 10 months.
Born 1960 or later: FRA is 67.
Early Claiming (as early as 62): You can start benefits at 62, but your monthly payment will be permanently reduced (up to 30% less for those with an FRA of 67).
Delayed Claiming (up to 70): For each year you delay claiming Social Security past your FRA (up to age 70), your benefit increases by about 8% per year. This can be a significant boost to your retirement income.
Pensions: If you're fortunate enough to have a pension, that will provide a predictable income stream.
Other Income: Rental properties, part-time work in retirement, or other passive income streams can also factor in.
Life Expectancy:
How long do you anticipate living in retirement? This affects how long your savings need to last. Advances in healthcare mean people are living longer, so planning for a retirement of 25-30+ years is wise.
Inflation:
The rising cost of living will erode the purchasing power of your money over time. Your retirement savings plan needs to account for inflation.
How to Calculate Your Retirement Age:
While there are many online retirement calculators that can give you a rough estimate, the most accurate way to figure out your personal retirement age involves a few steps:
Estimate Your Annual Retirement Expenses: Start with your current annual expenses and adjust for what will change (e.g., no more mortgage payments, less commuting, but more travel or healthcare).
Determine Your "FIRE Number" (Financial Independence, Retire Early): A common rule of thumb from the FIRE movement (Financial Independence, Retire Early) is the "25x rule." This suggests you need to save 25 times your annual expenses to retire.
For example, if you estimate you'll need $50,000 per year in retirement, your "FIRE number" would be $50,000 x 25 = $1,250,000.
Factor in a "Safe Withdrawal Rate": The "4% Rule" is often cited, suggesting you can safely withdraw 4% of your portfolio in the first year of retirement, adjusted for inflation in subsequent years, and have a high probability of your money lasting for 30 years. This rule is closely tied to the 25x rule (100% / 4% = 25).
Project Your Savings Growth: Use a retirement calculator or a spreadsheet to input:
Your current savings balance.
Your annual contributions.
An assumed average annual investment return (e.g., 5-7% after inflation).
This will show you when your savings are projected to reach your "FIRE number."
Incorporate Social Security and Pensions: Subtract your estimated annual Social Security and pension income (if applicable) from your annual retirement expenses. This will tell you how much income your investments need to generate. Then, adjust your "FIRE number" accordingly.
Example:
Desired annual retirement spending: $60,000
Expected annual Social Security (at FRA): $20,000
Amount needed from investments: $60,000 - $20,000 = $40,000
"FIRE number" (using 25x rule): $40,000 x 25 = $1,000,000
This means you would need $1,000,000 in investments to cover the portion of your expenses not covered by Social Security.
Strategies to Retire Earlier:
Increase Your Savings Rate: The most direct way to accelerate your retirement. Aim to save 15-20% or more of your income.
Boost Your Income: Earn more through raises, promotions, side hustles, or a higher-paying job.
Reduce Expenses: Cut unnecessary spending to free up more money for savings.
Invest Wisely: Ensure your investments are growing effectively, aligned with your risk tolerance and timeline. Diversification is key.
Eliminate Debt: High-interest debt (like credit card debt) is a major impediment to saving. Pay it off as quickly as possible.
Consider Downsizing: A smaller home can significantly reduce housing costs (mortgage, property taxes, insurance, utilities).
Delayed Gratification: Prioritize long-term financial goals over immediate wants.
The average retirement age in the US has been around 62, but more people are working into their late 60s and even 70s. This highlights that retirement age is a moving target influenced by individual circumstances and evolving economic realities.
To get a precise answer for you, set up an appointment with Legs Financial. We can help you create a personalized plan based on your unique financial situation and goals.
