The idea of taking a long, non-working break at the end of your life goes back to 1880s Germany (then Prussia). During Otto von Bismarck’s presidency, the Prussian government-funded old-age pensions for those 70 or older.
Bismarck’s proposal was quite innovative. You couldn’t end your “working life” while you were still alive before it. In other words, work was expected of you as long as you were alive.
It was Bismarck who popularized the idea of a time off after working most of your life. And, this concept eventually spread across the globe. U.S. Social Security, for example, was introduced in 1935 to assist workers when they left the paid workforce at age 65.
In the following decades, retirement became more popular. A defined-benefit pension plan and other employer-sponsored retirement savings plans, including 401(k)s, have been added to some Americans’ benefits packages. Unfortunately, these are decreasing in popularity. As such, it’s important to take charge of your retirement.
How Much Do I Need to Retire?
It’s inevitable. There will be a time when you have to ask yourself, “How much do I need to retire?” The thing is, when it comes to retiring, there are a few rules of thumb to consider. The most commonly used is an exact figure. Often, this is somewhere around $1 million. These days, a million bucks doesn’t go all that far. If your retirement depends on $1 million, you could be in for a rude awakening.
Alternatively, some experts suggest that you should be able to afford 12 times your salary. Or, around 70 percent to 90 percent of your pre-retirement income. In other words, if you make $100,000 a year at retirement, you will need at least $80,000 per year to maintain a comfortable lifestyle.
What is the best option for you? How do you know if you are on the right track? Well, there are several ways to answer those important questions.
- Current age
- Age at which you plan to retire
- Based on your family history, how long do you expect to live
- What you plan to spend in retirement
- Retirement income sources
- Overall net worth
The 4% Rule of Retirement
A financial planner named William Bengen developed the rule in his 1994 paper on the subject. This rule has become one of the most popular strategies for withdrawing money from retirement accounts.Why? Well, it’s really easy to use. Divide your retirement income by four percent—this is why it’s known as the four percent rule.
You would need a nest egg of approximately $2 million at retirement in order to generate the $80,000 mentioned above. The exact formula would be $80,000/0.04. After taxes and inflation, this strategy assumes a five percent return on investment. Additionally, it presumes no additional retirement income like Social Security and a lifestyle similar to that you would have at retirement.
If you want the four percent rule rate to be sustainable, consider your life expectancy. As a general rule, the four percent rule assumes that you will live another 30 years in retirement. When you’re older, you’ve got higher medical costs and other expenses, so retirement portfolios need to last longer.
Retirement Savings by Age
It’s important to know what amount you should save for retirement at different stages of your life if you want to answer, “How much should I save for retirement?”- 18-24: $4,745.25
- 25-29: $9,408.51
- 30-34: $21,731.92
- 35-39: $48,710.27
- 40-44: $101,899.22
- 45-49: $148,950.14
- 50-54: $146,068.38
- 55-59: $223,493.56
- 60-64: $221,451.67
- 65-69: $206,819.35
Percentage of Your Salary
Saving a certain percentage of your income can be a good way of estimating how much you need to accumulate as you progress through your life.- 30: 1x annual salary
- 40: 3x annual salary
- 50: 6x annual salary
- 60: 8x annual salary
- 67: 10x annual salary
Alternate Formula
As you enter your 20s, another more heuristic formula holds that you should save 25 percent of your gross wage each year. Such a large saving amount may seem impossible to achieve. Remember that it covers more than just 401(k) holdings and matches contributions from your employer.- 35: 2x annual salary
- 40: 3x annual salary
- 44: 4x annual salary
- 50: 5x annual salary
- 55: 6x annual salary
- 60: 7x annual salary
- 65: 8x annual salary
What it Means to Retire
Defining what retirement means to you is just as important as having a clear financial goal. While the federal government has a standard for retirement, your vision may differ. Finding out what kind of lifestyle you want, can help you create a solid plan to get there.The Government’s Definition of Retirement
So, how does Uncle Sam define retirement?Several income sources are likely to be available to you in retirement, including Social Security. The earliest age at which you can claim Social Security retirement benefits is 62. However, taking benefits as soon as you’re eligible—either on your own or through spousal benefits—can decrease your monthly benefit.
The Social Security Administration calls your full retirement age your “normal retirement age” before you can receive the full amount of your benefits. The full retirement age is 66 for people born between 1943 and 1954. For people born between 1955 and 1959, the full retirement age is 66 years and 2 months to 66 years and 10 months. The full retirement age increases to 67 for those born after 1960.
Retirement Types
By contrast, the dictionary defines retirement as the act of ceasing to work and relying on savings and investments for income. In general, this is a time for leisure pursuits. However, the meaning of retirement varies considerably from person to person.The most well-known type of retirement? This would a traditional retirement. Typically, this is when you quit the daily 9-to-5 grind. Usually, this is around age 62 or 65. The reason is that you have enough saved for retirement, can no longer work, or just want to enjoy your golden years.
- Living off the income of one spouse while allocating the other’s income to savings and investments.
- Earning more money by working a second job or starting a side hustle.
- Adapt your standard of living so that you require less income to live a happy, fulfilling life.
- Investing in passive income sources. These include dividend stocks, index funds, real estate, or annuities.
Create Your Own Definition of Retirement
As far as retiring is concerned, there is no right or wrong approach. What one person finds to be effective may not be applicable to another. Ultimately, the important thing is determining which arrangement will give you and your family the most happiness now and in the future. That decision is up to you alone.- Decide what is most important to you. Defining retirement begins with determining what you will do with the extra time you have available. Consider traveling the world, trying out a new hobby, or starting your own business.
- Calculate the cost of retirement. By estimating how much you’ll need to save for your retirement and when it might arrive, you can make it a reality. You should compare your retirement income and outgoing expenses once you’ve estimated your budget. Included are Social Security benefits, pensions, 401(k) withdrawals, IRA withdrawals, cash savings, and CD earnings, as well as inheritances and annuities.
- Analyze your progress so far. Take stock of your savings and investment accounts. Perhaps your 401(k) contributions or portfolio allocation need to be increased?
- Have a contingency plan. Sometimes, things don’t work out as planned. As such, you should have an emergency fund so that your retirement plans aren’t compromised. With a year or two’s worth of expenses put in high yield savings accounts, you’ll have money on hand and won’t have to exhaust your retirement funds.
- Talk to a financial advisor. You need to make retirement as personal as possible to make it work. Your financial adviser can assist you in doing exactly that.
Why Do People Retire?
Why is retiring a good idea? Well, that depends on your values and goals. For many, however, the main reason is that you’ve reached full retirement age. But, that’s far from the only reason that people retire. Here are the ten main reasons why people retire.1. You’re Financially Set
The transition from one stage of life to the next can be frightening. Despite this, you have been preparing for this moment all your working life.It makes sense to retire, however, after you have run the numbers, double-checked your 401k, and gotten the go-ahead from your financial advisor. Financially speaking, if you’re prepared for retirement, you’re part of a small minority.
2. Health Conditions
Another reason to retire is health issues. Rather concerning, you might find out that your health is declining as you age and that you are unable to work as a result. 3. Maintain Good Health
Improved health is a big reason people retire. A growing number of people suffer from work-related health issues such as burnout. According to the World Health Organization, “Burn-out is a syndrome conceptualized as resulting from chronic workplace stress that has not been successfully managed.”- Anxiety
- Depression
- Heart disease
- High blood pressure
- Obesity
- Stroke
4. Live Without Regrets.
“When questioned about any regrets they had or anything they would do differently,” says Bronnie Ware, an Australian palliative nurse who spent years caring for dying patients, “common themes surfaced again and again.”Was there a common regret she heard from each patient? That they didn’t earn enough money? Not enough hours worked? Too little vacation time? Not enough houses?
Not at all.
- I wish I’d had the courage to live a life true to myself, not the life others expected of me
- I wish I hadn’t worked so hard
- I wish I had the courage to express my feelings
- I wish I had stayed in touch with my friends
- I wish that I had let myself be happier
5. Spend More Time with Family and Friends
One study says Americans spend just 37 minutes a day with their family. Why? Because we’re too busy hustling around and working to spend time with our friends and family.If you’ve spent more time working than spending time with your family, retirement might be the perfect solution.
6. Have the Time to Do What You Love
There’s no need to slow down just because you’re retired. When you close the book on your career, you have more time to pursue projects you are passionate about. This could be anything from entrepreneurial hobbies, travel, or whatever else puts a smile on your face.7. Give Back to the Community
When you’d like to spend more time volunteering in your community, retiring can be a good idea. Finding more happiness is connected to volunteering, which creates fulfillment in life. Some ideas include:- Food banks, homeless shelters, and women’s shelters in your area
- Humane societies and animal rescue organizations
- Schools, hospitals, and nursing homes
- Politics and activism
- Serving in the religious community
8. You’ve Fallen out of Love with Your Job
Over the past 25 years, you have worked for the same company. And a lot has changed. You feel just not part of the company anymore.Does this sound familiar? A lot of people nearing retirement experience this. They lose interest in or love their job as time goes by.
9. Reorganization
If you’ve spent years at the same company, chances are you have survived numerous reorganizations. As markets change, companies must also change their working structures to stay competitive. Nevertheless, when you’re close to retirement, you may not want to drastically change your work style. It may make sense to retire at this point.You can discuss retirement options with your boss when your company undergoes a reorganization. Your benefits may still be preserved if you resign a little earlier as planned. Many companies are willing to talk about reducing their salary budget—especially if you give them an easy way to save money.
10. Avoid Unforeseen Changes
There is no way to predict what will happen next. Just look at the COVID-19 pandemic to hammer that point home.You may be at risk of having your nest egg destroyed by economic and political change.
In short, don’t wait until the market bottoms out if you’re secure financially now. Invest in safer investment strategies that will work in your favor long-term by consulting a financial planner.
In general, retirement is not a good idea when you are not financially prepared. Or, maybe you aren’t at full retirement age. You might even still love your job too much to quit.
Many people choose not to retire, even when they are financially ready and have reached retirement age. Mainly because they’re scared. However, many people find that working part-time is fulfilling. For instance, as part of their transition to retirement, they take on the role of mentor or coach for younger, less experienced colleagues.
