What Is Retirement?

Retirement is when a person chooses to leave the workforce. The concept of full retirement – being able to permanently leave the workforce later in life – is relatively new, and for the most part only culturally widespread in first-world countries. Many developed countries have some type of national pension or benefits system (i.e. the United States' Social Security system) to help supplement retirees' incomes.

Understanding Retirement

Dramatic advances in healthcare have extended the lives of people in, predominantly, first-world and developed countries. That means that without adequate personal savings and/or pensions, people could easily outlive their retirement funds. In times of economic downturn retirees may choose to "come out of retirement" and re-enter the workforce on a seasonal, part-time or full-time basis to earn income and obtain benefits, especially costly health insurance coverage.

Here's what the U.S. Census Bureau knows about retirement from its surveys: The average American retires at age 62;  20.7% of the population will be 65 years or older by 2050; the average length of retirement is 18 years; nearly half of retirees leave the workforce earlier than planned, sometimes involuntarily (41% retired due to health problems or disability, and another 14%, to provide care for a spouse or other family member).

Although Americans have professed the intention to work longer, many must do so out of economic need.  The Economic Policy Institute notes that the mean retirement savings of all working-age families is $95,776, but the median, which takes into account the nearly half of those who have no retirement savings, is just $5,000.

Here are some tips on how to save for retirement: Any savings is savings, and saving even relatively small amounts of money establishes the habit and the process. Many brokerages now offer no-minimum, no-fee retirement accounts and you can get $25 or $50 deposited into that retirement account.

It really is important to look at retirement saving as a non-stop, life-long habit. It can be tricky to scrape together the cash to make a contribution to an IRA in April, so don't set yourself up for failure. Save a little each month, ideally using an online savings account and only tapping into it in extreme emergencies. Most of these online accounts will allow you to automatically deduct a set amount every month from your regular account, and if your employer offers a 401(k) program, you will be able to have deductions made automatically from every paycheck and possibly have your employer match some part of those contributions.

Special Considerations

The idea of accumulating hundreds of thousands of dollars in a retirement nest egg certainly can seem intimidating. Here are a few more points about retirement savings strategies:

  • How much money you'll need to save for retirement will depend on your desired standard of living, your expenses and your target retirement age.
  • To determine the size of the retirement nest egg you want, you'll need to: 1) Decide the age at which you want to retire. 2) Decide the annual income you'll need for your retirement years. 3) Add up the current market value of all your savings and investments. 4) Determine a realistic real rate of return for your investments. 5) Obtain an estimate of the value of your company pension plan. 6) Estimate the value of your Social Security benefits.
  • Assume that an annual inflation rate of 4% will erode the value of your investments and adjust your savings plan accordingly to provide yourself with a margin of safety.
  • Income during retirement may come from the following sources: 1) employment income, 2) Social Security, 3) employer-sponsored retirement plans, 4) savings and investments, 5) other sources of funds, including inheritance money, prizes and lottery winnings, gifts, raises, bonuses and real estate.
  • There are several investment options that can be used to achieve your retirement savings goals. These include, but are not limited to, government-sponsored vehicles (IRAs, 401(k)s, RRSPs etc.), company pension plans, and other products such as annuities and life insurance.
  • Beginning to save for retirement at an early age is one of the biggest factors in ensuring success.
  • The power of compounding also works with taxes – using tax-deferred investment vehicles can help you to maximize your rate of savings.
  • Asset allocation is a key factor in building any successful portfolio. The assets you choose will depend on your risk tolerance and investment time horizon.
  • Diversification will help you to reduce the amount of risk in your portfolio, increasing the chances that you'll reach your retirement savings goals.
  • Make saving a priority by setting up automatic payments from your checking account to your retirement savings account, making the maximum salary deferral contribution to your employer-sponsored retirement plan and working aggressively to pay down large debts that can reduce your saving rate.
  • Make a household budget to ensure that you are contributing as much as possible to saving for retirement and aim to reduce unnecessary expenses.