What Is Retirement?
Retirement refers to the time of life when one chooses to permanently leave the workforce behind. The traditional retirement age is 65 in the United States and most other developed countries, many of which have some kind of national pension or benefits system in place to supplement retirees' incomes. In the U.S., for example, the Social Security Administration (SSA) has been offering retirees monthly Social Security income benefits since 1935.
Retire with More Money
Early retirement is typically considered at age 62, which is the earliest age an individual can collect Social Security retirement benefits. Typically, 40% of pre-retirement income comes from Social Security for those who decide to retire early.
Full retirement age is when an individual can collect the maximum amount of Social Security benefits, which is typically age 67 if you were born in 1960 or later. However, Social Security benefits are reduced for those who decide to retire early. How much Social Security benefits will be paid to an individual depends on several factors, including how much was paid into the system during working years. The amount of your expected annual benefits should be considered when calculating how much other retirement income you will need to live on, and subsequently, how much you will need to save.
How much to save for retirement depends in part, on how long you'll expect to live in retirement and how much annual income you'll need to live comfortably. On average, most people live 20 years after beginning retirement.
According to the Special Committee on Aging by the U.S. Senate, advances in public health and medicine have allowed Americans to live and work longer. Those who are aged 55 and over are expected to make up nearly 25% of the workforce by 2026, which represents an increase from 35.7 million in 2016 to 42.1 million in 2026.
These changes may present opportunities for people to save longer provided they remain healthy. The three most frequently used methods of saving for retirement are:
- Employer-sponsored retirement plans, such as a 401(k)
- Retirement savings, such as investments
- Social Security retirement benefits
When developing a retirement savings plan, it's important to determine how much income you'll need in retirement to comfortably live. Expenses should be considered such as whether there will be a mortgage or rent payment and if so, how much. Typically, retirees will need 80% of their pre-retirement income to continue their current standard of living.
Since people are living longer than ever, many don't have adequate retirement savings needed to sustain themselves throughout their remaining years. According to the Economic Policy Institute, the mean retirement savings of all working-age families is $95,776. However, the median amount, which factors in the nearly 50% of Americans who have no retirement savings, is just $5,000. Not surprisingly, many Americans work beyond the traditional retirement age, purely due to economic need.
Retirement Savings Tips
When it comes to saving for retirement, a disciplined plan of socking away even a small portion of savings each month can easily add up over time. Many brokerages offer no-minimum, no-fee retirement accounts that let individuals make automatic monthly deposits of $25 or $50.
Furthermore, many employers offer 401(k) programs that automatically invest a portion of a worker's paycheck. The company may match part of those contributions.
Projecting Retirement Saving Needs
To project their needed retirement nest eggs, individuals should consider the following:
- Their likely retirement ages
- The income needed to maintain one's standard of living, based on annual expenses and target retirement age
- The current market value of one's current savings and investments
- A realistic projection of the real rate of return on one's investments
- An estimated value of one's employer pension plan
- The estimated value of one's Social Security benefits
- Retiring to another state
When making retirement calculations, individuals should assume that an annual inflation rate of 4% will erode the value of their investments, and they should adjust their savings plans accordingly. But generally speaking, the earlier one launches the retirement saving process, the greater success they will enjoy. Other keys to success include:
- Shrewd asset allocation based on risk tolerance and investment time horizons
- Diversification, as a downside risk method, to protect portfolios during shaky economies
- Setting up automatic payments from checking accounts to your retirement savings account to eliminate the possibility of inadvertently skipping a monthly deposit
- Committing to making the maximum salary deferral contribution to employer-sponsored retirement plans
- Working aggressively towards pay down existing debts
Finally, it's never too late to start saving for retirement. Those late to the game may need to work a little harder to catch up, but it can be done by cutting down on household spending in order to channel more funds towards retirement savings accounts. Skipping the occasional dinner out can save hundreds of dollars over the course of a year.
In addition to saving for retirement, there's plenty of other important things to prepare for. For instance, to ensuring your money goes to exactly where you want if you or your partner dies, talk to your financial advisor about your beneficiary designations.