A lot of people wonder how old they will need to be to retire successfully. Well, there is no “one size fits all” solution when it comes to how much you should have saved going in to retirement. It really depends; Lifestyle, income and life expectancy are but a few of the determining factors.
There are some ways to determine your progress toward a successful retirement, ways to determine your ‘Retirement Number’ – the age at which you might leave the workforce. It may be the case that your current financial trajectory is not on track with your retirement expectations and goals. Here are a few guidelines for tracking your progress toward saving for retirement:
When do you want to retire?
We are living longer lives, indeed. This changes the landscape of retirement, employment and our society at large. I overheard my mother, at 61, say “I don’t know when I’ll be able to retire.” It seems to be a voice of the majority. We all chase that number – the age when we can sit back and rest on our life’s work, but that number changes. Things happen. Expenses arise. With some foresight, you can adjust your lifestyle to better proportion your income to savings to meet your retirement date expectations. It is also important to consider whether you are willing to continue working part-time for a period before stepping out of the sphere of employment altogether. Building a nest egg to support yourself entirely for 25 years is much different than a nest egg that aims to supplement part-time income for 10 years and fully support you for an additional 15.
What sort lifestyle do you expect in retirement?
Most of us begin considering retirement as soon as we enter the workforce. “That’ll be the day,” we imagine. Normally there’s a slightly wrinkled version of our current selves on some beachfront property wearing a silly hat and drinking a cocktail as part of that dream. Those visions, whatever they may be, set the stage for the kind of expenses we can expect in retirement. By crunching the numbers that take in to account your goals, be they hobbies, travel or other goals, you will be better suited to determine the amount of income you will need to suit that lifestyle.
What income streams can you rely on?
What types of income can you expect upon retirement? The most fortunate among us can expect a pension. Most of us can expect some social security payments. You may own a rental property or other assets that will generate income. Every retiree will need to develop a plan to support their lifestyle by pulling money from their investment portfolio. If your savings and investments aren’t adding up, you might consider working part time for a period to supplement before going in to full on retirement mode.
Will you have debt?
Debts have a huge effect once you switch from a state of generating new income to relying on existing investments. Heading in to retirement with a debt load will certainly impact your cash flow, and how much you can use for day-to-day, month-to-month needs. In the ideal scenario, retirees succeed at paying off significant debts like mortgages before they transition to retirement. Otherwise, you will have to factor in those debts when determining how much income you need for retirement.
The 4% Rule
The general rule of thumb from financial advisors is that retirees should withdraw no more than 4% from your retirement portfolio each year. So, a $1million portfolio would offer an annual income of $40k. The important factor here is knowing how far that $40k will get you during a year of retirement. This is a function of lifestyle. What is your cost of living? Will you have mortgage / car payments to worry about, still? Compare your debts to reliable income streams. From there, you can gain a better understanding of what you need to have invested in order to make your annual expenses make ends meet with the 4% rule.
Prioritizing retirement lifestyle over current desires is what it often takes to segue in to a successful retirement plan. Your retirement goals determine your need for savings. The earlier you start to prioritize, plan and pursue a savings plan that encompasses the retirement lifestyle you imagine, the better off you’ll be and the sooner you will be able to determine your retirement number. A nest egg that starts early and is able to accumulate decades of interest often means additional retirement income, years off your retirement number and weight off your shoulders at a time when you will need it most.
The simplest definition of an annuity is a contract between you and an insurance company. In exchange for your lump-sum premium payment or a series of premium payments, the insurer promises to provide you with a regular, reliable income stream* for a period of time, even for the rest of your life.
The two main types of safe money annuities are immediate and deferred. With an immediate annuity, you begin to receive income soon after making your initial premium payment. With a deferred annuity, your money accumulates before you begin to receive income.