The question remains, when is eventually? How do you choose when to retire? Is it even up to you?
The short answer is yes, you have plenty of control over when you retire, but a lot of it depends on the lifestyle you want. When it comes time to bask in post-employment bliss, you want enough set aside to not only make life comfortable, but also enough so you’re prepared for whatever may come up.
Time and Money
I’d love to tell you that if you save your pennies and stash away a chunk of change, you’ll be living it up in your RV by 65. But the reality of retirement is much more complex.
The two biggest factors that determine when you’re able to retire are time and money. Time is a determining factor because – let’s face it – you’re working against the clock. If you want to retire by 65, you have a deadline, a date in the future that you’ve set for yourself. And as much as we hate to admit it, the economic landscape will change between now and then. Things like pensions and Social Security aren’t the bedrocks of retirement they once were.
Money is the other determining factor for retirement. You need enough. Whether you’re content to live in a cabin miles from civilization, or you’re after a high-rise penthouse in Miami, you’ll need to plan for maintaining that kind of lifestyle. The days of keeping cash in your mattress are gone. These days, the more you invest in a retirement plan, whether it’s a 401(k) or an IRA, the more money you’ll most likely make.
Call in a Coach
Here’s a good news/bad news scenario that puts retirement into perspective. If you’re 35 and you want to retire at 45, you can. That’s the good news. The bad news is that if you want to retire at 45, you’ll have to put away about 90% of your income. Chances are, your standard of living will need some major adjustments.
Is it plausible? Sure. Is it realistic? Probably not. That’s why consulting with a retirement planning professional is so important. Whether it’s a financial planner you pick yourself or a plan adviser through work, a planner can help you align your retirement goals with your financial situation. He or she can help you make that retirement line in the sand and start you down the road to achieving your goal of retirement at any age.
Putting enough money away for retirement takes time. Making money on that money takes time as well. History has shown us that the market tends to grow over a long period of time. If you’re invested in that market, your money will grow too. You need all the time you can get to let the market keep on that long-term upward path of growth.
That long-term approach helps you weather short-term economic downturns. If you’ve been putting money toward a 401(k) or IRA from the time you started working, and you continue it right up until your last day at the office, you should be in good shape. But it’s not always possible.
For whatever reason, be it financial hardship or income limitations, you might not always be able to contribute to your retirement account. Fortunately, financial advisers or your company’s plan adviser can help you strategize around those hardships a few different ways.
Adjusting Your Contribution
You have the option to contribute up to a specific cap on your 401(k). Some employers even match your contribution. But if you’re falling on hard times, that contribution level can be lowered. It’s not ideal, and it will have an impact on your retirement date.
Adjusting the Strategy Behind Your Investment Portfolio
The stocks within a mutual fund (a group of stocks purchased as a block that’s managed by your plan) can be rated by growth risk. Aggressive funds typically have higher volatility and can sometimes offer a higher rate of return. On the opposite end of the spectrum, conservative funds typically offer a lower rate of return, but are less volatile.
Pushing Out Your Retirement Age
If time is of the essence and something eats away at the time you need to build up your retirement, then one option is to adjust your retirement age by pushing it back later in life, keeping you in the workforce and giving you and your investments more time to grow.
Time is always of the essence, but with retirement, it’s a long game to be sure. The retirement date you choose (with help from your financial adviser) is what you’re working against.
Paying into Retirement
In the good ol’ days, you worked at one place, you paid into your pension, you worked until you were ready to retire, then you started collecting your retirement. For the most part, those days are gone.
What’s also gone is the idea that you “pay” into your retirement. Rather, the idea that you “invest” into your retirement is more accurate.
More than likely, the money you have withheld gets invested into a retirement account that grows (ideally), and eventually is disbursed to you. It’s money, but you’re not paying yourself. You’re investing in your retirement.
So how much money is enough to retire? The short answer: depends. Ask yourself a few questions:
- Where do I want to live?
- How do I imagine I’ll be living?
- What kind of things will I be doing?
- Will I be able to invest until then? And how much?
The Multiply by-25 Rule
There’s a rough equation that helps calculate whether you’ve saved enough. It’s called the “multiply by-25” rule. According to Fool.com, you multiply your desired annual income in retirement, less projected annual Social Security benefits, by 25. If your savings are greater than that, then you’re in good shape.
Let’s say you’ll earn $75,000 in retirement and your pension, and Social Security pay out another $25,000. Subtract $25,000 from $75,000 and you’re left with $50,000. Multiply that by 25, and you get $1.25 million. That’s the estimated amount of money you’ll need at retirement.
There are a couple problems with this formula, however. First, it’s very loose and very rough. You can estimate what you’d like your annual income to be, but the younger you are, the more you have to consider inflation. A new car in 1979 cost $2,000. A new car in 2015 can easily cost $30,000. How much will $30,000 buy by the time you’re ready to retire? It’s unclear, but it’s worth considering.
Second, the big Social Security question mark raises its ugly head in this equation. Unfortunately, it’s not as dependable a source of income as it used to be. In the time since it began, there was a population boom. Coupled with increased life expectancy, more people are living longer, adding unanticipated strain on Social Security as a feasible means of income for retirees. Pessimists anticipate that Social Security will run out of funds. Others say it will live on, but as a greatly diminished resource.
Just as uncertain is the future of tax policies – specifically those associated with retirement disbursements. With 401(k)s, traditional IRAs and Roth IRAs, there are tax penalties for withdrawing before a specific age. And whether or not you choose to be taxed at the time of investment or withdrawal, the government will get its cut. How much those taxes are 10, 15 or 30 years from now is up to our policymakers.
Either way, time will tell what it means for retirees, and for the multiply by-25 rule.
Creating Your Portfolio
So how much is enough? It’s hard to say. More is better, but enough in the right places is best.
The general rule is to allocate your portfolio in fixed income funds, such as bonds, in an amount that’s equal to your age. So if you’re 40, 40% of your portfolio should be in bonds. The rest is in stock. That way, the older you get, the more funds you have secured against market volatility.
A good mix throughout your retirement investment is key. A financial planner can help you mix and match your portfolio to help you reach your retirement goal.
When the Big Day Comes
When you hit the age of retirement, hopefully time and money both add up to a nice, lazy beach vacation reading a book while the grandkids build sandcastles. But until then, there’s plenty to consider.
Much like buying a home, a lot goes into preparing for retirement. A lot of it is up to you, but with the help of a financial planner and a constant investment into your retirement future, you’ll be ready to take in those golden years in the best way possible.
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