At what age do most people retire nowadays? How will I know when I'm financially able to retire?
Answers
4087 points
EthanR answered 2 years ago …
Dragn, the age at which most people retire these days is problably 62-65. However, that number is irrelevant. What matters more is your lifestyle needs. Retirement is not only a financial decision, but a lifestyle one too. People who spend their retirement years depressed and doing nothing do not seem to live very long. But the active, vibrant retirees live well into their 90's all the time.
You will know when you are financially able to retire, because you will be able to live on 5% of your saved principal. If that's a million dollars a year, then you will live on $50,000. Having said that, I have to hedge it by saying that $50,000 may be adequate for some at age 62, but not at 82 because in 20 years that $50,000 will be vastly reduced by inflation. Then again, living expenses for most Senior Citizens are not that extensive.
If 5% of your current savings is too low for you to live on, then you probably need to continue working in some capacity. The problem with living off more than 5% of the principal each year is that you may run out of money at the very age that you are unable to acquire more wealth.
952 points
Grudun answered 2 years ago …
One issue that EthanR didn't note is that there is an increasingly large group that is unable to retire. There are a lot of lower income people who have few or no assets and are in their upper 60s or older who are forced to continue to work in whatever job they can because with no assets they have only their earned income and social security to rely on.
As far as the 5% EthanR recommended I think you can adjust that depending on your investment returns. Most people use a 5% withdrawl rate with an 8% earning rate(the other 3% go to inflation, variation in the market, and taxes) but if you consistently earn 10-15% on your investments and are willing to continue putting in the effort to continue to get that level of return you may be able to use a 7-10% withdrawl rate significantly reducing the amount you need(I would always recommend using a lower value).
2830 points
Oldman answered 2 years ago …
Long before (>5-10 yrs) you want or need to retire, you need to do a serious estimate of what your retirement budget will be. If part will be funded by pensions or Social Security, then the rest will need to be funded by savings (sheltered and taxable) There are dozens of sites to estimate this based upon your best estimates (blood relatives' health) of longevity and income stream.
http://fundadvice.com/tools/calculators
http:/dinkytown.net/java/Inve stmentDistribution2.html#calc
are two sites I recently visited. In addition, TRowePrice, Vanguard and Fidelity also have free retirement calculators. BUT THEY ALL NEED YOUR BEST ESTIMATES OF RETIREMENT EXPENSES!
Some people plan to do a lot of traveling, or expensive hobbies, and then they find that health and other expenses are troubling or preventing the plans from being activated. It all depends upon some reasonable guesses as to your personal wishes and the realities of getting older.
When I was 55, I planned a lot. I made sure my income would cover sickness interventions (what the general public calls "health care"), and I bought a non-qualified long-term disability+home health care+ nursing home insurance, with compounded inflation additions, for myself and spouse. We don't need it >15 years later (yet), but it could sure bankrupt an otherwise reasonable retirement plan. Fidelity's researchers say to prepare a $230K initial sum to cover average health care costs by age 65. I have no opinions about that.
Other sites suggest a maximum 4% of withdrawals, adjusted for inflation, with a 60/40 broad stock and bond mix will have a reasonable chance of lasting 20+ years, but large draws initially, or a downturn in the markets (such as the one that began in 2000) can wreak havoc on that, if you can't reduce the draw when yields and returns are reduced.
The initial plans that I made were revised and reworked for more than 10 years. When I finally did retire, the budget was reasonable, and continues to be tweaked (my first home insurance cost was <600, the second year it was 1700, the third year it was 4300, the next year 5600, then it dropped to 2500...so some things need some flexibility) Inflation estimates are often way under the reality, but are used in the calculators to determine future average portfolio growth...so if you stick with the 3-4% inflation figure in the calculators, (but secretly plan on having enough to afford expensive fuel and utilities) then the budget projections will come out fine.
Also the calculators print out tables of accumulations and taxes...but these are based upon average and constant percentages...and that seldom happens in real life. Tax rates change and yearly returns are variable...the best calculators use MonteCarlo simulations, but they aren't fool-proof.
2830 points
Oldman answered 2 years ago …
Sorry about that second link...it has an unnecessary space and if you click on it, and it appears in the address bar, delete the space in the 'Invest ment' and it should work for you.
Read more from Oldman
986 points
jillybeansisme answered 2 years ago …
Most people are totally unrealistic when it comes to planning for retirement. In fact, you probably should call it "reinvention" instead. Expenses don't go away. The only thing that goes away is the current job and current income the way you know it. All of your basic living costs remain the same or go up--you just might not have a mortgage payment. You'll still have property taxes, homeowners insurance, telephone, electric, gas, water, sewer, food, car insurance, gasoline, car maintenance, home maintnenance, health insurance, life insurance, etc.
That's why you have to save for retirement and for a rainy day now. Also, depending on when you were born is when the government says you can "retire" and collect Social Security. But that amount isn't sufficient to live on . . . it is simply to supplement what you've saved.
Write yourself a list of every single expense you currently have (don't forget clothing allowance and gift allowance for all the people in your life and savings for a new car). Figure out your monthly required net income. Subtract what social security is supposed to give you. The remainder multiplied by 12 (there are 12 months in a year) is your annual expense. Divide that sum by 4% to come up with what needs to be in your account. Remember, you cannot include the equity in your house as retirement money unless you plan to sell the house and then where will you live? You have to have allowance for that.
The sum that you need might seem impossible to attain. But that is where living below your means, saving, and compounding returns come in! The sooner you start, the better off you will be (so skip those new toys and think carefully when you do buy stuff).
