There is a Perfect Number for Retirement

Brandon Wang by Amol Tyagi on Unsplash

When do you want to retire?

As people grow older, it is inevitable to start thinking about retirement more and more. When is the perfect time to retire? Unfortunately, there is no easy answer to this. We all have different ideas for the future, but we all also live different lifestyles. The ideal retirement life for one person might be another person’s living nightmare.

So the question of the perfect time to retire persists. According to the center of retirement research at Boston College, the average retirement age is 64 for men and 62 for women in America. There is an overlying trend of early retirement. The traditional age of 65 now seems much too old for the majority of workers.

Early retirement has plenty of obvious benefits of increasing overall health and happiness. Despite this, the average American is severely underprepared for an extended retirement. The number of individuals that are financially set to leave their nine to five’s is shockingly few.

Although a consistent age for retirement continues to elude us, there is one magical number we can look at to understand when we become financially free and ready to face retirement. This perfect number is your nest egg. Instead of planning to retire at the traditional age of 65, it is much better to devise how you would want to live your retired years and calculate what is reasonable to sustain that lifestyle.

Especially for younger generations, it can be easy to fall into the trap of pushing back planning and saving for retirement until the future. After all, why start thinking about retirement in your twenties if there are still forty years until then. This mindset is why a large portion of the population is woefully unprepared once they reach retirement age. Your earliest years are the foundational years and actually have the greatest impact on your retirement compared to any other point in your life.

You shouldn’t be waiting until a certain age to retire. You should be choosing to focus on reaching a certain net worth and have a goal based on your savings and investments.

How much is enough?

Determining the ideal age to retire is an arduous problem, whereas calculating the dollar amount you need to retire is much simpler. The idea here is to think about your ideal retirement lifestyle.

Most importantly, what will your yearly expenses be like? If you end up retiring around the traditional age, the common rule of thumb is the 4% rule. This means that your expenses should only be 4% of your total investments or that you should have saved up at least 25 times your expenses.

How is the 4% rule calculated?

Based on a study created by three professors at Trinity University, there is an almost 100% chance that your investments will outlive your expenses in a 30-year window if you only withdraw 4% of your total investments each year.

  • The 4% rule assumes you’ll be spending roughly 4% of your total investments with annual increases on pace with inflation. Although your investments might fluctuate up or down, your expenses shouldn’t show the same volatility.
  • It also utilizes the basic assumption that your investment portfolio consists of roughly half stocks and half bonds. In reality, your portfolio diversity might look much different from this. You should take this into account when calculating the necessary amount to live off of and adjust accordingly.

With all this being said, the 4% rule is a great place to base your retirement calculations on but should not be the only rule. If you are planning for early retirement, it is strongly suggested to be much more conservative with how much you’ll need to put away for retirement.

Many early retirees live by the 3% rule instead and have a nest egg that is more than thirty-three times their yearly expenses. The opposite is also true if you are retiring later in life. You might not need a guarantee of being able to live off your money for thirty years and can be much more liberal with your retirement.

Secondly, your investment portfolio will have a great impact on your spending in retirement as well. If you choose to lie much heavier towards stocks, it will create much more upside for future growth and higher expected returns. If your portfolio is weighted more strongly towards bonds, then you can expect much more stability in retirement. Most portfolios will commonly lean towards stocks in your younger years and move towards bonds as you get older.

Benefits of working towards net worth rather than retirement age

Setting retirement goals based on a dollar amount instead of your biological age has many benefits you may have never even thought of.

  1. It becomes much easier psychologically to prepare for retirement even at a younger age. Instead of thinking that retirement is still twenty or thirty years away, you will be in the mindset of thinking that retirement is only X amount of dollars away. This not only is a more realistic goal but also may be an extra source of encouragement to work harder. If you only need X amount to retire, you can get there in thirty years or only ten depending on how hard you work and hustle.
  2. You’ll be much more prepared in retirement and will have a much stronger financial foundation. Social Security will only become eligible to you at age 62, and the earlier you start withdrawing from it, the less you will qualify for it. In fact, if you start withdrawing Social Security benefits at age 62, you can only receive 75% of the total benefits. On the other hand, if you wait until you are 70 to start withdrawing, you will receive 132% of the total benefits. Planning a substantial nest egg for retirement will allow you to have less stress over the possibility of outliving your means and lead to a much freer retirement.

Retirement doesn’t start at age 60 or 65. Retirement starts when you have the financial freedom to be able to support yourself without your daily nine to five job. If you think your retirement won’t be until much later in the future, that will be your reality. If you start planning and saving now for retirement, you’ll be much happier and have much more concrete steps to work towards. There is a perfect number for your retirement. The first step is figuring it out.

Happy investing!

This article is for informational purposes; only not all information will be accurate. This should not be considered Financial or Legal Advice. Consult a financial professional before making any significant financial decisions.

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