When most of us picture our retirement, we’re lounging on a beach or perfecting our tennis serve. But, in order to live that fantastic life of leisure, you’ve got to have ample money in the bank and enough life left in you to enjoy it.
Even those of us who love our jobs may be looking ahead to those golden years and wondering when they might come. A recent Gallup poll finds that the average retirement age non-retirees estimate for themselves is 66, an age that has held steady since 2009.
But a key factor will be whether you’ve saved enough to comfortably quit working at 66—or whatever age you prefer. Are you on track? Here’s what you need to know about when you can retire.
The idea of no longer earning an income from a job can be scary, but if you did adequate retirement planning during your career, you should be set. Here are the basic ways that you can get income during retirement.
One source of funds is Social Security—and that Gallup poll reveals that 88 percent of Americans expect to rely on their Social Security payment as a key source of retirement income.
Your Social Security benefit is based on how much you paid into the system and at what age you start drawing retirement benefits. While many of these specifics can change the closer you get to retirement age, here is how the system works currently.
You might have heard that 65 is the magic age you can start receiving Social Security benefits. That was the original age. But that might almost be considered “early retirement” now since our life expectancy has increased. Today the Social Security program is set up to distribute a different amount depending on what age you begin getting payments, starting from age 62, when you can first start collecting, to age 70.
The age at which you’ll receive 100 percent of your Social Security benefits, known as “full retirement age,” is currently 67 if you were born in 1960 or later. So the benefits you would receive at age 62 would be lower than if you waited a while longer to start collecting them.
There’s a reason to wait until age 70 to start collecting, though, and that’s a bonus called “delayed retirement credits.” Every month from the full retirement age of 67 until age 70 that you are able to wait to file, you will receive an increased monthly benefit of two-thirds of 1 percent, or a total of about 8 percent for each year you wait. So the longer period can really pay off: If your full retirement age was 67, but you delayed receiving benefits until age 70, your benefit amount would include an extra 24 percent for the duration!
In addition to Social Security, you will most likely want to supplement that with robust retirement funds. Even if your potential retirement is still years (or decades) away, the time to start saving is now.
That’s because you want as much time as possible to take advantage of compound interest. This is where the savings magic happens: What happens is your investments generate interest, which makes your account larger. Then that even bigger sum earns even more interest…over and over. The more you save at the beginning of your career, the longer the time the interest has to build on itself. Your account will grow far larger and you’ll likely have to save less overall the earlier you start. (Acorns allows you to start investing for retirement with just $5. Learn more.)
As you plan your retirement savings strategy, it might be wise to speak with an investment professional, such as a certified financial planner, to discuss your goals and strategy. Financial planners can help you prioritize a customized saving strategy, but in general the first place to start is typically by taking advantage of tax-advantaged accounts like a 401(k)—particularly if your company kicks in funds through an “employer match,” which is essentially a free bonus—or a traditional IRA or Roth IRA. (Acorns offers both, plus a SEP IRA if you run a business or are self-employed.)
Once you have put in the maximum yearly amount for those accounts, you might want to open a brokerage account, so you can continue saving. The best strategy is to create a diversified portfolio of investments with multiple asset classes. Ones to consider include stocks, mutual funds, bonds and exchange-traded funds, known as ETFs. Because each type of investment behaves a little definitely as the market goes through its regular cycles, diversification can help protect your savings in all kinds of economic climates. (Acorns also offers a regular investment account: Invest.)
In addition to receiving funds from the money you’ve saved and its growth, some retirees earn “dividend income,” or a bonus payout from specific stocks or funds in their portfolio.
Well that’s the million-dollar question—and a million dollars might seem to be a good place to start. If that sounds daunting, remember that you aren’t actually saving every dollar of your future retirement accounts; ideally they will grow as the market grows.
That’s why you want to make sure to account for your time horizon, meaning that investors who are farther away from retirement will likely want to consider more aggressive options that will help their retirement savings potentially grow faster, giving you even more time for compound interest to do its job.
One factor that’s completely out of your control is the market’s performance in the years just before and while you are making your withdrawals. That’s because even though we can feel confident that the market will eventually recover from any downturn, as it always has, no one can predict how long that will take and how that can affect someone close to or in retirement.That’s another reason why it’s important to have a portfolio structured to weather inevitable market ups and downs as much as possible.
It’s hard to estimate exactly how much you will need to retire comfortably, given the many unknowns such as how long you will live, how purchasing power will be affected, what your health care costs might be, what the market will be doing at that point in time, etc. etc. There are a number of retirement calculators online that you can play around with to see what might work for you.
The best advice is just to keep investing. Of course, the current market conditions are putting people’s risk tolerances to the test. After all, it’s painful to continue investing if you’ve experienced a sharp drop in your portfolio’s value. However, take heart that markets have always recovered after a downturn and gone on to hit new record highs, which you don’t want to miss.
You also can consider the fact that investing during a downturn means that you are essentially buying “on sale,” which means you may be able to scoop up solid gold investments at a fraction of what they were in the past. But, as always, keep your financial goals in mind. Since there’s no sure thing, stay focused on a diversified and disciplined approach.
Some people end up retiring before they’d like due to health concerns or family issues, so sometimes it’s not up to you. But ideally you can make that decision when your finances say you’re all set.
While none of us has the crystal ball that can help us know exactly when we can retire, it’s best to remember that there will never be a one-size-fits-all approach as everyone’s goals and situation are unique. Keep working, keep saving and keep enjoying the life you have now.
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