Everyone in the world, regardless of their current net worth, has some perspective on retirement. The breadth of their perspectives range from working by choice, satisfying their compulsive travel habits, or simply enjoying a quiet life at home. The ebb and flow of life, political climates, and economic events often dictate varied shifts in when we believe we are capable of retiring, or altogether even begin to take the steps to plan for it. Yet should these events really dictate so much of the steps we do or do not take in planning for our retirement?
Looking at the Numbers
According to the Survey of Consumer Finance (2013) data, Americans between the ages of 56-61 had saved, on average, $163,577 towards retirement. To work in round numbers, the amount of monthly income $175,000 could provide over 25 years is $1,018.79, assuming T-bills go to 5% and not having adjusted for inflation. This is the equivalent of about $12,225 annual income and a large hope placed upon social security not only being available at retirement but providing the vast majority of one’s retirement income. Furthermore, the issue is compounded by the fact that not only will one’s income stream be significantly lower (in this scenario) but this same individual/family may also not consider the need to significantly lower their annual expenses. While the Fed currently targets inflation at 2%, if we use a conservative 3.5% the same $1018.79 monthly income stream would need to rise to $2407.65, by the end of the 25-year retirement period. Where is that extra $1400 per month going to come from?!
Planning for Retirement
Certainly individuals and families need to not only start saving more for retirement, take firm control over the investing strategy utilized in their retirement plans, but most importantly develop a PLAN for their retirement. If you don’t know where you’re going, how will you know once you’ve arrived? People cannot merely hope to retire at a given age. They need to create goals for themselves and a financial plan to accomplish those goals. Regarding circumstances that are either unrealized or unattainable, my financial planning instructor always said, “That and $2 will get you on the subway.” Or in the case of making the choice to retire with no financial plan in place, subway tickets themselves may be a luxury we can’t afford. One may rely on Social Security to supplement retirement income, but there is great distress to be had if one is relying on their 401k to supplement their social security income. The solution to the retirement epidemic America is facing can be readily solved with a little planning and lot of dedication to disciplined investing.
If we use one simple tool we can easily see how quickly our money can grow over time: The Rule of 72. Without going into too much depth, the rule states that your money can double every 72 years given a rate of return of 1% and compounding the interest. If we increase the return to 2%, our money will double every 36 years. Thus 72 divided by our given rate of return equals the number of years it will take to double our money, with compounding interest. The higher the amount of compounding interest, the quicker we can double our money. If worker A is 10 years away from retirement and needs to double their total retirement savings, they need to earn an annual rate of return of 7.2% and reinvest all interest earned on their money to compound the growth. This is not so easily done! Thankfully the further away from retirement, the smaller amount of interest necessary to double our money over time and we benefit ourselves from planning ahead. This is an incredibly small demonstration of the benefits in actively planning ahead for our retirement and taking the dedication to actively save for our future.
To answer the question posed in the title of this blog, when can I retire? The answer is when you plan to allow yourself to choose to!
About the Author
JT Trimble, Candidate for CFP® certification, joined YHB in August of 2018 and serves as a Client Account Manager. Prior to joining YHB, JT worked with Charles Schwab & Co., Inc. as a Financial Services Representative for high net worth clients and specialized in trading strategy in Littleton, CO.