I began my career as a financial planner in November of 1992. Back then the popular goal for most baby boomers was to retire early. For some that meant retiring at age 55. For others, age 60. Like now, many of the people I met in those days wanted to retire when they became eligible for social security, typically age 62.
Then came along the 2000’s. By the end of the decade, the goal of retiring early, became “I just want to be able to retire someday”.
Over the years I have had the benefit of watching and learning as clients and others pursued their various goals. While some people retire successfully in their 50’s, for most, this is a very difficult goal to achieve. Frankly, even retiring in your 60’s can be a major challenge these days which is why I believe 70 is the new 62 when it comes to your retirement.
Retiring early is difficult.
According to the Social Security Administration, the life expectancy of a 55-year-old man is age 83. For a 55-year-old woman it’s age 86. Put another way, today’s 55-year-old can expect to live another 30 years on average. If that 55-year-old retires today their retirement savings needs to last at least that long as well.
To calculate your life expectancy, click here.
A 65-year-old retiring today can expect to live another 19-21 years. A 70-year-old has between 15 and 17 years left to live – statistically speaking that is.
Think about the difference. Assuming you began saving for retirement at age 25, retiring at age 55 means that you have 30 years to save money and 30 years in which it has to last. A 65-year-old has 40 years to save, and 20 years to spend. The 70-year-old has 45 years to save, and only 16 years to spend.
Having more years to save and fewer years to spend makes achieving your retirement goals much easier and much more realistic for many people.
Let me share some numbers with you.
To keep it simple, lets say you have $1,000,000 at age 55. That’s pretty good by most people’s standards. $1,000,0000 would probably allow for a retirement income of about $45,000 assuming a 4.5% withdrawal rate. Some would argue that that withdrawal rate is rather rosy, but let’s go with it for the sake of argument.
A $45,000 annual income for the rest of your life, plus social security starting as soon as age 62, plus any pension benefits you might receive could be enough to meet your needs. The problem is most 55-year-olds don’t have $1,000,000 in investment assets and they usually need to spend more than $45,000 a year.
By waiting to age 65 to retire, $1,000,000 may grow to $2,000,000 if you earn an average annual rate of return of 7.2% If you contribute $15,000 to your retirement plan each year, that number grows to $2,200,000 assuming the same rate of return. (7.2% is just for illustrative purposes, not necessarily reflective of any particular investment).
If you can wait to age 70, your nest egg grows to over $3,500,000. Assuming the same withdrawal rate, your retirement income could be as much as $125,000, plus social security, plus any pensions. No matter how you do the math or what return assumptions you use retiring later means more income and fewer years that your savings needs to produce income.
If you can afford to delay your social security benefit to age 70, your social security income also grows. Under the current rules, social security benefits increase 8% for each year you delay receiving benefits. This increases your benefit from an average of $1,111 a month to over $2,000 each month.
Delaying retirement isn’t just about having more income in retirement. It’s also about increasing the odds that you will never outlive your retirement income – a primary concern for many retirees. The big risk with retiring early is that you might spend down your retirement savings during your lifetime and be forced to live on social security and pension income in the later years of your life.
I realize the above assumes a lot. It assumes you can stay employed until age 70, that you do work you enjoy, that you and your spouse are healthy, etc.
However, if you want to maximize your odds of never outliving your retirement income, or if you lack the financial resources to support your lifestyle in retirement, carefully consider when you decide to start your retirement. It’s one of the biggest financial decisions you will make.
If you want help determining when you can afford to retire and what the financial outcome would be at various retirement ages, please contact me to create or update your financial plan.
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