If you’re wondering, “When can I retire?” you are not alone. More than half of Americans aren’t sure that they’ll be able to retire at the expected age of 65.
In fact, a recent study found that an estimated 64% of Americans are not prepared for retirement. For a lot of people, this boils down to not knowing how much they need to retire or how to start preparing early.
A common misconception is that you need to shoot for a specific number in savings and assets. Many people are led to believe that they need to accrue a worth of $1 million or more to retire.
The truth is a little more complicated. Read on to learn more about when you can retire and how to start thinking about your finances after retirement.
Shifting Your Thinking to Retirement Income
First, it’s time to shake the idea of a fixed number–at least one that applies to everyone. $1 million may be more than some people need to retire. For others, it may not be nearly enough.
Here’s an easier way to think about it. After retirement, your standard paycheck stops. However, your living expenses don’t. You still need to pay bills and buy groceries at the very least–and most people have far more expenses than those two things, alone.
In order to retire, you want to have enough money to cover all of your expenses for the rest of your life. How can you calculate what that may be?
Maintaining Your Quality of Life
At the base level, most people want to maintain the quality of life they had before retirement. That means affording the same types of leisure activities, maintaining property of similar quality, and providing oneself with necessary care. In order to meet this base level, you want to make sure that you have access to at least 70% of the income you were making in the past.
As you can see, this is why the dollar amount is going to be different from one person to the next. If your lifestyle requires, say, $40,000 a year to sustain, you’ll need access to $40,000 per year for the rest of your life. If your lifestyle is more expensive, $40,000 per year would not allow you to maintain the same quality of life.
Forms of Income After Retirement
Once you calculate how much you’ll need per year to sustain the lifestyle you want, it’s time to assess where that money is coming from. Let’s take a look at some of the possible sources of income retirees can pull from.
Pensions
If you’re lucky, your employer will provide a pension. A pension is a source of post-retirement income that you receive once or twice a month. No employer provides a pension that matches your prior income 100%, but you may be able to expect between 20-50%.
Retirement Accounts
You may have set up a 401k through your employer earlier in life. Alternatively, you may have set up your own Roth IRA. These are both investment accounts that are designed to support your post-retirement income.
How and when you choose to withdraw funds from these accounts is mostly up to you. You may begin pulling from a 401k without penalty after the age of 62. You may pull from a Roth IRA without penalty at any time.
We recommend factoring your investment accounts into your post-retirement income last. Calculate what your income will be from sources like social security, pension, and your standard savings account. Then, supplement your monthly needs with withdrawals from investment accounts and let the rest continue to grow over time.
Social Security
Social security comes from a federal fund that workers and employers pay into over the course of their working lives. You become eligible for social security at the age of 62.
Social security is supposed to provide you with 40% of your pre-retirement income. If you’re abiding by the 70% rule, that means that you need to account for an additional 30%, not the entire 70%. However, the maximum social security monthly payout is just over $3000, so it may not cover 40% of pre-retirement income for everyone.
Supplemental Security Income
How does supplemental security income, or SSI, fit into retirement? The reality is that most individuals will not qualify for supplemental security income. If you believe that you do, contact Heard and Smith for the legal representation you need to get the supplement security income you deserve.
What Should Your Savings Account Look Like For Retirement?
If you’re only focused on your savings account, retirement can seem like a far-off reality. Don’t forget to factor in your other sources of retirement income.
That being said, it doesn’t hurt to overcompensate with savings. Some forms of post-retirement income, like investment accounts and even social security, may be subject to unexpected fluctuations.
To be on the safe side, think about the living expenses you’ll still have after retirement. Come up with an annual number, as in how much you’ll need per year to achieve your desired quality of life. You will also need to think about your life expectancy to determine how many years you’ll need retirement income.
Once you have a final number (annual financial needs x the number of expected retirement years), cut it in half. If you know that your other sources of retirement income are strong, this is how much you should accrue in your savings account.
When Can I Retire? It Depends on Your Sources of Retirement Income
If you’re wondering, “When can I retire?” you are one of the millions of Americans wondering the same thing. Preparing early and understanding how much you need to maintain your quality of life will make all the difference. At the end of the day, retirement is about income, not about reaching a certain age or a universal dollar amount.
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