The lynchpin to financial planning is: When can I retire?
It’s such a common question that I’ve already written a few blogs on the topic (what’s my magic number to retire and retirement tips to consider). However, dealing with a lot of engineers and analytics I know many of you like to understand statistics and averages when formulating decisions. While I don’t consider the below information part of a robust financial plan, I do recognize gaining perspective is indeed helpful. In the end though, I think the best course of action is to work with an accredited financial planner to achieve your financial goals.
Average Retirement Age
The “average” American retires at 63. While appealing, I don’t recommend using this baseline. Why? Because the average retiree lives on Social Security as their sole form of retirement income. Additionally, the average retirement savings for a family (between ages 56-61) is $163,577. Once we understand the financial circumstances of the average retiree, it becomes clearer to our clients these numbers are not reflective of their personal circumstances. Therefore, while helpful, these values aren’t guiding.
Social Security & Medicare Ages
Understanding when key retirement vehicles start is helpful, too. Medicare is fairly easy. Once you turn age 65, you are eligible to start receiving Medicare. Social Security, however, is trickier. Today, everyone is eligible to start receiving social security benefits at age 62. But, the latest you can collect is 70. Every year you wait your benefit increases (roughly 8%/yr). The full retirement age (FRA) changes depending on your birth year. (For figuring out your specific FRA, here is an online tool: full retirement age.) Just to be clear, the range is anywhere from 66 & 6 months to age 67.
How long will you live? I get it; it’s a morbid question. But just like funeral planning, life expectancies are vital to crafting a complete retirement plan. In 2014, the averages for a 63-year-old American were: 19 years (or age 82) for a man and 22 years (or age 85) for a woman. You can check out your life expectancy here (Actuarial Life Table). For a more detailed calculation, you can take the few-minute quiz at the living to 100 websites. Additionally (for you visual types), below is a great graph (courtesy of JP Morgan) showing the chances of a 65-year-old couple living to age 80 and 90.
Fortunately, or unfortunately (depending on if the glass is half empty or half full), longevity is one of the biggest threats to any retirement plan. Centennials are the fastest-growing demographic in our country – a fact to surely keep in mind!
Average Cost of Retirement
According to Fidelity’s retiree health care cost estimate, the average cost of retirement is $738,400. The average retired person spends between 70-80% of their pre-retirement spending in retirement. To be fair, this is why it’s called averages. In my experience, these figures above are not “accurate. I’ve seen retirees spend more than they ever have and I’ve seen those so worried that they hoard every last dollar. What I can tell you with certainty is: everyone slows spending, eventually. In some instances, health care costs make up that difference (just some food for thought).
The old rule of thumb is to plan a drawn-down rate of around 4% of your assets in retirement. The other rule I’ve often heard is to plan to have 10-12 times your current pre-retirement income saved. So, let’s say you make $200,000/yr. In this case, you should have somewhere in the range of 2 to 2.4 million dollars saved for retirement.
That’s a Lot of Info
Hopefully, you better understand some of the key retirement statistics. I again state, I wouldn’t use these as steadfast rules. Rather, use these tools to understand your current standing. Retirement planning is very customizable and specific. Building a plan based off averages is well… average. You deserve better!