Plan For Your Retirement
The emphasis is on “your” retirement here, because no 2 will look the same. You could take two 55-year-old women with the same job and even the same postal code, and their vision for this next chapter will probably be very different along with what they can actually afford. Thats because a range of factors from how much we have saved to how much we want to spend can all influence just how much money well need to retire. Ideally, comfortably as well!
Whether youre 25 or 55, it can be helpful to sit down and answer a few questions to help you clarify what retirement might look like to you. Heres what you should ask yourself and why that matters:
1) When do I want to retire?
Its just math: The later you retire from full time work, the longer you have to accumulate that retirement nest egg. You might want to retire at 55 like your parents did, but do you have their fantastic pension? Its also worth remembering that were living longer, so its possible you may have to make this amount last for several decades. Is this something you want?
2) Where would I like to live in retirement?
3) What will my expenses be?
4) What will my income be each month?
Is 55 Too Early To Retire
Its a common misconception that pensioners are grey-haired OAPs in their seventies and eighties.
But in the UK, you can generally access your pension from 55 theres no need to wait until state pension age. This means theres a growing group of people enjoying early retirement from their mid-fifties.
But is 55 too early to retire? In the UK, were hard wired into believing you retire in your sixties.
A lot of people dont realise you CAN retire at 55.
Some think they wont have enough for a comfortable retirement if they retire early.
Others think it is self-indulgent to stop working at 55.
But seriously, if you can afford it retire early, why wait?
Its true that some people experience retirement fear as they wonder what theyll do with themselves after work. Theres no doubt that retiring is a huge step anditsimportant to prepare for the emotions you might feel.
But whilst its a cliché life is short and you dont know what is around the corner. Sadly, ill health can cut lives short or prevent us from fulfilling our dreams. Most of us work to live, not live to work. So, if you can afford to retire early, why wouldnt you?
The first step to retiring at 55 is to speak to a retirement planning adviser as soon as you can.
Theyll help you work out how you want to spend retirement, how much money youll need to fund your retirement lifestyle and whether fingers crossed youve got enough in your pension pot already
Real Advice, For Real People
Percentage Of Your Salary
Some experts recommend that you save at least 70 80% of your preretirement income. This means if you earned $100,000 year before retiring, you should plan on spending $70,000 $80,000 a year in retirement.
A benefit of this strategy is that its easy to calculate. And you can use the result to estimate how much you need to save for retirement. For instance, if your current income is $50,000 and you expect your retirement to last at least 30 years, youll need roughly $1.5 million for your nest egg .
However, a major downside of this guideline is that it doesnt consider inflation. You wont know how much youll need to retire unless you look at your current salary and adjust it for inflation. You can use an inflation calculator , which can be the simplest option, or you can use the rule of 72.
If you take 72 and divide it by the average inflation rate, youll get the number of years it takes to double your cost of living. For example, using a 3% inflation rate, itll take 24 years for it to double. While this is a good rule of thumb, the more accurate way is to use an inflation calculator.
Another downside is that its hard to determine how much money youll need because its hard to predict how long your retirement will last. That said, you can still use it as a guideline to start setting aside a percentage of your income into retirement and savings accounts.
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What Are The Options For Withdrawing My Super Benefit
When you withdraw your super savings at retirement, you can choose to take either a lump sum or an income stream:
Compare super funds
- Income stream If you decide to take a super income stream, you will receive a series of regular payments from your super fund. These must be paid at least annually and must meet minimum annual payment rules.
- Lump sum This is a single payment that withdraws some or all of your super. If you take a lump sum the money is no longer within the super system and if you invest it, any return received on the money will not be taxed as super savings. This means the concessional tax rate of 15% on your super accounts investment earnings will no longer apply. Instead, your investment earnings will be taxed at your marginal tax rate, which could be as high as 45% .
Need to know: When choosing whether to take a lump sum or income stream from your super account, consider getting professional advice from an independent financial adviser or tax professional.
Tax and super are very complicated and taking a lump sum may not necessarily be the best strategy for you, as there can be tax advantages with a retirement income stream.
Can I Still Make Contributions Into My Super If I Retire At 55
Once you have retired from the workforce, the contributions you can make into your super account are more limited and depend on your age:
- Aged 64 and under, you can only make non-concessional contributions into your super account up to the annual contribution cap
- Aged 65 and over, you can only make downsizer contributions . For more information, see SuperGuide article Making downsizer super contributions: 10 things you need to know.
For more information see SuperGuide article How to make super contributions after youve retired.
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Why Have You Set The Default Life Expectancy Of The Calculator To 95 Years
For starters, people are living longer. Even though the average life expectancy in Canada is 82 years, many people live past this. It’s better to have more money tucked away for retirement than to run out of savings. Extra savings can always be passed down to your beneficiaries. You can change the default life expectancy if you think you’ll live a longer or shorter life.
What Age To Retire With Social Security
Choosing what retirement age to turn on your Social Security Benefits is a critical decision to make.
When choosing a target retirement age, you must consider how much Social Security income you will receive now versus later, and if the amount is dramatically different, decide later.
One should consider what expenses will arise as you get older instead of the monthly income you will receive today.
Youre 66 years old, and if you turn on Social Security Benefits today, your income is $1,900 a month.
If you wait four more years at age 70, your monthly income will be roughly $3,000 a month.
Which retirement age will benefit you the most at age 80 when you may need to go into a nursing home?
What is the quality of your nursing home earning $1,900 a month versus $3,000 a month?
We didnt even consider inflation, increasing taxes, and the consistently increasing cost of care between today and 20 years from now.
The Golden Years have often been overlooked factors in .
Is it worth it to retire early and collect SSI prematurely?
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Calculating How Much Retirement Income Youll Need
There are a few quick ways to get a rough idea of how much you might need, but none are 100% accurate.
1. Multiply your expected annual outgoings by the number of years you hope to be retired
If you expect to spend £25,000 per year and live until 85, you might need a pension of around £490,000 to support you through those 30 years of retirement.
2. Multiply your final salary by 70%
So if you retired on £40,000 per year, youd need around £28,000 per year to live on in retirement .
The idea behind this is that youre likely to have paid off your mortgage and other expenses, so your outgoings will be lower.
3. Consider what others are spending
According to consumer group Which? a couple needs a joint household income of £26,000 a year to cover living expenses. This rises to £41,000 if you include luxuries like exotic holidays and a new car every five years.
*Pension pot sizes were estimated using this calculator, assuming funds were drawn down over 30 years from the age of 55 and the pension continued to grow 3% annually. Were not including the State Pension which youll receive in your late 60s.
Retirement Savings Confidence By Age
Anxious that you aren’t saving enough for retirement? You’re not alone. A 2020 survey by Charles Schwab of currently employed 401 plan participants found that saving enough for retirement continues to be a leading source of significant financial stress for all generations. Participants in the survey anticipate that the economic fallout from the COVID-19 pandemic will have an impact on their retirement savings.
Overall, only 37% of survey respondents think they are “very likely” to achieve their retirement savings goals. Almost half believe they are “somewhat likely” to do so, and 14% said it is “not likely” at all. Gen X has the least confidencejust 32% feel it is “very likely” they will reach their goalscompared to 39% of baby boomers and 42% of millennials.
In the early and middle years of your career, you have time to recover from any losses in your retirement accounts. That’s a good time to take some of the risks that allow you to earn more with your investments.
Read Also: How To Invest Retirement Savings
How Much Money Do I Need To Retire At 55 Plan To Retire At 55
To see how all these questions work in practice, lets consider Craig. He earns £60,000 a year and would like to maintain a similar lifestyle after retiring at 55. Using the 70 per cent rule, he estimates he needs an income of £40,000 a year in retirement.
Craig estimates that hell live to the age of 80, meaning a 25 year retirement. He also assumes average growth of 4 per cent interest on his pot . If he were to draw out £40,000 per year, he would need a £650,000 pension pot to retire at 55 and make it last the full 25 years .
This calculation doesnt take into account Craigs state pension, which he would start to receive 10 years after he retires, but he decides not to include this in his estimates in case he lives a lot longer than he expected.
So if Craig discounts the state pension from his figures, hell need to save that pot of £650,000 by the time hes 55. Can it be done?
Investing Safely For Early Retirement
Fixed income are considered to be a safer asset class than stocks. Fixed income plays a major role in diversification and wealth preservation.
Historically, bonds have an inverse relationship with stocks. During market downturns when most stocks decrease in value, investment-grade bonds increase in value. This makes them ideal positions to liquidate if stocks are down to provide the income needed in retirement.
In addition to being a hedge against stock declines, bonds pay higher interest than cash. One mistake that some retirees make is having large cash positions in retirement. Cash historically does not keep pace with inflation and is a poor way to invest in the long-term.
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How Much Do I Need To Retire Comfortably
One common goal that everyone has is maximizing their quality of life in retirement. This means spending money confidently, without fear, worry, or anxiety.
Traveling the world will require more financial resources than playing bridge or having coffee with friends every day. Consider traveling costs to visit your children and gifts to grandchildren. What does your bucket list look like? Make sure to create a good framework detailing all of your retirement goals.
Mapping out your daily, weekly, and monthly lifestyle goals will assist in determining what a comfortable retirement will feel like. Knowing your expenses is the first step in determining your withdrawal rate. Your withdrawal rate is the amount withdrawn divided by the value of your retirement portfolio.
Want To Boost Your Score Here’s How
Here are some ways to boost your retirement readiness whether youre behind on your goals or are on track but maybe want to retire a little earlier.
“My score needs attention.”
An individual retirement account is one of the most popular ways to save for retirement given its large tax advantages. You can put in up to $6,000 a year. And if you’re 50 or older, you can contribute an additional $1,000 a year. » Learn more about IRAs
“On my way, but I could close the gap.”
The annual limit for 401 contributions is $19,500 . Its wise to at least contribute up to the point where youre getting all of the matching dollars your employer might offer. » See about increasing your 401 contributions
“I’m on track, but I want to do more.”
A good advisor can help you understand complex issues, diagnose potential problems and take steps to plan for the future. And theyre not as expensive as you might think. » Learn how to choose a financial advisor
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Assumptions Used To Calculate The Starting Investment Balance For A 55
Fry said the Monte Carlo simulation has two clear limitations: The outputs are only as good as the inputs, and it does not factor in the behavioral aspects of finance or how investors react to swings in the markets.
Here are the assumptions used in the simulation:
- All investments are in a taxable account.
- Used $8,333/month for a $100,000 target annual income and $5,417/month for a $65,000 target annual income.
- JPMorgan long-term return estimates used for investments 3% inflation used for a conservative amount.
- Assumed younger investors can take on more risk than older investors.
- 5% annual portfolio turnover.
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How To Retire Early And Not Run Out Of Money
Retiring at 55 is tough goal to achieve but as these figures show, its not a completely unrealistic one. By working out in advance what your income needs will be, working out how much youll need to save up and then how to do this, you can turn a pipe dream into a practical plan. And of course, you may not even wish to retire so early, or may take part-retirement for a number of years, in which case the dream becomes more achievable still.
The examples given here are simplified, and dont cover all the variables and uncertainties that are a part of retirement planning. If you want to achieve your own comfortable retirement early or late! a financial adviser can give you a fully tailored plan of your own.
The Five Most Common Retirement Risks You Should Know
There are five main risks every prospective retiree should plan for prior to retirement. Neglecting these risks could inhibit you from your goal to retire early at 55.
A decline in asset values similar to the Great Recession of 2008 is a good example of market risk. At the same time, you cant be too conservative in retirement. Having a well-diversified portfolio that takes into account your retirement income needs is key.
Longevity and Mortality Risk
The risk of outliving your assets is what every retiree fears. Another risk related to longevity is premature death. This can impact your spouse and any other dependants in your household.
These risks can dictate whether to purchase/retain any life insurance policies. They may also assist you in making decisions like when to take Social Security benefits and pensions.
More trips to the doctor should be accounted for in retirement. We already discussed the higher cost of purchasing your own healthcare before you become eligible for Medicare. But you also have to account for more frequent doctor visits, co-pays, and deductibles.
Health risks increase as you grow older so make sure this is planned for in your retirement expenses. These costs should be higher in your budget until Medicare eligibility at age 65.
Relying on an inheritance without 100% certainty could be another example. An earthquake in California could devastate most retirees as only 13% of California homeowners have earthquake insurance.
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