There are many unanswerable questions that have baffled wise men and women through the ages, questions like “Who closes the door after the bus driver gets off the bus?” and “Why is there a light in the fridge and not in the freezer?,” however it’s possible that no one question has stumped so many smart people as “When can I retire?” So, in the next several paragraphs, we’ll attempt to succeed where scores before us have failed and just give you the absolute best answer possible.
When can I retire?
18, pretty much everywhere. Yes, you heard right. As soon as you’re an adult, or, as Canadians like to say, as soon as you reach the “age of majority” and your parents have no legal right to tell you what to do, you’d be free to ditch the workforce even before you’ve joined it, just as you’re free to use the bathroom whenever you like and adorn your face with any regrettable face tattoo you could imagine. The better question to ask yourself is, how much money do a I need to retire, and how long will it take me to amass that much? Because the earlier you retire, the more years you’re going to have to support yourself without an income. Lucky kids who were born into old rich families named Getty and Rockefeller and newer rich ones like Gates and Bezos may have the luxury of seeking only fulfillment in their careers and might have the option to retire after sustaining their first painful paper cut at work. The rest of us have to hang on in the work trenches until we put enough dough away to cover a couple decades worth of grocery, electric and gas bills.
When should I retire?
Besides blown out knees, neuropathy, sciatica and other stuff renders office life less enjoyable for older folks, there’s another good reasons why most people retire in their sixties and early seventies. It’s around this age that the government provides certain benefits to help older people pay their bills. For most people, it would be impossible to make ends meet otherwise.
The term “state pension age” that has lately been the source of much controversy is currently 65 for men, and has gradually been raised from 60 to 65 for women as well; both will gradually increase to age 67 by 2028. (The date you can collect your full pension depends on your year of birth; find out yours here.) Whenever it starts, it won’t represent a great deal of money; in fact, the UK State Pension just landed dead last compared with the percentage of income provided to pensioners by other countries in the developed world. Full pension currently sits at £164.35 a week, or just over £8,500 a year.
For financial planning purposes in the UK, one rule of thumb is that clients retiring at 65 should have a portfolio of 20 times what they plan to withdraw per year. So, if you need £50,000 per year to live, and will eventually receive £8,500 a year from your State Pension, you’ll need to net £41,500 from your investments at age 65. For this to work, you’ll need access to just about £830,000.
If you imagine a retirement in which you plan on sleeping on your child’s sofa and eating lots of packaged ramen, or alternately chartering lots of yachts on Mustique, adjust your annual needs accordingly.
How to prepare for retirement
If you’ve been an incredibly disciplined retirement saver from a young age, and manage to retire with a nice chunk of change, you may choose to follow the famous 4% rule, a guideline introduced by an American financial advisor named William Bengen who ran the numbers and figured out that if you withdraw 4% of your well-invested retirement portfolio annually and adjust for inflation, you will never, ever run out of money. Legend has it, Dracula kept his castle rent paid for 400 years using the 4% rule; it’s also how well-to-do mortals finance their retirement and then pass on their wealth.
How on earth might you find yourself in this amazing position? Ironically, the most effective way of living painlessly and comfortably in retirement is the one that hurts the most when you earn the least. The absolute best way to create a comfortable retirement if you’re not a huge earner will require your savings to simmer for a very long time in an investment account, experiencing the magical power of compounding year in and year out. Play around with a compounding calculator like this one to get a feel for the kind of magical effect has on money. Assuming a hypothetical 5% annual rate of return on an investment, a 25 year-old who manages to put £5,000 away every year will end up with over £675,000 million by age 65. Put in that same £5,000 beginning at age 35, and she’ll only end up with about £371,000 by 65. In fact, in order for that 35 year-old to end up with the identical £675,000 by 65, she’d have to put away more than £9,000 a year to catch up to the early bird who started at 25.
So what does the 4% rule mean in real numbers? When you hit retirement age, you’ll be eligible to take the state pension—which at £8,546.20 a year, won’t exactly keep your pantry stocked with truffles and caviar. Some financial advisors will suggest that in order not to feel deprived, you should be netting 70-80% of your pre-retirement income. So, if you’re used to making £75,000, you’ll want to be bringing in about £56,250 annually.
If you’re going off the 4% rule, in order to make up that $47,700 your state pension won’t cover, you’d need to have a portfolio of almost £1.2 million. Used to making $150,000? Using the same calculations, you’d need to retire with a portfolio of £2.6 million. As the saying goes, nice work if you can get it—but very few can. According to a recent study, 55-65 year-olds currently have on average £105,496 saved in their pensions. (As a rule of thumb, a pension pot of £100,000 will yield an annual £5,000 of income.)
The good news is that as great as having a cool million in the bank upon retirement would be, it’s easily accomplished with a lot less. Research conducted by consumer group which showed that the average couple could cover all their expenses with £18,000 a year. £26,000 would cover all expenses plus regular European holidays. The retirement pot required to cover that £26,000 annual bill? £210,000 in 2018 dollars (in addition to the proceeds from a state pension.)
If you’re a bit older, and these numbers seem WAY out of the realm of possibility for what you’ll be able to put away, fear not. A pension calculator like this one will tell you exactly where you’re at, and where you need to be, financially, and there are scads of resources that will help you catch up at any age.
What if I want to retire early?
What if you really want to retire years, even decades before The Man thinks you should? Can you retire at 50? We’ve got a guide on how it can be done. Trying to retire at 40 will provide you with a much shorter runway for retirement investments to grow, but this too is possible, especially if you’re someone who loves nothing more than clipping coupons and subsisting on pasta.
Whatever age you retire, the strategies you find in our “Retirement Strategies” guide will prove invaluable.
Although we’re biased, we reckon the absolute best way to chart a course for becoming the most comfortable retiree in town is through Wealthsimple. We offer state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service.