Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
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.
Here in the US, you might come across the term “full retirement age” referring to age 67. This is because at age 67, you’ll be eligible to benefit fully from the two major programs the federal government offers retirees, Social Security and Medicare. Medicare is available to any American 65 or over; at least some Social Security is available the vast majority of Americans who have amassed enough so-called work credits to qualify (and since taxpaying freelancers pay into the system as both employer, and employee, they’re certainly eligible.)
But you don’t necessarily have to wait to turn 67. At age 62, you’d actually be able to take a reduced amount of Social Security, which tends to be a choice that financial pros often only recommended for rich folks (and those who, God forbid, don’t imagine they’ll live to see 65.) And most so-called defined contribution plans like IRAs and 401(k)s have a very specific idea of the minimum retirement age, since you’ll pay stiff penalties should you withdraw from one of these accounts before age 59 1/2.
So let’s look at some numbers that pertain to the people who wait until the government’s retirement age. Exactly how much Social Security you’ll be entitled to will depend on how much you’ve paid into the system over the years, but the current average payment is $1,400 per month, or $16,800 per year. If you hoped to gross $50,000 a year, you’d need to bring in an additional $33,200 annually to add to that average sum. To be safe, plan on living 20 years past retirement at 70. So you’d have to have at your disposal $664,000. If you imagine a retirement in which you plan on crashing on your kid’s pull-out sofa and eating lots of ramen, or alternately chartering lots of yachts in Bimini, 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 enviable 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, though historically reasonable (http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm) 7% annual rate of return on an investment, a 25 year-old who manages to put $5,000 away every year will end up with almost $1.18 million by age 65. Put in that same $5,000 beginning at age 35, and she’ll only end up with $551,000 by 65. In fact, in order for that 35 year-old to end up with the identical $1.18 million by 65, she’d have to put away more than $10,000 a year to catch up to the early bird who started at 25.
So what does the 4% rule mean in real numbers? Financial advisors often suggest that in order not to feel lifestyle 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 between $52,500 and $60,000 annually. If you’re going off the 4% rule, in order to make up that $35,700 to $43,200 Social Security won’t cover, you’d need to have a portfolio of $890,000 to $1.08 million. Used to making $150,000? Using the same calculations, you’d need to retire with a portfolio of $2.2 to $2.6 million.
As the saying goes, nice work if you can get it—but very few can. According to a recent report from Stanford University’s Center on Longevity, as of 2014, almost a third of baby boomers, average age 58, had no money saved in retirement plans, and, of those in that group that had put money away, their median savings was only about $200,000. That same research institution analyzed292 different retirement strategies and came up with one clear winner that they recommend for us not-nearly one percenters. The full 20-page report’s definitely worth a read as you’re wargaming for your retirement, and here you’ll find a bit more information on their “spend safely in retirement strategy.”
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.