Personal Finance – Retirement Age, What It Means For You
More than likely, you’ve heard peers admit concerning their personal finance(s) -that they will probably never be able to retire. Whether they view retirement as a breezy hammock on a private beach or simply relaxing in the backyard on a breezy Tuesday afternoon, the concept of financial planning for the future or the unthinkable goal of early retirement both seem as unlikely as living on the moon.
According to Forbes, approximately 33 percent of people feel they will never have enough money saved up to retire. They have spent their lives dabbling in various savings accounts, dropping income in their 401k, and skipping vacations to log more hours at the office only to feel let-down at the end of the day.
Despite the pessimism in one-third of Americans, retirement is still possible, whatever your view may be the day after you punch your final time clock. Logistically, what do you see when you ask yourself, “What do I need to retire?”
Determining Your Retirement Age
In terms of personal finance, everyone’s goal for an age to retire may be different.
A relatively pessimistic article from U.S. News provides a headline that reads, “The Ideal Retirement Age — And Why You Won’t Retire Then.”
The article revolves around a Gallup poll that lists today’s current retirement age as 66, three years higher than it was a few years ago in 2002.
Frank Newport, Editor in chief from Gallup comments, “Americans have two reasons in which they may project a later retirement year. One is financial, and they simply think they will need to work longer because there are fewer pensions, and now people may have a more psychologically positive view of work.”
So what’s next?
Calculate Your Retirement Portfolio
“An investment in knowledge pays the best interest.”
How Much Do I Need To Retire?
The number to calculate would be the necessary amount of income needed to live comfortably. Consider the amount you spend now, specifically separating the items that are considered needs versus those that are considered wants. You need food, water, shelter, and utilities—transportation is less important when work isn’t necessary a factor.
Once that end number has been discovered, it’s important to find out how to reach that number, which is where the retirement portfolio will come into play. The income number specifically determines the amount of the investment portfolio, like a simple algebra equation.
While “average retirement savings” can be different for everyone, there is a formula to find your own personal number.
When solving for X, the general consensus is that at least 80 percent of the current income will still be needed during retirement. For the sake of simplicity, using this interval will make the math easy, but it’s important to understand your own needs when investing in your future.
Not only should you consider your own basic needs and future luxuries (perhaps you want to celebrate with a hot tub or splurge for a spa membership), it’s also important to consider unknown costs, such as the possibility that insurance may rise or your rent could increase if you do not currently own your own home.
The Safe Withdrawal Rate
“Invest in yourself. Your career is the engine of your wealth.”
According to Madfientist, the Safe Withdrawal Rate (SWD) is the amount of money you can safely withdrawal without ever running out of money. Generally speaking, with low interest rates on your savings account, the amount of a SWD is around 4 percent each year.
Given inflation rates and the estimation of a thirty-year retirement, 4 percent should be a safe bet if your money is in a savings account that also builds accordingly over time.
In recent years, even the modest SWR is brought into scrutiny. Since media controls the masses, advertisers can use fear to scare individuals into believing that the SWR is no longer valid, but according to the Trinity Study, the SWR has been correct approximately 96 percent of the time in our modern era.
Using this method, you can find your necessary annual income number and multiple it by 25 to calculate your portfolio. In that situation, 4 percent is 1/25 of the total portfolio, so if you can create a portfolio 25 times larger than your current income, it is then possible to calculate an accurate investment portfolio.
While the retirement calculator above can make it simple, there are always other factors to consider when estimating your retirement age or even your necessary goals for retirement planning. With that in mind, use discretion and do what is best for you and your retirement.
What About Inflation?
According to Kiplinger Magazine, interest rates are increasing by 1.8 percent and inflation is increasing by 2.1 percent in 2016, but with such a diverse economy, even the best experts are merely making their best predictions in terms of inflation and in regards to personal finance.
Rather than try to predict the future, guessing inflation can be calculated by looking into the past. As author Chuck Palahniuk once said, “What we call chaos is just patterns we haven’t recognized.” By using a formula such as that from the Bureau of Labor Statistics, it’s possible to track inflation data over the past twenty years, which can tell us what may happen in the near future.
Avoid Debt Like the Plague
“Interest on debts grow without rain.”
Avoiding debt is perhaps the best way to plan for your retirement. It’s a bad habit that is becoming more and more common among Americans who know little about their own personal finances. According to Business Insider, “the average consumer carries four credit cards…while the average household carries $6,500 of debt.”
Not only does debt carry a psychological burden, but the hidden fang of the beast is that it also limits your positive cash flow. It seems ideal to decrease a credit card payment to $50 per month and lower student loans to $80 per month—because it feels like you are saving money—but it’s more likely that you’ll pay off these amounts countless times as you spend your days giving your income away.
For those who get past the mental load and can live with debt, there is the possibility of this debt familiarity taking over in a way that you will take it with you into retirement. While there is a dispute between paying off large debts first (debt avalanche) or small debts first (debt snowball), the main idea is to simply take action and move forward in a positive direction.
Recalculating Your Cost of Living
“From now on it is not dying we must fear, but living.”
—Arundhati Roy, The Cost of Living
If the numbers do not seem to be adding up based on your current living standard, consider lowering your basic cost of living. This can feel unfair, especially after a lifetime of proper saving, but it may be necessary for big picture goals.
This can come down to time versus money (like everything else). The less money required to survive means the less money you need to save and the quicker you could hypothetically reach your version of retirement. Determine what’s important for your own personal finance goals.
Everyone knows how to cut back but it can be hard to actually do it. Get rid of that car payment. Pay off those debts now to save more later. Quit going out to eat so much and prepare something healthy at home. The thought is simple, but the act can feel nearly impossible. Consider doing so now to make it easier on yourself later.
Consider this, if you have the same job for ten years and you go out to eat three times per week instead of five (Men spend an average of $21 on lunch while women spend $14, so let’s meet in the middle at $17.50), then at the end of this short career example, you will have saved $18,200 by simply brown-bagging two days per week.
What could you do with that additional money?
Don’t Find Yourself “House Poor”
“That’s not to say that everyone who is liquid-assets poor spends all their time fretting. On the contrary, because many have regular paychecks coming in, they may not grasp the precariousness of their situation.”
—Alexander Eigchler, The Huffington Post
The unflattering term “house poor” refers to those individuals who live in a beautiful home but have little to no money outside of that very home. While this status isn’t ideal in any sense, it’s especially dangerous for those thinking about retirement in the near future. It could mean that you spend too long paying off a home, but it could also mean that you aren’t able to save those many years.
A home is a long-term expense so swimming into that deep end of debt can feel unbearable before the paint begins to dry. On the personal finance blog, Canadian Budget Binder, they warn, “Becoming house poor doesn’t happen overnight, rather it happens month over month after moving into your home or when situations arise that you are unable to cope with financially.”
Simply Save More Money
“Freedom is low overhead.”
“Simply” and “Save More Money” may feel like phrases that are opposing magnets, but they can actually be linked together with proper financial care. Whether you need more money for your current retirement or wish to call it quits early, consider saving 30 or 40 percent of your income, rather than the advised 10 to 15 percent.
When thinking of retirement planning and saving money now, Kiplinger advises money savings tactics such as adjusting your tax-withholding’s, enrolling in your company’s 401k plan, altering your insurance deductibles, paying off credit cards, updating your home to save money on energy, finding credit cards with reward programs, and cutting bad habits, to name a few.
Increase Your Income
“Make more money—this is America!”
Mr. French in The Departed
For those who feel safe in their career, negotiating a larger salary can seem unthinkable. It’s certainly easier to settle for the annual 3 percent raise or occasional bump in commissions. However, for those who want more, it’s best to consider thinking about a raise as a practical business decision.
Financial and negotiation guru Ramit Sethi provides dozens of ways to negotiate yourself into a higher salary. He brings up the simple fact that “increasing your salary is the easiest and fastest way to make more money… A one-time salary increase of $5,000 — properly invested — adds up to over $1,300,000 by the time you retire.”
While the thought of such a negotiation feels overwhelming, he reminds us that “$5,000 or $10,000 means nothing to a company, but it means everything to you.” Some of his methods are to take note of the extra work you’re already doing, pay attention to their current problems, carry a briefcase and then to simply ask for the raise. After all, why would your boss pay more for a product advertised as less?
Perhaps his best advice comes from the Briefcase Technique, where he advises individuals to avoid answering income requirements until your exact worth has been proven. This immediately changes the dynamic of the conversation. Earning a raise is the fastest step to increasing your goals of proper personal finance for early retirement.
Entrepreneurship, Travel Living, and Lifestyle Design
“Often when you think you’re at the end of something, you’re at the beginning of something else.”
—Fred Rogers, a.k.a. Mr. Rogers
There is, of course, an alternative to the norm. Given that millennials today aren’t receiving their promised careers after University study and many only stick with a given employer for two years, there are other considerations rather than traditional retirement, which can feel complicated to obtain and potentially boring in theory.
Younger generations today are launching businesses more and more often. Some of this comes from the relatively inexpensive practice of creating a website, blog or writing an ebook, while marketing on social media, which can be free.
Once this attempt at passive income has been set-up, those who can live for very little can then travel more often and live for pennies on the dollar compared to the previous American dream of a single job with potential pension upon retirement.
For those unsure of entrepreneurship, freelancing is another aspect of this new Lifestyle Design. In an article by Fast Company, the journal writes, “15.5 million people in the U.S. were self-employed, according to the Bureau of Labor Statistics—an increase of roughly 1 million since May 2014.”
Starting a new career or pivoting a current career can be daunting, but in today’s world, these attempts can be done with minimal time and little money. While the safe bet is to follow the steps to retirement above, taking an extra hour or so each day to build a small back-up business or write a series of ebooks (find something you enjoy!), is relatively minimal effort in the grand scheme of things.
If it feels like you don’t have the time for something new, consider it to be a hobby to later enjoy while you’re sitting on your beach or relaxing in the backyard after you’ve put the right steps in motion and reached your version of retirement.