If you ask working folks when they expect to retire, the typical answer for most is “65, I think.” Pressed, they might say “70, I hope.”
The fact is they don’t know, and that’s not a disaster so much as it is a sign that they haven’t done the math on their own savings and retirement planning. If you haven’t, it’s probably because the very idea combines two things most people prefer to avoid: math and their own mortality.
Time to get over it. It’s important to set a retirement age because if you don’t, you have no idea if you are saving enough to ever stop working.
Here’s an easy way to pick a retirement age, or at least start a conversation about it with your significant other. What year do you think your life will substantially change in terms of spending needs?
It’s a tricky question: If you have kids, it might be when they graduate or leave home. If you don’t, it might be when you own your home free and clear. For someone else, it might be when an inheritance comes due.
Asking the question that way puts a fine point on the issue: You might be substantially less beholden to a high fixed cost of living sooner than 65. If that’s the case, do the math backward to your current age to come up with the number of years you must continue to work at your current income.
Let’s say the number turns out to be 15. But you’re only 45 now. That means 60 is not an unreasonable retirement age. Can you estimate what your cost of living will be post-mortgage, post-kids and perhaps after having downsized?
Chances are, the number you end up with is somewhat lower than you might have guessed. Now, go to the Social Security Administration and calculate your expected income from government benefits at your earliest and latest possible retirement ages.
Now you know what it is likely to cost you to live in retirement and how much will be covered by Social Security. Fidelity Investments makes this a bit easier with a savings checkup table that can help you see if you are on track. Here’s an example:
Bob, age 45, has $250,000 in IRA and 401(k) savings.
Bob and his wife both earn an income, which combined total $85,000. Fidelity figures they’ll need three times that salary number to retire at 67. He’s pretty much on track, since three times $85,000 is just a bit more than he has set aside today.
Bob and his wife are projected to earn $32,000 a year in Social Security benefits, combined. Fidelity includes a rough estimate of that number in their rule-of-thumb math.
Here’s the kicker: Fidelity assumes that you need 85% of your income to retire, and that you don’t increase your savings rate by much.
It might be that neither are true. You might be able to live perfectly well on 60% of that income. Conversely, you might be able to double up on saving and push your target retirement year to lower than 67.
Don’t just say “65 or 70” and hope for the best. Sit down and figure out your real retirement age target and, if necessary, kick up your savings rate a notch to make it happen.