For parents with young children or those just thinking about starting a family, retirement is not on most radar screens as a near-term goal. However, you probably want to retire someday. By what age can you retire? If you do not know the answer to this question, read on.
Unless you plan to buy a castle or private jet in your lifetime, retirement is pretty much everyone’s largest financial goal. Surprisingly, the majority of people have not run even a basic retirement needs analysis.
In order to find out by what age you can retire and whether you are on track, you need to know several pieces of information and make some assumptions.
Here are the questions for you to answer:
1. How much do you currently have saved for retirement?
2. What is your current age?
3. When do you want to retire? Some people say tomorrow and others cannot imagine not working. For our generation, the social security retirement age is 67.
4. How long do you think you will live? This is a tough one. Most likely, we will live longer than our parents and grandparents. I like to plan on at least 92 for my clients, depending on their family history.
5. What do you think your monthly expenses will be in retirement? Ideally, your mortgage will be paid off and your kids financially independent. But, you may also want to travel and really enjoy retirement.
The Assumptions (there are a lot, but her are a few of the big ones):
1. Your retirement investments will grow between 6-8%.
2. Inflation will average 3% per year.
3. You will consistently contribute $34,000 per year for retirement. The maximum pre-tax contribution to a 401(k) or 403(b) is $17,000 for 2012 for each employee.
Here is an example for you to consider. A couple in their early forties has approximately $400,000 already saved for retirement between their 401k’s and IRA’s. They contribute $17,000 each to their 401k’s and have a diversified investment portfolio they expect to earn 8% until they retire. They plan to have their house paid off by the time they retire, so they estimate their monthly income need at $8,000 in retirement. They have great longevity and expect to live until 95 years old.
Can they retire by age 62? Unfortunately, NO they cannot. They would need to save $62,000 per year to retire by age 62, not $34,000. However, they are on track to retire by age 66.
For those of you fortunate enough to expect an inheritance some day, how much would this couple need to inherit today to fully fund their retirement and retire at 62? They would need a cool $1million to add to their retirement savings today and know that they can retire at 62 without saving another penny for retirement.
There are a lot of numbers to consider when calculating your retirement need, but the most important number is how much you are saving each year for this enormous financial goal. This is fully within your control! If the answer is “not enough”, then you need to look at your cash flow and see if you can increase your annual savings goal or know that you will be working much longer. Making positive changes today will significantly impact your ability to retire.
How to find out When you can Retire
If you would like help finding out when you can retire, there are some good online calculators to help you (CNN Money http://bit.ly/lQzsY or AARP http://aarp.us/bCILtk). If you want customized help consult with a financial planner that specializes in your stage of life. Do not let another year go by without knowing whether you are on track for retirement.
Katy Song, CFP, focuses on comprehensive financial planning for families with young children and couples starting their lives together. You can contact Katy at katy@katysong.com , visit her website katysong.com, or follow her on twitter @katydavissong.
