There’s no universal retirement number where you can say goodbye to your job and head towards warmer weather without worrying about running out of money. While the average retirement age is generally 65 for men and 63 for women, according to the Center for Retirement Research at Boston College, this isn’t a magic number for everyone. Instead, your retirement age relies heavily on when you’ll get Social Security benefits, your expenses and how much you have saved in your nest egg.
The first step to determining when you can retire is figuring out when you become eligible for full Social Security retirement benefits. The Social Security Administration has a convenient retirement age calculator that can tell you what age you’ll become eligible for unreduced payments.
Although you can start collecting retirement benefits as early as age 62, your payments will be reduced. For example, if you were born in 1960 or later and retire at 62, you’d only receive 70% of the entire Social Security benefit amount. At age 65, you may get 86.7%, but if you wait until age 67, you will get the full amount.
Your retirement age can vary for many reasons, including health, job availability and simply whether you can afford to stop working. When determining when you should retire, consider how much you’ll need to support yourself in retirement.
There are two primary ways to calculate how much money you’ll need to retire:
Based on income
The income method is a straightforward way to calculate how much you need to retire. Take your current income and multiply it by 10, according to Fidelity Investments. For example, someone who makes $60,000 a year may need to save $600,000 to retire at age 67, whereas someone accustomed to making $80,000 a year might need $800,000 to retire.
A few fundamental assumptions for this calculation include:
Based on expenses
The expense method is a bit more labor-intensive. Your retirement number is based on covering your expenses in retirement. Here’s how to calculate your retirement number:
This calculation uses the 4% withdrawal method. That means that for the first year of retirement, you’ll withdraw 4% of your retirement nest egg. Every year after that, you should adjust for inflation. Some financial planners prefer using a more conservative 3%, while others, like retired financial advisor William Bengen, advocate for 4.5% or 5%.
Suppose you have a $300,000 retirement nest egg. The 4% rule says that you’ll withdraw $12,000 in your first year of retirement, giving you $1,000 per month, on top of Social Security and other income sources.
If inflation in that first year were 2%, you’d multiply $12,000 (your initial withdrawal) by 1.03 to determine your withdrawal for the next year, accounting for inflation. So you’d withdraw $12,360 for year two. And if inflation in year two is 3%, you’d multiply $12,360 by 1.03 and withdraw $12,730.80 for year three.
Aside from your savings, other factors that may speed up or delay your retirement include:
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Calculating your retirement number is a good start for tracking where you are with your retirement goals and how much you’ll need to leave your job. Fortunately, it’s never too late to dive into retirement plans to start saving for the future.
When should I hire a financial planner?
You might want to hire a financial advisor when you’re five to 10 years away from retirement. A financial planner can help you:
How do I account for inflation in retirement?
When you include inflation in your retirement withdrawals, you’d need more money than you did in the previous year. In other words, after your first year of retirement, you should check the average inflation rate of that year and multiply it by your last year’s withdrawal amount. This is the extra amount that you’d need to account for inflation.
For example, suppose you withdrew $15,000 for your year one. Since the inflation rate for the last 12 months is about 1.4%, you’d need to add $210 ($15,000 x 0.014) to your initial withdrawal. So your total withdrawal for year two would be $15,210 ($15,000 + $210) after accounting for inflation.
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