Retirement is a dream for many American workers, most commonly envisioned around ages 65, 66 or 67, when they are eligible for Medicare and Social Security benefits. But a 2023 survey conducted by NerdWallet and The Harris Poll revealed that three in 10 Americans say their plans have changed in the last 12 months. Some Americans (16%) plan to retire later than they originally envisioned, while others (11%) say they will check out earlier.
For Americans who have not already retired, their anticipated retirement age is now age 57 — nearly a decade earlier than the common retirement experience.
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These sooner-rather-than-later attitudes about retirement also come at a time when the graying of America is also considered a megatrend. For example, the population percentage share of Americans over age 65 doubled in size from 8% in 1950 to 16.9% in 2020, according to data from Statista.
Statista also estimates that the number of older Americans will represent more than 20% of the U.S. population by 2030, and 22% by 2050. Plus, according to demographers from the U.S. Census Bureau, the number of centenarians is projected to grow to 130,000 by 2030 — and to exceed 603,000 by 2060.
So, for American workers who want to retire early — or on time — and extend the life of their savings and other financial resources throughout what could be a long retirement period, what are some practical ways to plan for these important priorities? Here are three strategies to consider:
— Determine your retirement income.
— Calculate how much you’ll need.
— Spend wisely in retirement.
Determine Your Retirement Income
While spending needs in retirement can vary based on personal expenses, a reasonable goal is to save enough to replace 60% to 80% of your pre-retirement salary. So, for example, let’s assume Mary, age 37, has an annual income of $80,000, and anticipates she’ll receive an annual salary adjustment of 2% until her retirement at age 57. If Mary aims to replace 70% of her pre-retirement pay, she’ll need to save enough to support $81,581 in annual, after-tax spending needs in retirement.
The U.S. Department of Labor’s “Savings Fitness” retirement worksheet can help you determine whether you are on track with your retirement savings goals.
If you recently launched your career, Fidelity suggests setting incremental goals of saving one times your current salary by age 30 and three times your salary by age 40. The retirement savings goal includes your personal contributions to your workplace retirement plan, any employer contributions to your plan, plus any investment earnings you may receive over time.
Calculate How Much You’ll Need
Let’s continue with Mary’s aspiration to retire early at age 57. How much will she need to replace 70% of her pre-retirement income throughout her retirement of 35 years? Mary has a current 401(k) balance of $100,000, contributes $12,000 annually (adjusted by 2% each year) to her plan and estimates her investments will earn an average of 7% annually over the next 20 years. If Mary includes her estimated, annual Social Security benefit of $32,705, beginning at age 62, then Mary’s ballpark savings goal is close to $1 million. To reach her goal, Mary will likely need to bump up her savings rate to at least $12,800 annually.
These are rough estimates, and do not include other important variables, like relocation after retirement, out-of-pocket medical expenses and long-term care expenses. For example, Fidelity’s 2023 Retiree Health Care Cost Estimate revealed that a single person, age 65 in 2023, will need about $157,500 in after-tax savings to cover health care costs in retirement; retired couples, age 65, will need nearly $315,000 for health care expenses. Fidelity’s estimates do not include long-term care expenses, which, according to data from Genworth, range from a national average of $108,405 annually for a private room to $61,776 annually for home-health aide.
[READ: Types of Fixed-Income Investments.]
Spend Wisely in Retirement
A common rule of thumb for retirement spending is to pattern it around portfolio withdrawals of about 4% annually. William P. Bengen first mentioned the 4% rule in his 1994 Journal of Financial Planning article, “Determining Withdrawal Rates Using Historical Data,” in reference to a relatively safe method to pull money from a balanced portfolio of bonds and stocks over a 30-year period.
While investors and financial planners alike have warmly embraced the 4% rule since 1994, it was never intended to address every type of scenario in retirement. For starters, Bengen’s 4% rule was originally developed for the classic retirement ages, between 62 and 65. Even Bengen has since revised the 4% rule to include factors, such as small-cap stocks and periods of low inflation, that would potentially allow investors to safely withdraw more than 4%.
Vanguard’s research on sustainable withdrawal rates also suggests that a variety of variables, like giving priorities (or bequests), depletion (or risk tolerance) and asset allocation, play a vital role in retirement.
“What many might find surprising is that, among the three factors considered in our study, asset allocation will likely have the least impact on moving the dial when it comes to the sustainable withdrawal rate (SWR),” says Vanguard’s Kevin Khang, coauthor of the 2022 paper “Sustainable Withdrawal Rates in Retirement: The Importance of Customization.”
Khang adds, “Vanguard’s research found that both desired bequest levels and portfolio depletion risk are bigger factors in determining the SWR than asset allocation. We see SWRs approaching or exceeding the old 4% rule only in our most optimistic investment scenario and for the more risk-tolerant retirees with no desire to leave a bequest. It illustrates the need for customization for each investor. Relying on old rules of thumb could mean prematurely depleting the portfolio.”
Perhaps customization is the key to retiring with confidence at almost any age. Customization integrates a deep dive into what matters most to someone who is contemplating retirement:
— What is the money for in retirement?
— What circumstances shape how confident you would feel about retirement at any age?
— What do you want to do with your time in retirement?
— Where would you like to live, and what are some places you would like to visit?
— With whom do you want to spend your time in retirement?
— To what extent do you want to support loved ones or charitable causes?
It’s these types of questions that can help investors plan well for what will likely be a lengthy retirement period.
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How to Save and Invest for a Long Retirement originally appeared on usnews.com
Update 06/26/23: This story was previously published at an earlier date and has been updated with new information.
