There was a time when most people worked at the same company for 30 or 40 years and retired between 62 and 67.
In return for their years of service, they would receive a pension from the employer which, along with Social Security and perhaps a little money set aside, enabled them to live relatively comfortably in retirement.
This typical scenario dramatically changed when the financial responsibility of retirement began to shift from the employer to the employee.
Suddenly, employees were expected to contribute to a 401k or individual retirement account, and defined benefit plans such as pensions became rare and perhaps on their way to extinction in private business.
At the same time, the average life expectancy continued to increase, and many retirees found themselves spending more years in retirement.
Indeed, the entire landscape of paying for retirement has been transformed.
“We see a trend toward people retiring later because they aren’t financially ready to retire at the ‘traditional’ retirement age,” said Thomas Reardon, senior wealth adviser with RKL Wealth Management LLC in Wyomissing. “We’re also seeing more people retire from their current careers to pursue other passions. Others are working into their 70s because they’re still healthy and enjoy what they do.
“There’s even a slight trend toward the idea of retiring early – like the mid-50s – because as the economy recovers, people are feeling more comfortable with their savings and investments.”
So, what will your retirement look like, at what age can or should you retire, and how much money do you need?
If you can answer the following questions, you’ll be well on your way to finding out. (And whatever retirement looks like for you, your best bet is to begin planning and saving as early as possible.)
< What kind of lifestyle do I want to enjoy when I retire?
Financial experts emphasize the importance of deciding what kind of lifestyle you’ll want when you retire – both financially and emotionally.
For many, their careers have defined who they are, and retirement brings a loss of purpose. It’s important to think about how you will fill those free hours.
According to Sean Linder, financial adviser at Corbenic Partners in Hanover Township, Northampton County, people without this answer struggle the most with the transition to retirement.
< How much will that lifestyle cost?
People often underestimate their current living expenses, and many believe the common misconception that costs will decrease after retirement, according to William Velekei, financial adviser at Corbenic Partners.
The truth is that additional free time and better health often lead to more expenses in retirement. Many retirees travel more or take up a new hobby.
“People need to be brutally honest with themselves and take a hard look at their lifestyle and how their assets will support it,” Velekei said.
< What asset level do I need in order to generate enough income to support that lifestyle?
This is the $64,000 question. Or, perhaps it’s the $640,000 question.
Unfortunately, there is no secret formula and no one-size-fits-all answer. It depends on your goals, lifestyle and other factors – some beyond your control.
“Retirement at any age brings with it the need to make sure there are sufficient sources of income and/or sufficient savings to provide funds to support the lifestyle one wants to live,” said William Morgan, wealth adviser/advisory team leader with Buckingham Strategic Wealth in Wyomissing.
Because the stock market is inherently volatile, the more conservative you can be with your estimates, the less strain there will be on your assets to generate the income and return you need.
Long-term investors can withstand the vicissitudes of the market, but all that changes when you begin to rely on the interest from those investments to pay for daily living expenses.
“One of the main concerns, when we’re talking to folks who are looking to retire early, is the cost of health care or insurance in those interim years between, say 55 and 65, when they’re eligible for Medicare,” Reardon said. “It’s a driving force behind their decision.”
He suggested checking if your employer offers any health benefits to retirees.
“It comes down to how long you need these assets to last,” Linder said. “We focus on getting our clients to an asset level that generates [through a conservative growth rate and income] enough assets per year to live off of.
“The longer you can delay tapping into principal, the longer your assets are going to last you.”