Retirement is a major life transition, and it's important to be financially prepared for it. But with so many factors to consider, it can be difficult to know when the right time to retire might be. And that uncertainty is causing major stress for Americans today.
According to a recent study by BlackRock, 62% of Americans say that inflation and market volatility have had a negative impact on their retirement planning. In fact, just 56% of Americans stated they are on track to retire with the lifestyle they desire, according to the survey. That's down from 68% just two years ago - and it means 44% of us have some work to do towards our ideal retirement.
While there are many factors at play in deciding your ideal retirement age, addressing each of them individually is the first step to start reducing your stress and planning for the retirement lifestyle of your dreams.
Take hold of your finances
The first step to finding your perfect retirement age is to assess your financial preparedness. Unfortunately, there's no single round number that Americans should aim for when it comes to retirement. Right now, Americans estimate they'll need around $1.27 million on average to retire comfortably, according to Northwestern Mutual's 2023 Planning & Progress Study. That's an increase from $1.25 million just one year ago.
Accordingly, Americans are starting to stash away more money in their retirement accounts. The average adult's retirement savings increased by 3% year-over-year in 2023 to $89,300, according to the Northwestern study.
To bring some cold, hard numbers to your own planning process, look at your expenses and consider how these might change in retirement. Collect all current expenses from bank statements and credit cards, and calculate how much you're spending each month to paint a clear picture of your monthly payments. Then, put them into categories, and identify changes that are likely to occur during retirement.
For example, a mortgage might be paid off, or commuting costs could decrease. You may also have more costs in areas such as travel or healthcare. From there, account for inflation, which on average increases 2% to 3% each year. Then, multiply your results by each year you plan on working until you reach retirement to create a broad starting goal.
Once you've logged your expenses, look at how much you've saved, along with your investment earnings, to calculate whether you're on track.
Factor in additional help
So, you've tracked your savings and expenses and created a broad goal - but now realize you might come up short. The next step then is to calculate how other sources of retirement income might bridge the gap.
Social Security benefits provide financial assistance to retirees, but also to people with disabilities and their families. Social Security benefits depend on several factors, such as your earnings history, and when you start taking them out. Americans taking out Social Security earlier may end up with less money over time, which is why it's important to calculate your Full Retirement Age (FRA) using the program's benefits calculator. For instance, if you were born in 1956 and start claiming benefits at age 62, you'll only receive 73.3% of the benefit amount over time, rather than the 100% payout eligibility achieved for those who wait until the FRA of 66 years + 4 months.
Employee-sponsored pension plans can also aid in retirement, providing a significant source of income. However, these pensions have become less common over the years, having been largely replaced by 401(k) plans. Even still, companies can choose to match employee contributions on a partial basis, according to the Internal Revenue Service (IRS), so it's important to discuss these options with your employer.
Finally, annuities can be another source of income, provided by guaranteed income payments for a specific period of time. As you get closer to retirement and wish to protect your earnings, this is an excellent option to invest in.
What will life look like?
Now that you've sourced all your current spending and all your future income, it's time to figure out what your lifestyle could look like in retirement. While this might ideally include more golf and travel, it could also reasonably mean more healthcare costs. These costs vary widely depending on where you live, your family health history, and your retirement plans.
Some of these expenses can be planned and saved for now - for example, by investing in health insurance and staying healthy, or putting more money aside for travel. On the other hand, some of these expenses are bound to be unexpected.
This is why, along with having a savings goal in mind for retirement, Americans should also have an emergency savings goal. That way, should a sudden healthcare emergency occur, you won't have to dip into retirement savings. During retirement, this emergency fund will also help should you need cash right away to fix a broken engine, or repair a flooded basement. Emergency funds should include between three to six months of your current salary, so make sure to adjust this figure appropriately as the years go on.
If health is a concern based on current or family health history, retiring earlier than planned might be a good decision, too. In this case, talk to your doctor in addition to a financial planner. A doctor can help you stay on top of your health to live not only a longer, but more enjoyable, retirement.
Putting basic retirement strategies to work
One more obvious strategy is to delay retirement as long as possible. This gives you more time to save and invest, and also increases your Social Security benefits. However, these benefits do not increase any further after age 70, so that's a reasonable limit on a delayed retirement goal.
If 70 seems too long, another option is to phase out from your current job, or consider part-time employment. This can help bridge the gap between your working years and retirement, and can even be a chance to pursue passion projects to earn income.
Americans who still want to retire as young as possible will likely need to make trade-offs, especially if they plan on living a long life. For example, retirees who don't travel, downsize their home, and move to an area with a lower tax rate and cost of living may be able to retire earlier than a prospective retiree who travels each year and lives in California.
As you can see, retirement comes down to individual situations. Yet there are some basic strategies just about everyone can use to help calculate and save toward your ideal level of savings for retirement.
Now that you've collected all of this information, you're ready to create a retirement plan. This can be done online through programs such as Betterment and Empower.
Even after creating a plan of your own, it's a good idea to speak with a financial professional who can help assess your situation and fine-tune your strategy even further. In any case, early retirement planning is key to minimizing stress, and consistent saving and investing will certainly help on the way to reaching your goals.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
