Whether you’re in your 30s or 50s, you have probably wondered about when you can retire. And no matter what age you choose, you’ll want to live the retirement of your dreams.
Getting to that place takes preparation. Before you make the final call, ask yourself these three questions.
1. How much have you already saved?
Before you can determine if you can retire, you should assess how much you already have saved and if you’re on track to save enough. There are some general rules of thumb, like having a year’s salary saved by the time you are 30, three times that figure by 40, and six times your annual income by 50. But these suggestions don’t take into account specifics like whether you’ll have guaranteed income sources in retirement or what the cost of living is where you plan on retiring.
A calculator will give you a more focused idea of how much you’ll need. Consider things like how much of your income you plan on replacing and inflation, and then figure out a number you can aim for. You can then subtract how much you’ve already saved and come up with an annual savings goal.
2. How much are you saving annually?
If you’re 40 years old, have $200,000 saved, and determine that you’ll need $500,000, you’ll need to accumulate $300,000 more by retirement. You could feasibly retire by age 65 by saving $12,000 a year if you don’t invested that money. But investing can help achieve this goal with even less money saved each year.
For example, if you can only save $5,000 a year for 25 years and earn an average annual return of 6.5%, your account could grow to more than $313,000 in 25 years, helping you reach your goal.
Starting to save early gives you the benefit of time, and when you factor in compound interest, it can help your money grow exponentially. But one advantage you may have if you start saving later in life is that you are making more money. This can allow you to save more each year and help catch up for the years you lost. If you’re 40 and have nothing saved for retirement, saving $8,000 a year instead of $5,000 — while earning the same 6.5% average return — could get you to the same $500,000 saved at age 65.
3. What’s your expected rate of return?
The rate of return on your investments will determine what you wind up with, and is driven by your asset allocation, which should be chosen based on your appetite for risk. Stocks are considered riskier than bonds, but the more you have of them in your portfolio, the higher rate of return you can expect if you invest wisely.
Between the years of 2001 and 2020, a portfolio consisting entirely of bonds would’ve earned you 4.88% on average every year. If you owned 100% large-cap stocks, you would’ve earned 9.1%. A 50% blend of the two investment classes would’ve earned you 7%.
Even though these rates of return only differ by a few percentage points, how they impact your account growth is substantial. If you contribute $10,000 a year to a retirement account for 20 years with a 4.88% average annual return, your account could grow to more than $342,000. If you earned 7% on average, your money could grow to almost $439,000; and with a 9.1% return, you would have over $564,000.
You can arbitrarily set a retirement date, but if you want a comfortable retirement without financial stress, plan before picking a date. If you are off target and some small tweaks are needed, you will have plenty of time to get on track.