Younger Americans like the idea of retiring relatively early, in fact, when Bankrate asked millennials, which it defined as Americans ages 18 to 37, what the perfect time to retire would be, they said 61 years old.
They tend to be optimistic about reaching that goal, too: According to research from Charles Schwab, which surveyed 2,000 Americans aged 16 to 25, they expect to retire, on average, at age 60. That’s “seven years earlier than full Social Security benefit eligibility for their age bracket,” the report notes.
But are they actually preparing to settle down on the sooner side? CNBC Make It turned to Fidelity, the nation’s largest retirement-plan provider, for the numbers.
As of the second quarter of 2018, millennials — which Fidelity defined as those ages 21 to 37 — with 401(k)s had an average balance of $25,500 and were contributing 7.3 percent of their paychecks. Fidelity also found that employers were matching, on average, 4.1 percent, which put the total savings rate for millennials with 401(k)s at 11.3 percent.
While younger adults are saving more today than they were five years ago — in 2013, millennials with 401(k)s had an average balance of $13,100 and were contributing 5.9 percent of their paychecks — many of them are not on track to retire in their 60s.
Keep in mind that the numbers from Fidelity represent young people who are saving in the first place: Roughly two-thirds of millennials have nothing saved for the future at all.
As a millennial or a young person, this article will provide you with everything you need to know about 401(k).
How much should a Millennial save for Retirement?
How much should a Millennial save for Retirement: The Actual Calculation
How long will 500k last in Retirement?
What age will Millennials Retire?
How Millennial can Achieve Early Retirement
How much should a Millennial save for Retirement?
401k plans are one of the most common investment vehicles that Americans use to save for retirement. For most of us, the 401k is an employer-sponsored plan that allows you to save for retirement in a tax-sheltered way (up to $19,500 per year in 2020) to help maximize your retirement dollars.
Read Also: Can I Roll over my 401(k) from a Previous Job?
If your employer offers a 401k and you are not utilizing it, you may be leaving money on the table – especially if your employer matches your contributions. While the 401k is one of the best available retirement saving options for many people, only 32% of Americans are investing in one, according to the U.S. Census Bureau (as of 2017). That is staggering given the number of employees who have access to one (59% of Americans).
We are constantly being reminded that there is a retirement crisis in America — according to a Personal Capital-sponsored study conducted by ORC International, nearly two in five (37%) pre-retirees have no money saved for retirement. While a majority of Americans (63%) with full-time or part-time employment participate in an employer-sponsored retirement program, just 21% max it out.
So, what does this mean in terms of how much people actually have saved in their 401k plans, and how does this stack up against what they could have saved if they were maxing out their 401k’s every year?
401k Savings Potential by Age
The following chart depicts 401k savings potential by age, based on several assumptions. So this is how much you could have saved. While these numbers can seem high to many people (especially if you are older and started your retirement savings when the contribution limit was much lower,) it can be used as a guide for your target total retirement savings amounts, including your IRA, Roth IRA, and after-tax savings.
While it’s designed for one person, it can also be used as a guide for a married couple if one spouse decides to no longer work.
The assumptions we used for this chart include:
- The numbers are more forward-looking vs. backward, since 401k contribution limits were lower in the past (in fact, this year, the limit was raised $500 from 2019).
- You start full-time employment at age 22 at a company that provides a 401k, without a company match.
- You contribute $8,000 to your 401k after the first year, then from the second year onward, you contribute the maximum annual amount of $19,500.
- The “No Growth” column shows what you could potentially have in your 401k after so many years of a constant $19,500-per-year contribution and no growth.
- The “8% Growth”* column shows what you could potentially have in your 401k after so many years of a constant $19,500-per year contribution (ignoring catch-up contributions but those over age 50 can actually add an extra $6,000 per year into a 401k) compounded over the next 43 years.
- The difference between the two columns emphasizes the power of growth, compounding over time. By starting early and enjoying historically average returns, at age 65, an individual could turn $827,000 of contributions into over $6.6M dollars.
| AGE | YEARS WORKED | NO GROWTH | 8% GROWTH |
|---|---|---|---|
| 22 | 0 | $0 | $0 |
| 23 | 1 | $8,000.00 | $8,000.00 |
| 24 | 2 | $27,500.00 | $29,700.00 |
| 25 | 3 | $47,000.00 | $53,136.00 |
| 30 | 8 | $144,500.00 | $201,624.83 |
| 35 | 13 | $242,000.00 | $419,803.64 |
| 40 | 18 | $339,500.00 | $740,379.90 |
| 45 | 23 | $437,000.00 | $1,211,411.59 |
| 50 | 28 | $534,500.00 | $1,903,511.67 |
| 55 | 33 | $632,000.00 | $2,920,433.76 |
| 60 | 38 | $729,500.00 | $4,414,625.94 |
| 65 | 43 | $827,000.00 | $6,610,084.46 |
*Generally, financial planners say the expected rate of return for a 401k is between 8% and 10%.
So, how do you stack up? Are you on the high end? The low end? Do you think these numbers are realistic?
Breaking it Down: Where Do You Fit In?
There are many reasons you might think this chart seems totally reasonable, or, conversely, totally unreasonable. And that’s understandable. Life presents us all with different challenges – we have unexpected medical expenses, decide to go back to school, or have kids and want to pay their college tuitions. These are all perfectly valid excuses as to why you might be falling behind where this chart says you should, or could, be.
Based on this chart, you would think that most Americans should be retiring as multi-millionaires at age 65. This probably seems way off-base, and in reality, it is — most people retire with very little in the way of savings and investments. The point is that this chart shows what is possible if you are disciplined and strategic about your 401k savings.
If you are on the younger end of the ages shown on the chart, you may be daunted at the prospect of contributing $8,000 per year to your 401k, not to mention $19,500. Depending on where you live, what your first-year salary is, or whether you are paying off student loans can make it difficult for this contribution to seem realistic. It’s crucial, however, to recognize the importance of saving as much as you can for retirement as early as you can.
To illustrate why retirement saving should be a top priority in your monthly budget, let’s think about the implications of this chart for when you are 65 years old, you no longer want to save, and are about to retire. The question then becomes: “Do I have enough saved to retire comfortably?”
So, let’s determine, based on the two scenarios in the potential savings chart, whether these figures would be sufficient to support your lifestyle for the rest of your retirement.
The average life expectancy for men is around 84 years old, and 86.5 years old for women.
Let’s say you are retiring at age 65. If you take the numbers at the low and high end of the chart, then divide by 22 (the approximate number of years you might expect to live if you retire at 65), you get $37,590 on the low end to a whopping $300,458 on the high end, to spend annually for the rest of your life.
If you add maximum Social Security Benefits ($34,284 assuming you retire at age 65 in 2020), you may increase your take-home amount to $71,874 to $334,742 per year.
$71,874 may seem like quite a bit, but remember, inflation can throw a wrench into this and make your money less valuable in the future. Also, Social Security benefits may decrease or be gone altogether by the time Millennials and Gen-Zers retire.
Assumptions vs. Reality: The Actual 401k Balance by Age
Hopefully, you find yourself somewhere on the “potential savings” chart, but if you don’t, you are not alone. Take a look at this chart showing the actual estimated average 401k balance by age. Let’s start with the latest numbers from Vanguard, one of the largest 401k plan administrators in the country.
| AGE | AVERAGE 401K BALANCE | MEDIAN 401K BALANCE |
|---|---|---|
| 22-25 | $4,236 | $1,427 |
| 25-34 | $21,970 | $8,126 |
| 35-44 | $61,238 | $22,123 |
| 45-54 | $115,497 | $40,243 |
| 55-64 | $171,623 | $61,739 |
| 65+ | $192,877 | $58,035 |
Source: https://pressroom.vanguard.com/nonindexed/Research-How-America-Saves-2019-Report.pdf
The average Personal Capital user* is ahead of the curve when it comes to 401k savings, but they too fall below the projected savings chart:
| AGE | AVERAGE 401K BALANCE | MEDIAN 401K BALANCE |
|---|---|---|
| 22-24 | $20,498 | $11,685 |
| 25-34 | $77,130 | $47,194 |
| 35-44 | $197,956 | $121,352 |
| 45-54 | $371,322 | $220,188 |
| 55-64 | $496,853 | $292,208 |
| 65+ | $422,960 | $165,740 |
*Note: Averages are rounded up to the nearest dollar. Numbers are based on aggregated and anonymous data from the Personal Capital dashboard. Methodolgy: Accounts included are the following: 401k, former employer, roth 401k. Excludes test and invalid accounts. Excludes any account value greater than $100,000,000 or less than -$100,000,00. Excludes spouse accounts. Snapshotted balance as of 1/31/2020.
Average 401k Balance at Age 22-24 – $20,498; Median – $11,685
The average 401k balance at age 22-24 is $20,498. This is actually pretty impressive, and indicates that young people using the Personal Capital dashboard are taking their retirement savings seriously. When you’re in your early 20’s, if you’ve paid down any high-interest debt, endeavor to save as much as you can into your 401k. The earlier you start, the better. As you can see from the potential savings chart, compounding interest is no joke!
Average 401k Balance at Age 25-34 – $77,130; Median $47,194
When you’re in your late 20’s and early 30’s, this is the time to make sure you are aggressively paying down any non-mortgage debt. If you still have high-interest debt, you may be earning 8% in your retirement account, but might be paying 20% or more in credit card interest.
Average 401k Balance at Age 35-44 – $197,956; Median $121,352
If you haven’t already started to max out your 401k by this age, then really start thinking about what changes you can make to get as close as possible to that $19,500 per year contribution. You don’t want to lose out on years of compounding interest!
Average 401k Balance at Age 45-54 – $371,322; Median $220,188
When you hit your 50’s, you become eligible to make larger contributions towards retirement accounts. These are called “catch-up contributions” – make sure that you take advantage of them! Catch-up contributions are $6,500 in 2020. So if you contribute the annual limit of $19,500 plus your catch-up contribution of $6,500, that’s a total of $26,000 tax-deferred dollars you could be saving towards your retirement.
Average 401k Balance at Age 55-64 – $496,853; Median – $292,208
By your late 50’s or early 60’s, you should have a better idea of what retirement could look like for you and what it really means for you to be “retired”. Do you want to keep working as long as you can? Would you like to slow down? What are your Social Security benefits and when is the optimal age to start taking them? Are you eligible for spousal or survivor benefits?
Average 401k Balance at Age 65+ – $422,960; Median – $165,740
The most common age to retire in the U.S. is 62, so it’s not surprising to see the average and median 401k balance figures start to decline after age 65. Once you reach age 65, there are still several considerations for your retirement, even if you are no longer working and accumulating wealth.
Some of these include making decisions about Medicare, creating a plan around withdrawing money from your retirement accounts, and evaluating any additional insurance needs.
How much should a Millennial save for Retirement: The Actual Calculation
You may have heard that you need to save $1 million over the course of your lifetime to retire comfortably. But it can be confusing to know how much that means you need to be saving right now.
Financial analysts at Blacktower Financial Management Group did the math for you, and it turns out that you can probably squeak by with a little over a third of that $1 million benchmark saved if you invest it well.
Blacktower calculates that the average person will need to put away $386,100 of their own money over their lifetime to retire at 67, assuming you want an annual income of about $35,100 in retirement, which is just under 75% of the national median income of $48,700, according to the Bureau of Labor Statistics. Depending on how you invest that money, it could last up to 50 years.
To reach a total of $386,100 by 67, the youngest millennials (age 24) need to have $8,775 already set aside, while the oldest millennials (age 39)should have about $140,400 stashed away in retirement savings. Here’s a breakdown by age:
Doing the Calculation on retirement savings
Blacktower’s calculations assume you’ll earn an average return of about 6%. To get to that number, Blacktower notes that the average annual return of the S&P 500 Index is historically at around 10% and takes into account the adjusted 2.25% of long term inflation.
While the data shows that the average real return would consequently sit at 7.75%, Blacktower’s analysts would conservatively average this down to a target rate of 6% per year to account for market fluctuations.
That means if you start saving $8,775 a year, or about $730 a month, in a retirement account like a 401(k) over the course of the next 44 years, that $386,100 in savings will grow to over $1.7 million thanks to compound interest. Again, that’s assuming you earn about a 6% rate of return. With that kind of savings, you’ll have enough for about 50 years of retirement.
If you set aside that same $730 a month in a savings account paying 1% interest, you’ll earn less and only have about 13.7 years before the money runs out. And if you stick your savings under a mattress, which is not recommended, you’ll likely run out of money by 78, which is roughly the average life expectancy, according to the current estimate from the Centers for Disease Control and Prevention.
Yet whether or not $35,100 a year will buy you a comfortable retirement is also up for debate. In addition to any personal retirement savings, the average Social Security retirement benefit is currently about $1,470 a month, or about $17,640 a year, according to the Center on Budget and Policy Priorities.
However, the typical American spent about $3,900 a month last year on basics such as food, housing, utilities, transportation and health care, according to the latest consumer spending data from the Bureau of Labor Statistics. That adds up to about $46,800 a year, which means that there’s not a lot of room for luxuries, such as travel, if you’re trying to stick to a $35,100 budget plus Social Security.
How long will 500k last in Retirement?
If you’re like many adults, the thought of taking early retirement (could you retire at 45?) has probably crossed your mind at least once or twice. For most of us, it’s simply not an option as the financial ramifications are complicated (not to mention those dependent children who seem to need to go to college).
Still, we sometimes hear about friends, family members or complete strangers who decided to clock out early and gamble that they’ll be able to make ends meet for the next several (or more) decades. Here’s a quick look to see if it’s possible to retire on $500K if you are 45 years old.
“Retire at 45 with $500,000” and the 4% Rule
The “four percent rule”—a widely accepted financial rule of thumb—states that your savings should last through 30 years of retirement if you withdraw 4% of your nest egg during the first year of retirement and then adjust each year thereafter for inflation.
To figure out how big a nest egg you’ll need, you have to match that 4% to your anticipated expenses. If you plan to live on $30,000 each year, for example, you’ll need $750K socked away. If your expenses will be $40,000,you’ll need $1 million—and so forth.
If you have $500K, the math comes out to $20,000 a year, assuming a 4% withdrawal strategy. But remember, the 4% rule doesn’t work for an indefinite amount of time. It’s intended to see you through 30 years of retirement, which if you are in good health will not be enough if you retire at 45. Retiring on $500K at age 55 may give you a better outcome financially.
Reality Check
Whether or not you could live (and be happy) on $20,000 depends on your lifestyle preferences and situation. If you stick to 4%, you’re looking at about $385 a week or about $1,667 a month—which isn’t a lot. And there are those who think that in the current environment, 4% may be too generous.
But for now, let’s work with that budget and see what would help you manage on that amount. It will be easier if you:
- Already own your home free and clear (no mortgage)
- Don’t have college expenses coming up (you don’t have kids, they’ve already graduated, they’ll qualify for full scholarships, or you’ve already set money aside in a college savings plan)
- Are healthy now and are really proactive about staying that way (eating well, getting enough exercise, getting enough sleep, etc.)
- Are content to live frugally
- Are willing to think outside the box and try a different approach
Out-of-the-Box Options
There are ways to lower your monthly living expenses if you’re willing to go that route. One option: Retire abroad in a destination that offers a change of scenery, new experiences, access to affordable health care, and—the big one—a lower cost of living. It’s possible for a couple to live comfortably in Ecuador, including rent, for example, at about $1,500 per month.
According to the Annual Global Retirement Index for 2020, Mexico, Panama, and Costa Rica, all offer affordable options for retirees.
Another option: If you already own a home, you could sell it and add the proceeds to your savings. You would then have the option to rent, buy a smaller home, live abroad, or even buy an RV and travel the U.S. (some people get free rent at a campground in exchange for being a “host”).
Social Security Kicks In
At some point, Social Security will kick in. For anyone born in 1960 or later, the normal retirement age—the age at which you are entitled to full Social Security benefits—is 67. You can start taking benefits as early as age 62, but your monthly benefit will be reduced by about 30%. The longer you wait to start, the more you’ll receive each month. You can delay your retirement benefits until age 70 for an even larger monthly benefit.
If you can stretch your $500K in savings until then, your Social Security benefits will kick in and provide a welcome monthly cash infusion. Be sure, by the way, that you have worked enough quarters to qualify for Social Security.
“If you invest at an average return of 7% per year (not too big an “if”), your money will double every ten years. Therefore, if you have $500,000 at age 45, you can have $2 million at age 65 if you leave it alone. Why not work longer so you can enjoy life more?
If you are going to live for 40 years or so (after retirement at 45) you might get awfully bored if you are not gainfully employed. And if you are living off savings that must last 45 years, your lifestyle will never get more opulent,” says John R. Frye, CFA, chief investment officer, Crane Asset Management, LLC, Beverly Hills, California.
What age will Millennials Retire?
For generations, early retirement has been a dream among Americans, but for millennials, it’s less of a lighthearted fantasy than it is a set goal. According to a recent T.Rowe Price survey, 43 percent of millennials expect to retire before the age of 65, while a Bankrate survey found that millennials cited age 61 as the ideal age to bid adieu to their careers.
Retiring a few years before your retirement benefits kick-off doesn’t sound like that big of a deal, until you consider the odds American millennials have stacked against them. A study by NerdWallet found that because of factors such as rising rents and student loan debt, the graduating college class of 2015 won’t be able to retire until the age of 75 — two years later than those who graduated in 2013.
Despite these and other dismal findings (like FinanceBuzz’s survey showing just what people are willing to sacrifice for early retirement — everything from books to coffee to their own pets), retiring early isn’t an unattainable goal, and you can take concrete steps to make it happen.
“To retire early is a matter of math and making it work to your advantage,” says Riley Adams, CPA, who runs the personal finance blog Young and The Invested. “In the past, many espoused the notion of saving 10 percent of your paycheck and retirement would take care of itself.
This future state relies on the presence of entitlements being available in their current form, which is not a certainty for millennials like it is for baby boomers or Gen Xers. As such, to retire early, millennials [must] take retirement planning more into their own hands and elevate their preparation.”
How Millennial can Achieve Early Retirement
Get strategic about paying down student debt
Facing down student loan debt can be daunting, but it’s imperative to pay it off strategically.
“The best thing that graduates can do is to be strategic about making regular payments against their loans, paying off higher-interest debt first (and being wary of refinancing that offers a variable rate, which may increase in the future),” says Rick Wholey, CFP, managing director at Baird. “Also, remember that in some cases, student loan interest is tax deductible.”
Don’t skimp on your 401(k) contributions
So how do you elevate your preparation? For starters, you need to be dumping as much money as you can into your 401(k) plan.
Jason Alderson, CFP, wealth manager at Elbert Capital Management, suggests that too often, millennials are “leaving money on the table” by neglecting to take full advantage of their company’s 401(k) plan.
“I often find that many millennials are goal driven but in a sequential manner,” says Alderson. “Many skip making 401(k) contributions that are eligible for matching because another goal has been prioritized above 401(k) contributions and has not yet been completed. Over time, that adds up to a large amount of money that could have been used to make up a potential deficit.”
You can work out how much you should be putting into your 401(k) by using calculators like this one from NerdWallet, but generally, financial planners recommend putting in at least 10 percent.
Invest in a diversified portfolio of small stocks
“Invest in a diversified portfolio of small stocks,” says Dr. Robert R. Johnson, CFA, CAIA, chairman and CEO of Economic Index Associates and professor of finance, Heider College of Business, Creighton University. “The easiest way to do this is to invest in an ETF (exchange-traded fund) with the Russell 2000 [(a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index)] as a benchmark.
Since 1926, according to Ibbotson Associates, the compound annual rate of return of a diversified portfolio of large stocks (the S&P 500) was 10 percent. Investing in a diversified basket of small stocks provides even greater returns.
The compound annual rate of return of a basket of small stocks over that 93-year period according to Ibbotson Associates was 11.8 percent, [which] may not sound like much, but over the long term a small return advantage can have a huge ending wealth difference.”
Small stock indices (or performance) tend to be more volatile than large stock indices, Johnson notes, “but millennials have the distinct advantage of having a long-term time horizon and being able to ride out that volatility and take advantage of compounding.”
Get a Roth IRA
Regardless of whether you have a 401(k), millennials should also opt into a Roth IRA, which allows them to set aside $5500 of their annual income.
“Roth IRAs are very popular accounts with millennials, and the appeal makes sense: Pay taxes now on contributions and don’t pay taxes on any of the growth taken through qualified withdrawals during retirement,” says Derek Brainard, AFC, CRPC, director of financial education at the AccessLex Center for Education and Financial Capability.
“What many millennials don’t realize is that Roth IRAs have a back-up feature that distinguishes them from other types of retirement accounts. You can withdraw your contributions from your Roth IRA at any time (even before age 59 ½) without penalty, as long as the value of your investments still equals at least what you put in.
This can be useful for investors who need to access their funds before 59 ½, but remember, whatever principal you take out is no longer ‘working for you’ in the market.”
If it’s not a bill, pay it with cash
NBC News BETTER has previously explored how using a cash-only system can help people save money. Lauren Mochizuki, 34, a nurse and creator of the budgeting blog Casamochi, swears by this method, noting that by doing away with credit cards, she and her husband have been able to tackle $266k in combined debt.
“Apart from a home and student loans, everything else you purchase should be paid with cash,” Mochizuki says. “If you don’t have the money to buy something, wait until you do, otherwise you will spend your life in a cycle of paying off your debt, and this will detract from your efforts to save for your retirement.”
Hire a certified financial planner; it can be a one time thing
Paying someone to help you save money can seem somewhat self-defeating, but a certified financial planner can walk you through the ins and outs of retirement planning and customize a system that works for you.
“A financial planner can help identify your goals and work with you to create a roadmap to achieving said goals,” says Alderson. “They can help you determine if your budget is in line and make sure that your investments are aligned with your actual risk tolerance.
Many think that financial planners and advisors are for the wealthy but changes in the industry have significantly brought down servicing costs allowing for planners to come up with new ways to charge for their services. ‘It’s too expensive’ is a comment that I hear frequently but with a goal of retiring early, millennials [often] can’t afford not to hire someone to help keep them on track.”
The costs of a financial planner’s services can vary widely, and how much you’re charged depends in part on your portfolio, as well as what sort of arrangement you set up.
Alderson finds that people who “like to DIY or manage their own investments” can benefit from a “Fee for Planning” arrangement, where the financial planner “typically charges a flat fee for a completed plan based on the complexity of the plan (anywhere from $1,000 to $10,000) or charges an hourly rate to complete the financial plan (typically between $250 to $350 per hour).”
In this scenario, “a plan is usually completed one time and then may be updated at certain intervals for an additional fee,” says Alderson.
If buying a house, consider a multi-family home you can rent out
If you’re saving to buy a house, you might want to save a bit longer to buy a multi-family home. Renting out spare space can reap big savings benefits.
“If you can purchase a multi-family as your permanent residence, your cost of living will be drastically cut by the nature of your tenants paying most of your mortgage,” says Stephen McGrath, a practice management assistant at Cross Coastal Advisors.
“This puts you in a position to either sell the property later to buy another home, or better yet, buy a different property and keep the multifamily as an income stream that will forever support you as long as you maintain the property and have tenants in it.”
Sandy Yong, author of “The Money Master: Inside Secrets On How to Make Your Money Grow and Stay Safe” also recommends becoming a landlord. If that’s not possible, or if you’re unsure as to whether you want the job of being a landlord, “consider listing a spare bedroom on Airbnb for travelers visiting your area This way, you can get a taste of what it will be like to be a host — and earn additional income,” Yong says.
Turn a side hustle into a nest egg
“Turn your side hustle into your retirement machine,” says Niko Finnigan, CFA, CAIA, a partner at Delta Wealth Advisor. “Before spending extra cash from a side hustle on yourself, use the funds to create your own retirement plan.
If you own your own side hustle company, you can fund a SIMPLE IRA [(a Savings Incentive Match Plan for Employees Individual Retirement Account)], with up to $13,000 in 2019. Best of all, you can do this contribution in addition to your 401(k) contributions through your daytime job.”
Fully funding both a 401(k) and SIMPLE IRA can result in a nearly 70 percent increase in annual retirement savings rate, Finnigan adds.
Start your own blog or YouTube channel
“Developing other income streams are vitally important. Not being solely dependent on the stock market is key to success,” says McGrath. “This also could entail seeking equity is smaller start-up companies by contributing your time and skill set as an advisor (if possible). Again, small income stream for a short time investment.
Start your own blog or YouTube channel, contribute regularly to it (on a topic you love) and you should see slow growth to the point where you can generate revenue from advertising. The more options you can create for yourself the better you will be in the long run.”
Don’t overlook Social Security
Research from TransAmerica Center for Retirement Studies, found that 80 percent of millennials are worried that social security won’t be there by the time they retire. It’s a valid concern, but financial planners don’t think you should entirely rule SS benefits out.
Read Also: Should you Convert your Traditional IRA or 401(k) to a Roth IRA?
“While there will likely be changes to the system before you retire, you need to consider it in your plan,” says Dr. Brandon Renfro, CFP, a financial advisor and assistant professor of finance at East Texas Baptist University.
“Something you can do now is to make sure that you are on track to be covered for 35 years. Since your benefit is currently calculated based on your highest 35 years of earnings, anything less than 35 years of covered employment will mean you have zeros in that benefit calculation.”
Final Words
Deciding when to retire—if you’re fortunate enough to have the choice—can be challenging. Retire too soon and you might risk running out of money. Retire too late and you risk not being able to enjoy some of the adventures you were looking forward to experiencing.
If you want to retire early—or really early, at age 45—it’s important to consider more than finances. “The tradeoffs for such a decision should not be taken lightly as [retiring at 45] you would give up prime earning years, which not only provide greater retirement savings but because Social Security looks at years of work and earnings levels, your Social Security income would be greatly reduced in retirement. Further, if you were required to return to work you’d be at a huge disadvantage,” says Matthew J. Ure, vice president, Anthony Capital, LLC-Southwest Region, San Antonio, Texas.
And don’t forget the cost of health coverage. “Health insurance will be a significant expense until you reach Medicare age at 65, probably eating one third to one-half of your yearly expenses, depending upon where you live,” says Ross Haycock, CFP®, AIF®, vice president, Summit Wealth Group, Colorado Springs, Colorado.
People who clock out early can face the same challenges met by people who work for the long haul: things such as loneliness, boredom, lack of purpose, and feeling out of touch. It’s best to look at the whole picture—financial and emotional factors alike—when deciding whether you can retire at age 45 with $500,000.
