Definition, Examples, and Retirement

Retirement is a stage in life where one chooses to quit the workforce and live from savings or income that does not require any active work. The age at retirement, the lifestyle, and how they fund their retirement will vary depending on personal financial planning and individual preferences.

In a broad sense, retirement means when you no longer have to work for your living standards and can rely only on savings or passive income sources to pay for your lifestyle. Sometimes, retirement and financial independence are used interchangeably. Both can be achieved when you have enough combined investment income, savings, and pension earnings to cover your daily living expenses.

Retirement is, in a technical sense, a background in financial planning. It can be through specialized retirement funds that you contributed during working years (e.g., an IRA, employer-sponsored 401k), available investment tools, and Social Safety benefits. Some people who work in government may also be able to access pensions or similar government-sponsored retirement schemes. Many of these sources can be combined when you plan to retire.

How much Money do I need for retirement?

How much Money do you need for retirement? It is one of the most commonly asked questions. This is not surprising. There are so many unknowns. When will you retire? How much will your retirement pay? And how long will it take?

Our analysis was extended to identify age-based retirement savings strategies that can help plan despite uncertainties. These milestones should be aspirational. These milestones are unlikely to be met all. However, they can help help you to make a plan to ensure your retirement is comfortable.

Our savings factors assume that an individual saves 15% of his income annually starting at age 25, including any employer matches, invests more than 50% of their savings each year in stocks over their lifetime, and retires at age67 with plans to maintain their preretirement lifestyle in retirement. See footnote 1 (for more details).

These assumptions are based on the assumption that 10x (or more) of your preretirement salary by age67 will be enough to ensure you have enough income for retirement. Although the goal of 10x may seem lofty, it is achievable. However, you still have many years before you reach that goal. These milestones are age-based to help you stay on the right track. It would be best if you aimed to save at minimum 1x your income before age 30, 40, 50, 6x, 50, and 8x after 60. Your personal savings goal will vary depending on many factors, including the two key ones below. These guidelines will help you build your savings strategy and track progress.

 When will you retire?

The age at which you want to retire will impact the amount of savings you can save. It also affects the milestones that you set along the way. Your savings factor can drop the longer you put off retirement. This is because delaying retirement will give your savings more time to grow, and you’ll be able to retire earlier. Your Social Security benefit, however, will also be lower.

Take a look at these hypothetical examples (see graphic). Max intends to delay his retirement to age 70. He will need to have 8x his final income saved to continue his preretirement lifestyle. Amy would like to retire at 67, so she needs to have saved 10x of her preretirement Money. John will retire at age 65. To do so, he must have saved at least 12x the preretirement income.

Although you cannot always control when you retire, your health and job availability might be out of your hands. One thing is certain: If you work longer, it will be easier for you to save more.

2. What do you want to do in retirement?

Or, in other words, do your expectations for your expenses to decline when you retire. We refer to this as a “below average” lifestyle. Or will you still spend as much? That’s average. This is an average.

Let’s consider some hypothetical investors who will retire at 67. Joe wants to live comfortably and downsize in retirement. His savings factor could be closer to 8x to 10x. Elizabeth plans to retire in 67 years. She also wants to preserve her lifestyle during retirement. Therefore, her savings factor is 10. Sean sees retirement as a great opportunity to travel, so it may make sense to save even more and plan for higher retirement spending levels. At 67, his savings ratio is 12x.

Bottom line:

Retirement is, in a technical sense, a background in financial planning. It can be through specialized retirement funds that you contributed during working years (e.g., an IRA, employer-sponsored 401k), available investment tools, and Social Safety benefits. Some people who work in government may also be able to access pensions or similar government-sponsored retirement schemes. Many of these sources can be combined when you plan to retire.

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