Retirement is the stage in life when one chooses to leave the work force and live off sources of income or savings that do not require active work. The age at which a person retires, their lifestyle during retirement, and the way they fund that lifestyle, will vary from one person to the next, depending on individual preferences and financial planning.
You can achieve retirement when you have sources of income that do not have to be earned by working, and can sustain your chosen lifestyle. There are many ways to fund your retirement, including common government-based sources, and many rules or guidance to be aware of when planning for your "golden years."
Definition and Examples of Retirement
Retirement in a general sense is the time of life when you no longer need to work to live comfortably, and can rely on savings or passive forms of income to fund your lifestyle. Retirement and the term “financial independence” are often used interchangeably. Both are achieved when you have enough combined savings, investment income, and/or pension income to cover your living expenses.
In a more technical sense, however, retirement implies a backdrop of financial planning, whether through specialized retirement accounts that you contributed to during your working years (such as an IRA or employer-sponsored 401k), other general investment tools, or through Social Security benefits. People who work in the public sector may have pensions or similar government-sponsored retirement plans as well. It is common when planning for retirement to utilize many of these sources of funding in combination.
How Does Retirement Work?
Retirement is a relatively new concept that has come about as life expectancy has increased. Little more than a century ago, the idea of retirement did not exist. Our modern-day concept of retirement developed due to a combination of increased life spans, growing popularity of pension plans in certain sectors, and the onset of government-sponsored benefits in 1935 with the creation of Social Security.
Prior to the enactment of Social Security, people worked their entire lives. If they became unable to work, their family was expected to provide for them.
One of the biggest decisions you will make is when to retire. Another is how much to spend in retirement. You will also have to decide when to start taking Social Security. If you're able to avoid taking it as soon as you are eligible, you can increase your monthly paycheck later on.
If you have a pension, you will have some permanent pension decisions to make such as deciding whether to take a lump sum or an annuity, and what term to choose such as a benefit for your lifetime only or a benefit that provides ongoing benefits for your spouse if you should die young.
There is no mandatory retirement age in the United States, but the Social Security Administration has rules around the timing of retirement benefits that can impact your payout, and should factor into your plans. Standard retirement age is considered to be 65, but under current rules, Social Security defines your full retirement age based on your date of birth, and it is not the same age for everyone. In general, retiring before age 60 would be considered an early retirement. The IRS will typically penalize retirement plan withdrawals before age 59½. Note, however, that there are some exceptions to these rules, for a number of scenarios related to military service, medical needs, death or disability, corrective withdrawals, and more. For individualized advice, consult the IRS website or a financial professional.
How Much Does Retirement Cost?
There is no single dollar figure to cite that will work for everyone's retirement. Funding your own retirement will depend on many factors, such as the age at which you plan to retire, your life expectancy (or how many years you will need to fund), and your projected cost of living during that time. This requires a personal financial assessment.
To achieve retirement, you need to plan ahead and save accordingly. It is best to start saving young (in your 20s or 30s) and put away at least 10% of your income each year. If you start saving late (in your 40s and 50s), you’ll have to save a larger portion of your income—as much as 50% a year.
How to Save for Retirement
You can save in any number of ways. Here are just a few of many:
- Employer-sponsored retirement account, such as a 401(k)
- Government-based or public-employee sponsored fund, like a pension or 457 plan
- Individual Retirement Account (IRA), whether traditional IRA or Roth IRA
- Annuities and 403(b) plans
- SEP plans
- Non-retirement specific investment vehicles
Many of these and other forms of retirement accounts come with perks like employer-match programs or tax-advantaged treatment. The idea behind putting aside funds to save for retirement is that you can take advantage of the specific benefits each account offers, as well as the time value of money to earn interest on your contributions, to grow your earnings over time. The earlier you start to save, the more you will benefit.
A Broad View of Retirement Savings
Many people, however, are unwilling to make the lifestyle changes they would need in order to save enough to afford a comfortable retirement.
Although most people have dreams of being able to retire in some capacity, numerous studies have found that the majority of Americans don't have enough saved to stop working. According to the most recent census data release in 2017, the U.S. Government Accountability Office found that nearly half of households headed by someone aged 55 or older had no retirement savings in 2016. In a more recent 2020 post-pandemic survey by the Federal Reserve, only 36% of working adults felt they were financially on track to retire. With pension funds in jeopardy and Americans not saving enough on their own, future retirees may find themselves working longer than they had hoped unless they save more during their pre-retirement years.
How to Invest Your Retirement Money
As you get closer to retirement, you will want to monitor your retirement investments closely. Take time to learn basic investing concepts so you understand how your retirement investments produce income for you later in life and how much income they might produce.
You will also need to decide if you want to keep most of your retirement money in safe investments or allocate it across many different types of accounts. A financial advisor or qualified retirement planner can help you with these decisions.
It's important to understand the difference between retirement planning, financial planning, and investment advice. Know the difference and learn how to research a financial advisor's credentials and how they get paid, to ensure you're choosing the right one for you.
Alternatives to Retirement
Spending your golden years traveling the world, or settling into a comfortable relaxed lifestyle without the need to work may be enticing prospects, but these models of retirement are not for everyone. In fact, retirement itself may not be for everyone, whether due to financial constraints, or simply a desire to keep working.
One alternative is to consider part-time retirement, where you find work that you enjoy, even if it pays less. Ideally, this work pays enough to cover your living expenses and gives your retirement money time to continue to grow before you have to use it for income.
- The standard retirement age is 65, but everyone has to decide for themselves exactly when, and if, they will stop working.
- The government typically penalizes those who draw on retirement savings before reaching age 59½.
- As you get closer to retirement, it's wise to be more careful with your investments. A financial planner can help you choose how to allocate your investments.
- What your retirement looks like will depend on many factors, each unique to your personal preferences, number of years you will be retired, and cost of living.