What Retirement Is and How to Get There
Retirement, according to the dictionary, means to “withdraw from one’s position or occupation or from active working life.” You can achieve retirement when you have sources of income that do not have to be earned by working.
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.
History of Retirement
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 such programs, people worked their entire lives. If they became unable to work, their family was expected to provide for them.
The Big Retirement Decisions
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 a 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. 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, though there are some exceptions.
How to Achieve Retirement
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.
Many people, however, are unwilling to make the lifestyle changes they would need in order to save enough to afford a comfortable retirement.
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.
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 U.S. Government Accountability Office, nearly half of households headed by someone aged 55 or older had no retirement savings in 2016. 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 can help you with these decisions.
How to Find a Retirement Planner
To help you make these decisions, consider finding a qualified retirement planner. 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.
The Atlantic. "How Retirement Was Invented." Accessed Feb. 19. 2020.
IRS. "Retirement Topics—Exceptions to Tax on Early Distributions." Accessed Feb. 19, 2020.
U.S. Government Accountability Office. "Retirement Security: Most Households Approaching Retirement Have Low Savings, an Update." Accessed March 2, 2020.
Forbes. "The Coming Pension Crisis Is So Big That It's A Problem For Everyone." Accessed March 2, 2020.