Answering the Age Old Question, “When can I retire?”
No one wants to think about getting older. For some of you, getting older might mean finally getting a paycheck as opposed to spending tens of thousands of dollars on a degree. For others, maybe it’s calling up your one night stands and telling them that there will be a cute little surprise in about 9 months or so. However, for most of you, it falls somewhere between finally getting your own cell phone plan and paying taxes for the first time. But if I had to guess, I’d say that one of the grown up questions that’s furthest from your mind is, “When can I retire?”
And frankly, this makes sense. It’s not fun to think about when your life might be reduced to daily golf rounds, bingo, and sporadic phone calls from your kids. Not to mention there isn’t much in the way of financial literacy education in US high schools. But unless you want to be the poor fool who works for his/her entire life, you need to get on the retirement train, take a seat, and wait for the whistle. This’ll be a long ride, but well worth it.
What is retirement?
When I say retirement, I’m sure a lot of things come to mind. Maybe it’s golfing and fishing down in Florida. Maybe it involves you and your spouse/significant other finally traveling the world. Or maybe it means spoiling the shit out of your grandkids as repayment for your kids being such little snots when they were younger, I don’t know. But here at The Code to Riches, I think it’s important to give a very specific definition, so that we understand “retirement” in it’s entirety. So here’s what I’ve got for you:
Retirement is the point in an individual’s life when the assets they’ve accumulated can provide the income they need until the day they die AND allows for daily freedom of choice.
Ok, so that is obviously a mouthful. Let’s break it down a little bit so you know exactly what I’m talking about.
Retirement is the point in an individual’s life – So you obviously can’t retire right when you graduate from college. Retiring is going to take time, at least a few years of working and setting aside funds (more on this later).
…when the assets they’ve accumulated – An asset is anything you own that can provide a financial return. There is an endless supply of assets you can accumulate over the course of your life: stocks, bonds, real estate, private businesses, artwork, gold, education, etc. The important part is that you need to accumulate enough of these things so that they…
…can provide the income you need until the day you die – Clearly not a happy thought, but this is money that is going to have to last until you kick the bucket. I can think of no worse fate than going into retirement, than having to re-enter the work force because your money didn’t last long enough. The key here is long lasting income.
…AND allows for daily freedom of choice. – This is the whole point, people. It’s great that you’re no longer working… yippie! But if you’re housebound because you only have enough money to pay for your mortgage and food, then your quality of life will be worse than a fish living in a toilet bowl.
GREAT! So when can I retire?
Woah, slow down, sparky, we’ve still got some questions that need answering!
The first thing you have to realize is that you are going to receive money from a number of different sources when you retire. Most of you are not going to have a situation where you’re only going to have your savings to rely on. In fact, you should have at least a few of the following:
Social Security – Started by FDR back in 1935, Social Security is a program of forced savings implemented by the government. Every paycheck you earn will have a little bit of money taken out for Social Security purposes. The thought is that since you’ve been paying into it your entire life, you will be able to pull out a small sum by the time you retire.
Here’s the thing, though: you’re only allowed to pull out Social Security at a certain age. You can start pulling out money at 62, however there are penalties that you will be charged (damn government). You can pull out your money free of charge by at age 66. So if you were having dreams of living on a beach at 40 AND having the government send you checks, you are in for a serious wake-up call.
Now, you might have heard the argument, “Social Security is going broke!” A lot can be argued as to whether or not Social Security is still going to be around by the time you reach “dentures” age, but I would argue that though it may not be in it’s same form by the time we’re older, the basics of the program will still be around. For now, let’s not argue the finer points of entitlement policy, ok?
Pension – In addition, your employer might offer you a pension, which is quite similar to Social Security. The only difference is that a pension is through your employer, and Social Security is through the federal government. Not all employers offer pensions, but if you work for a public entity or a large corporation, you should have access to these plans. That being said, they are a bit harder to come by nowadays, so don’t be disappointed if your employer doesn’t offer one.
These also come with age restrictions, just like Social Security. However, they’ll be different for each employer. You more than likely won’t be pulling out your pensions before 50 years of age.
401(k) – I’ve already gone into 401(k)’s in depth, but these are somewhat of a mix between a pension and an individual account. Essentially, you make contributions to this account, and at the
ripe old young age of 59 and a half, you can start taking contributions.
There are a few advantages of 401(k)’s worth mentioning. First the contributions you make are tax deductible (#fighthepower). Second, most employers that offer a 401(K) offer some kind of match, meaning that whatever you put in to the account, they’ll put in to the account (up to a certain point)(#freemoney). Lastly, the contribution limit for 401(k)’s in 2016 is $18,000.
Long story short, if you have the opportunity to take advantage of a 401(k), you should!
IRA’s – A TLA (three letter acronym) for Individual Retirement Account, I’ve also spent some time going into these as well. This is essentially an account that is completely run by you. There are advantages to Roth vs. Traditional that could take up a whole article. The biggest issue with IRA’s is that you can’t take money from them until you’re 59 and a half, so these really don’t help you retire early, either.
Other Accounts/Businesses – This is kind of the catch-all category. If this were American sports, then everything before this point was football, baseball, and basketball. Now we’re talking about hockey, soccer, and golf.
Basically, any other investment accounts/businesses/rental properties you have can and should be used to help plan for retirement. And while none of these are the usual heavy hitters listed above, they can be used to really alter your perspective on the “Get born -> grow up -> do school -> do work for ~40 years -> retire -> die” life plan.
Uh, ‘scuse me… Can I have yo’ “numbuh”?
Wonderful, now you know exactly what accounts you’re going to use to make sure you have a rosy retirement. And now that you know where the money is going to come from, the next step to answering, “When can I retire” is figuring out two VERY important numbers.
Yearly Expenses – This is the number that you have to meet every year simply in order to break even. This will be important to know because if you can make this amount of money every year, then you’ll never have to experience the worst retirement nightmare ever: running out of money.
Below is a quick example of a budget that may or may not be close to what you spend. We’ll be using this budget for our examples below. You can find a blank example of that budget here (thanks to Budgets are Sexy!) I like this budget the best because it goes really in depth.
This budget is obviously on a monthly basis, so all we’ve got to do is 12 x 2,005 = 24,060. To make our lives easy, and to allow for some error, let’s say that this person’s yearly expenses are right around $25,000.
Total Assets – This end goal number. Once you’ve hit this, you can do pretty much whatever it is you want to do. In short, it’s your pretty pile of “Fuck You” money. Your total assets is going to be calculated by adding together everything you own: every stock, bond, house, painting, car, cookie shop, you name it. If it can be sold or makes money, it counts as an asset.
Now here is where things get sticky. This number is going to be different for every single person on this earth, because we each have different situations. Some of you might be crazy and pop out more than three kids (God bless you), some of you might go to grad school, some of you might do the Peace Corps and suspend any real earnings for a few years. And because we each have different goals in life, our final “Total Assets” number is not going to be the same as someone else’s.
The Last Step
The final step to answering the “When can I retire?” question has to do with knowing how much money you can make from your money.
…say that again?
When you have finally reached your “Total Assets” number, you will be earning a small return on those assets. Your stocks will be paying dividends, your bonds will be paying interest, your rental houses will be paying a monthly rent, etc. With a balanced portfolio, you should be able to get a 5% return annually on your money, with not a ton of volatility.
I don’t want to be a wrinkly dinosaur, how do I retire early?
There are some assumptions we need to list before we start crunching these numbers.
- Average life expectancy – 79 (depends on sex)
- Inflation rate – 2.5% (just an estimate)
- Rate of return for assets – 5% (again, just an estimate)
- Annual Expenses – $25,000
Here we go!
Retire at 30? You need $900,000.
Retire at 40? You need $770,000.
Retire at 50? You need $610,000.
Now folks, that’s assuming the absolutely best case scenario! I highly doubt that anyone will be able to live off of $25,000 per year for almost 50 years. Let’s look at a more realistic scenario…
- Average life expectancy – 79 (depends on sex)
- Inflation rate – 2.5% (just an estimate)
- Rate of return for assets – 4% (a safer estimate)
- Annual Expenses – $52,000
Retire at 30? You need $2.2 million.
Retire at 40? You need $1.85 million.
Retire at 50? You need $1.4 million.
Man, those numbers will sober you up faster than mom and dad coming home from their trip too early. How are you supposed to get $770,000 dollars by the time you’re 40, at a minimum?! If you want a decent life though, you’d need to get to right around $2 million. How are you supposed to do that?! Well, the short answer is you need to own as much business as possible.
What you have to keep in mind, also, is that these examples do not include Social Security, pension, 401(k), or an IRA. Those numbers you’d have to reach? Yeah, all without the help of Uncle Sam or your employer. Pretty bleak picture, right?
THAT’S EXACTLY MY POINT
Retiring early, while mathematically pretty simple, is not EASY! It will require at least a decade of dedication from you, both in terms of saving and in terms of building a business portfolio that will allow you financial freedom. You have to be ready to save a solid chunk (like 30%-50%) of your income and come up with some hustles on the side! All that being said, this is not an impossible task. Here’s how I know…
…and lots of others!
When can I retire? – The Wrap Up
Here’s what we’ve learned about retirement today:
- Retirement is defined as, “The point in an individual’s life when the assets they’ve accumulated can provide the income they need until the day they die AND allows for daily freedom of choice.”
- There are multiple programs, through the government and through your employer that will help you retire. However, most of them kick in at around 60 years of age.
- If you’re looking to retire comfortably before that age, you need to work to have at least $1,000,000 in assets by the time you’re ready to retire.
- Retiring early is a simple concept, but it’s certainly not easy. With that being said, there are loads of people who have done it, which means you can, too!
Remember, early retirement is there for the taking, so GO GET IT!
Would you want to retire early? How early? Are you on track to do so if this is a dream of yours? Comment below!
Keep trying to crack the code,