While “big resignation” and “quiet resignation” may be broad offices for younger Americans, older Americans may have a similar, if more permanent, idea these days. With the holidays behind us, some may be asking if they can retire. Like now.
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This is not to say that early retirement is a new trend at all, as the pandemic has almost certainly forced many Americans’ hands. According to Pew Research, by 2021, approximately 50.3% of Americans over the age of 55 will be out of the workforce and retired. This is a significant increase from 48.1% in 2019.
But here’s the thing. When the pension increases, so do the prices. As of 2021, the U.S. Census Bureau says the average retirement income for Americans 65 and older will be $73,288. If you live another 30 years, that means you’ll need $2,198,640 — and that’s without inflation.
Before you panic, here are three tips you can use to guide your retirement decision.
The 4% rule
When you decide to retire, many financial advisors can give you a rule of thumb to withdraw 4% of your savings each year. That’s the amount you can get back no matter what, and hypothetically still have those retirement savings going for another 30 years.
The key question here is, can it offer you enough income, along with Social Security, retirement and more? If you have $500,000, that would only be $20,000 a year. But if you had $2 million, that would be $80,000.
It’s also important to consider what you want to spend that money on now and over the next few decades. While travel may be important when you’re in early retirement, remember that you’ll need cash for health care expenses as you continue to age.
This next rule of thumb deals with the tax implications of early retirement. Although some potential retirees have a lot of savings, retiring early won’t be beneficial if you pay normal income taxes. This is the case for those who retire after the age of 55.
Typically, you’ll face a 10% tax withdrawal penalty for withdrawing from a tax-advantaged retirement plan like a 401(k). But for employees with an employer-sponsored 401(k) plan, the IRS allows anyone who decides to leave the workforce over age 55 to begin taking penalty-free distributions from that plan.
Keep in mind that you’ll still be some distance from claiming Social Security. You can find out your full retirement age to take full advantage of Social Security by visiting the Social Security Administration’s website. There you can find out how old you need to be to get 100% of your Social Security and what it would cost to retire early.
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You need $1 million (or more) in the bank
A recent survey by Northwestern Mutual found that Americans believe they need $1.25 million today to retire comfortably and continue to generate income for the next 20 years. Creating a goal based on your financial advisor’s advice and budget is definitely a great idea.
But if you want to retire today, you need to make that goal flexible. If you’re old enough to be thinking about retirement, then we don’t have to tell you that life happens. You should have enough savings in case of emergency and you can take care of any health problem. This is usually around 80 for most Americans, but can happen sooner.
It’s also worth noting that the study saw a 20% increase in how much Americans believe they need to retire between 2021 and 2022. But who knows what 2023 will bring? Having a flexible goal will allow you to pivot when circumstances change.
While these are solid guidelines to get you started, their best rule of thumb is to seek expert advice. Especially if you count yourself among the one in four Americans who tell Northwestern Mutual they don’t have enough saved for retirement.
It’s understandable if you feel unprepared. It’s a volatile time with a potential recession on the way, and so is the country yet Coping with the effects of the COVID-19 pandemic.
You may be done, but you may feel like you’re retired years if not decades. However, many people are pleasantly surprised at how feasible this really is after meeting with their advisor.
And anyway, knowledge is power. Knowing where you stand is the first step to getting where you want to be. Hopefully, with these guidelines and a little guidance from your counselor, you’ll be on your feet in no time.
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This article provides information only and should not be construed as advice. Provided without any warranty.