Is 65 the right age to retire? 70? I believe that retirement is not an age, it should be a number. Let’s dive in!
Many have said it, but it is worth repeating – retirement is not an age, it is a number. The concept of retirement is changing in a good way, but many still have antiquated views on what it actually means and when it happens. I would like to shed some light on that here.
Long gone are the days of pensions and other defined benefit plans. Also long gone are the days of devoting 40+ years to the same company in exchange for receiving guaranteed portions of your salary (often by way of a pension) for the duration of your life. So what are we looking at these days, then?
This should go without saying, there is a (somewhat annoying) banner at the top of this site that explicitly says that this information is for educational purposes, but please speak to a financial professional before making large decisions if you are in any way uncertain.
In days of old, you had no choice but to dedicate your entire career (and essentially entire life) to one company in hopes to max out your pension. Couple that with social security checks and you have a recipe for a moderately comfortable retirement in your late 60’s, maybe early 70’s. Somewhere along the line, a handful of us realized that we don’t need to waste more than half of our life working 40, 50, or 60 hour weeks in exchange for freedom. What caused this shift? The realization that retirement is a number, not an age.
The next logical question, then, is how in the world do we know what that number is? This answer is different for every single person. A traditional rule of thumb is the 25x rule – very similar to the 4% rule. While this is absolutely a case of oversimplification, not to mention an extremely outdated study, having 25 times your annual expenses in an investment account (really that amount spread across all accessible investment accounts) is generally seen to be enough to allow you to at least consider leaving the 9-5 behind. As mentioned, studies have been conducted on the success rates of this strategy, I would encourage you to research them, but the most famous of them is from the mid 1900’s. Withdrawing 4% of the the total value of your account(s) each year in retirement has been shown to generally allow the account to stay above water for roughly three decades per these old studies. When it comes to pulling the trigger, so to speak, on leaving the 9-5 it would be preferable to be more than, “cautiously optimistic”.
An important point from the above (underlined) is that these funds need to be accessible without penalty for this to work. If you are younger than 59.5 years old and have all of your money in IRA’s or 401(k)’s, for example, this theory doesn’t apply. Most early withdraws (there are exceptions but I’m not a CPA and don’t intend on getting into tax nuance here) would incur a penalty and that is something we should avoid.
Drawing only 3% out each year dramatically increases the odds of the money lasting a whole lot longer. In terms of the 25x annual expenses number, holding off on retiring until you are closer to having 28x or 30x your annual expenses set aside is another way to increase the odds of success.
My personal problem with the above? These plans expect the funds in these accounts to eventually run out. That doesn’t work for me. I feel that an unstoppable retirement plan hinges on the use (or lack thereof) of principle of your account(s) vs. your growth and distributions. If you can reach a point where you only ever withdraw distributions (dividends are a good example) and you never touch the underlying principle of your account(s), you simply cannot run out of money (provided you are well diversified in your holdings). I like to say, if every single stock/ETF/bond etc. that I own were to go bankrupt or cease existing, my retirement is probably the least of my concerns.
Now, this all raises one additional question. If the majority of retirements are funded by retirement accounts and you would like to consider leaving the 9-5 before you become 59.5 years old, how do you amass 25x (+) your annual expenses in an accessible account? The answer for me is a taxable brokerage account. Some also turn to real estate for cash flow. The core of the matter, to me, is that you receive a salary in passive income that requires little to no work on your part. This passive income, coupled with a robust emergency fund and a considerable multiple of your annual expenses in assets should allow for a comfortable early retirement. If you have reached Coast FIRE, a concept I wrote an articles about here, you can also keep in mind that these funds technically just have to bridge the gap between today and the point that you reach 59.5 years old. This plan sounds, again, like it anticipates the funds run out at some point which I am not comfortable with, but it is something to keep in mind.
There are many different methods of FIRE (financial independence, retire early) including Barista FIRE (read about it here) which entails having enough cash flowing assets to cover the majority of your expenses, but needing to also maintain part time work to make ends meet and usually cover expenses like health insurance. There is also Fat FIRE, the ultimate form in my opinion, where you obtain such a significant amount of cash flowing assets that when you decide to hang up your coat (often that of a doctor or lawyer) you don’t have to make any sacrifices at all in your early retirement. If you want to learn more about Fat & Lean FIRE, I wrote about them here!
After all, everyone seems to forget the below when early retirement is brought up in discussion:
I have created multiple other videos on how you can, for free, make your own retirement calculators with spreadsheets.
This one, for example, allows you to calculate how many years you have until your funds run out (or hit a given value if you intend to leave money behind to charity or your children).
I have many others that allow for different types of calculations, I hope you found that video useful!
Thank you so much for taking the time to read this article! Please do not hesitate to reach out with any thoughts / questions / comments by emailing firstname.lastname@example.org or messaging me @retirement_calc_guy on Instagram!