Retirement 101: How to Retire
Planning for retirement is something that we are not taught how to do in school. Even though this is knowledge that really we should all have before we enter our 20’s, most people don’t start thinking about retirement until much later.
The sad reality is, it’s actually really hard to retire on time- let alone retire early. But so many of the people I work with, when asked about retirement, say that they want an early retirement. And, understandably so. I mean, who doesn’t want to achieve financial freedom and retire when you’re still young? I know I do.
But in my experience, most people who say they want to retire early, haven’t worked out the math of what this actually means for them financially. Let alone have a strategic financial plan that will get them there.
If this is you, don’t worry. You’re not the only one. And I’ve got your back.
It is important however, that you do take the time to lay down the groundwork in order to secure your financial future for retirement. That is, unless you want these dreams to forever remain an impossible fantasy.
So, in hopes that I may be able to help more people, I have provided below some basic concepts that you need to know in order to properly plan for your retirement.
Here are 4 important questions and answers, which everyone who plans to retire should understand:
1) What is ‘retirement’?
The classic definition of retirement is: The time of life when one chooses to permanently leave the workforce behind.
For me, I define retirement as the point in which one no longer has to work in order to finance their living expenses for the rest of their lives.
It means that you’ve worked long enough to accumulate enough money, to the point that you don’t need to work anymore to survive financially. This milestone is not necessarily attached to age - but it usually means that you’ve been working for a while.
Some people will still choose to work, even after having reached retirement. But the power of choice is the crux. If they work, they do so because they want to, not because they have to.
Many nurses for example, choose to go into the field of nurse education after they have already retired. Some choose to embark on entrepreneurial pursuits.
But again, retirement means you have earned a powerful financial choice that you didn’t have access to before.
2) How do you plan for retirement?
Well, with a whole bunch of math.
Here are the basic series of numbers you need to figure out, in order to position yourself to build a critical path toward retirement. Keep in mind that each of these figures will vary person to person, as they are largely based on your individual lifestyle preferences.
a) At what age do you want to retire?
What is that golden number for you? Remember that the younger you are when you retire, the more money you will need to support your retirement. See the section below for a more in-depth look at this specific topic.
b) How long do you want to live? (As in at what age do you see yourself dying?)
Yes, I know - it’s a bit of an uncomfortable question. But to be frank, we need to figure out how many years you will likely spend in retirement to be able to calculate how much money you will need in your retirement accounts at the time when you do.
To give you a sense, the current average life expectancy for an American is around 79 years.
c) What is the total sum of money you will need to cover all of your expenses each year?
This again largely depends on what kind of lifestyle you want to enjoy during your retirement years. But basically here are the main categories of expenses you need to consider:
🔳 Basic needs: rent, food, transportation, etc.
🔳 Health care needs: as you get older, there is a greater chance of developing health conditions, which will require you to increase how much you spend on health care services.
For example - you may need to access the support of nursing homes, assisted living facilities, assisted nurse care, doctor’s visits, medications, etc. Health care can get pretty pricey in America - especially in your later years. So it’s really important to take account of this in your financial plan.
🔳 Luxuries: what kinds of luxuries do you want to be able to enjoy during retirement?
For example - vacations, owning a luxury car, living by the beach, etc. All of these things cost money, so you need to figure out how much money you’ll need to be able to enjoy the “finer things in life” in your retirement.
🔳 Activities & hobbies: What kinds of activities are important to you to be able to engage in on a regular basis when you retire? Calculate how much this will cost you annually.
3) When is a good age to retire?
To be honest, there is no strict set of guidelines around what is the “best age to retire”.
But statistically speaking, the average age for retirement in America is 62-65. Those who retire before the age of 60 are considered to be taking an “early” retirement. This is because most retirement accounts will slap you with a penalty if you touch it before the age of 59.5.
The other thing to note is that, the earlier you retire, the more money you will need for retirement. Which means that you will need to make preparations for retirement in your younger years, if you want to reach retirement early.
But in reality, a lot of people wait longer to retire. Mainly because they don’t have enough money, so they have no choice but to work longer. There is however, one interesting perk related to waiting longer to retire in regards to your social security payouts.
Technically, you can start to touch social security beginning at age 62. But the annual payments that you will get will be smaller the earlier you begin to take it out.
What this means is that, the longer you wait to retire, the annual amount of your social security payments will increase. This increase tops out when you reach age 70 (or 67 for baby boomers).
So if you are in good health, it’s most ideal to wait until you are 70 before you start taking money out from social security.
4) How much money do I need to retire?
Once you have the figures from section #3, it’s just a matter of plugging these numbers into a formula which looks something like this.
ADD total annual basic living expenses
+ annual health care needs
+ annual luxuries
+ annual budget for activities and hobbies
= your yearly sub total
Yearly sub total (x) the number of years you plan to live
= your net total after taxes
Calculate taxes on the previous number, and add the two together to get a sense of the total amount you need to have saved up when you retire.
= your gross total with taxes included
To give you an example, let’s say with all things considered that you will need $50K annually after taxes. And you are planning to live for 30 years of your life in retirement from age 60-90. You will need 1.5 million dollars to retire. This is net, after calculating taxes. You can assume an average tax rate of 25-35%
Let’s keep working with the baseline of 50K annually for this next demonstration.
5) How much do I need to be saving each month toward my retirement?
Retirement savings by age chart
The above chart is a generic way to get a sense of a basic minimum. But remember that each individual’s financial situation is different, just like how we are people are each individually different.
The best way to chart your course is to work with a financial planner, to make sure you are taking into consideration things that are unique to you, your family, your legacy, and the life you want to live.
A Word of Warning for Nurses
If you’re a nurse, you know that there can be a high level of turn around in your job. Meaning a lot of nurses stay at one job for just a few years before moving on.
To get a baseline on this, the average corporate person might stay at job 10-30 years, but the average nurse only stays 3-7 years at any given location - and that’s on the high end
How does this impact your retirement accounts? Your 401K is not as consistent when you switch employers a lot. Which means that you should have a plan b in the works at all times.
The unfortunate truth is that what your employer provides toward your 401K, is most likely not enough in the first place (even if you stay with one employer long-term). And so it's super important for an average employee to have a retirement account outside of work, but this is even more so for nurses.
Set yourself up to WIN.
The harsh reality is that an alarming number of elderly people struggle financially. Many of them run out of money, and have to return to work. Some people are never actually able to afford to retire fully, and so end up working until they just physically can’t anymore.
I have seen my own parents struggle in this way. And let me tell you, I don’t want this for you, or anyone. We work our entire lives, with the dream that all of our hard work will pay off one day. We are sold on the idea that you work hard, and earn the right to kick back and enjoy life in your later years.
I’m sorry to say that a financially secure retirement is not a guaranteed thing, not by a long shot. I wish it were. I really, really do. I wish that I could tell you that my parents worked hard all of their lives, and are living the high life and have all of their financial needs covered. But only the first half of that statement is true.
They worked hard, real hard. But they didn’t plan properly. So my dad has worked in his retirement years, and my mom is dependent on the support of people in the family for money to get by. The financial burden is not just hard on them, but also for the loved ones around them.
Honestly, they deserve better. And so do you.
The only way to ensure you don’t end up like them is to start planning as soon as possible. And in so doing, work with a professional to make sure you get it set up right.
If you found the contents of this article to be helpful, good. I’m glad I can be of assistance. But I have to throw in a disclaimer to say, please understand that this is just scratching the surface.
There is so much more that would need to be taken into account to put together a proper plan based on your individual situation. So this is not prescriptive advice, just a rough overview of some of the key dynamics at play.
That being said, I’m not just going to abandon you and just leave you with that. Remember that our team is here to support you. Please reach out to us and we would be happy to offer you a free consultation to get you started!