The average retirement age seems to be edging upward, as the average American predicts that they’ll retire at the age of 66. This is up six years from the 1990s, when nonretired persons planned to stop working at the age of 60. Considering people are living much longer than they were two decades ago, this is no surprise, but many still want to limit the number of days they spend in an office. The good news is, with some sacrifice and careful planning, you can retire much earlier than your peers. If you’ve said, “I know I can’t afford to stop working,” you may be surprised to learn how doable it is.
How to Retire at 60
In order to retire early – whatever the age – you’ll need to have enough money set aside to cover the decades you won’t be working. Yes, you’ll receive Social Security income, but it will be reduced far below what you earn at your nine-to-five. To get an idea of what to expect, the average Social Security payout was $1,413.37 a month in June 2018, with the maximum possible benefit being $2,788 monthly. If you’re living on double that or more, you’ll need to have enough savings to cover the extra amount necessary to pay your bills.
Retiring early also means you’ll have more years you’ll need to cover with that savings. Some experts have stated that the average person will need $1 million for retirement, but others have said that amount is too low. How much you’ll need depends on your own planned way of living when you retire. If you hope to buy an expensive cabin in the mountains, for instance, you may need more than if you can stay in your current home, mortgage fully paid.
Creating Recurring Revenue
An alternative to saving is to create some sort of recurring revenue that will see you through your older years. In doing this, you’ll be able to give yourself the cushion you’ll need to fully enjoy life. That can be easier said than done, though. If you invent a hugely successful product or start a subscription service, for instance, you’ll have that money coming in. Musicians and authors also get royalties for their creations, and that money can pay out for many years.
The problem with recurring revenue is that it often dwindles over time, especially if you aren’t actively working. That thriving subscription service you created may lose steam once you retire, unless you put good people in place who can keep it going. The chances of launching a business that’s a huge hit are slim, but it’s worth a try if you have what it takes.
The FIRE Movement
A movement called FIRE (Financial Independence, Retire Early) has gained momentum among millennials. The idea isn’t to retire completely from the workforce in your 30s or 40s, but to set enough money aside so that you aren’t chained to a job you hate for most of your active years. You may follow a more conservative plan so that you can retire at 60, rather than your 30s or 40s, but the goal with FIRE is to be financially independent even if you keep working. If you follow financial advice like the Suze Orman budget, you probably won’t be surprised to learn that she at first balked at the idea of saving enough to retire after only 20 or so years in the workforce. However, once she learned the goal wasn’t full retirement but financial independence, she was on board.
With FIRE, you set aside a significant part of your income each month with the goal of financial independence by a specific date. This extra savings gives you the freedom to leave a job you don’t like or even work as a freelancer. It requires significant sacrifice, though, so it may not be the right choice for you. You may have to give up vacations and extras like expensive cups of coffee every day for a later payoff, which could or could not be worth it to you.
Receiving Social Security Benefits
If you’ve said, “I know I can’t afford to stop working,” it’s important to understand what exactly you’re facing. Even if you don’t have other sources of retirement savings, you should have Social Security benefits coming to you when you retire. The earliest you can take those benefits is age 62, but you’ll only get a portion of the benefits due to you. This is calculated to make up for the extra time you’ll be receiving benefits.
The minimum retirement age to receive full benefits depends on your birth year. One reason many respondents say “66” as the age they’ll retire is that if you were born between 1943 and 1959, the earliest you can retire is age 66. If you retire at 62 and you’re among that generation, you’ll only receive 75 percent of your full benefits. For those born after 1959, the earliest to retire with full benefits is 67.
The good news is, you shouldn’t have to guess at what your amount will be after retirement. You can get a statement from the Social Security Administration estimating what you’ll receive each month after retirement. This statement assumes you’ll continue to make the same amount, so it doesn’t factor in the income increases you’ll have between now and the time you retire. These estimates become more accurate the closer you get to your eligible retirement age.
Receiving Retirement Account Benefits
If you have a retirement savings account, you’ll also be limited on what age you’ll be able to start taking distributions. If you have a 401(k) with your current employer, you’ll be able to begin taking funds at the age of 59 1/2. If you leave that employer after you reach the age of 55, you may be able to take funds out sooner. The issue you’re trying to avoid has to do with the IRS and their requirements for paying taxes on the money. If you take it before the minimum age, you’ll likely be subject to a 10 percent penalty in addition to the taxes you’ll owe.
Instead of a 401(k), if you’ve chosen an IRA as your savings vehicle, you’ll have similar limitations. As with a 401(k), you won’t be able to take money out until the age of 59 1/2 without an early withdrawal penalty. If your business is one of the few remaining employers to offer a pension, you’ll be similarly bound, often with the minimum retirement age being closer to the age at which you can begin taking Social Security payments.
Retiring Without a Work History
One reason you may say, “I know I can’t afford to stop working” is that you don’t have a strong enough work history to receive a sizable retirement benefit. Your Social Security payments are based on the amount you earned over the course of your life, so if you were a stay-at-home parent or you worked low-paying jobs throughout your career, you may be disappointed in the amount coming to you.
Even if you’ve never worked at all, though, you still may be able to retire at 60. You’ll be eligible for a portion of your spouse’s benefits – usually up to half. If the amount you’re due is less than one-half of what your spouse is getting, you can choose to take that rather than what you would collect.
Setting a Budget
In order to achieve your goals of retiring early, you’ll need to have a plan. There are many financial experts who can help you put your money in the right place, but you’ll also need to cut back on your expenses and keep debt at a minimum. The Suze Orman budget includes having an emergency fund to keep you out of debt and paying off your mortgage so you’ll have reduced living expenses.
One popular alternative to the Suze Orman budget is that recommended by Dave Ramsey. Ramsey recommends paying off your debt using the debt snowball method, which has you paying off lower-balance credit cards first, then using that monthly minimum toward paying off the next credit card until you’re debt free. He also recommends Roth IRAs, which have you paying taxes as you put the money in so you can make retirement as tax-free as possible. Whatever plan you choose, make sure it’s something you can stick with long-term since your motivation will likely occasionally wane.
- Gallup: Snapshot: Average American Predicts Retirement Age of 66
- IHME: Life expectancy increases globally as death toll falls from major diseases
- CNBC: $1 million may not last you in retirement—here's how to figure out how much you need
- Forbes: Creating Sources Of Recurring Revenue
- SSA: Benefits By Year Of Birth
- SSA: Get Your Social Security Statement
- Sensible Money: At What Age Should I Start Making 401(k) Withdrawals?
- The Motley Fool: How to Get Social Security Benefits if You've Never Worked a Day in Your Life
- Dave Ramsey: Roth IRA 101