Can You Afford To Retire At 40? Or Do You Need To Wait Till 70?

By Susan Tompor
Detroit Free Press

WWR Article Summary (tl;dr) To retire in your 30s or 40s, some suggest, you could need to have saved up 30 times or more of your living expenses before you retire. If you’re spending $40,000 a year, that’s $1.2 million.

Detroit Free Press

We’re looking at a new dust-up in the retirement universe. What, exactly, is a reasonable age for retiring?

Is 70 the new 65? Or is 35 the magic number?

TV personality Suze Orman says don’t dream about retiring a minute before you hit 70, while Twitter showman and blogger “Mr. Money Mustache” is promoting a lifestyle through the FIRE movement, which stands for “Financial Independence, Retire Early”, which might enable you to leave your day job by your 30s or 40s.

Join the FIRE movement? Or prepare to burn out by working eight years beyond a solid retirement age?

Unfortunately, it’s one extreme or another to snag a sound bite.

Magic numbers do drive blogs and podcasts

Let’s face it, if you’re trying to build a huge following why not create a cash cult based on the idea of retiring young.

The theory that you can take control of your money, as well as your time and energy, so that you can ultimately walk away from the rat race is hugely appealing.

And I’d imagine that the FIRE movement isn’t hurt by the incredible steady returns for the stock market in the past few years.

Much easier to talk about retiring early when the Dow is sitting around 26,000, not 6,000. It doesn’t hurt that the U.S. jobless rate for September was 3.7 percent, the lowest rate since 1969, when the Beatles released “Abbey Road.”

“The skill is deciding NOT to buy it, even when you DO have the money for it,” according to a recent tweet by “Mr. Money Mustache,” a Canadian-born blogger whose real name is Pete Adeney and who promotes himself as a “thirtysomething retiree who now writes about how we can all lead a frugal yet Badass life of leisure.”

Forget asking yourself things like “Can I afford it?” Sure, you might easily afford a $5 coffee or a $50 bottle of wine at dinner. But do you need it? And what might you be giving up in the long run if you give in to a small splurge now?

“It’s a trade off between your current self and your future self,” said Jean Young, senior research associate in the Vanguard Center for Investor Research.

No matter your age, it’s a worthwhile point to consider before spending money.

Yet is it really possible to save 40 percent or 50 percent of your pay toward retirement when you’re in your 20s or 30s? And live debt-free as early as possible?

Maybe, if you’re extraordinarily frugal and live an extremely modest lifestyle. It can involve consistently packing the kids salami sandwiches to take on a day of activities instead of stopping at McDonald’s or Burger King, skipping trips to Disney World and avoiding high-priced school activities and hobbies.

You’d need to question whether you really need the latest SUV, too. Or will a boring used sedan do? Or do you even need a car at all? Can you get there by bike?

The whole focus is to get out of a work-to-buy, spend-to-save culture. It’s not easy, even on a small scale.

You’d need an even bigger level of savings because if you stop working in your 40s, you’re not going to be building up a significant retirement benefit from Social Security, said David M. Blanchett, head of retirement research for Morningstar Investment Management in Chicago.

While some might be able to retire earlier, plenty of people aren’t able to do that.

“Like everything else, there’s no one number for everyone,” Blanchett said.

One guideline suggests you need 10 times the last year of your salary saved for retirement if you’re retiring in your 60s. But even that might not be enough if you retire earlier or live in a high-cost community.

To retire in your 30s or 40s, some suggest, you could need to have saved up 30 times or more of your living expenses before you retire. If you’re spending $40,000 a year, that’s $1.2 million.

But remember, you might need much more money because you could have higher expenses in retirement if you suddenly need to pick up the cost of your own health care, instead of receiving coverage from your employer. Medicare doesn’t kick in until age 65.

“The reason most people have this ‘pipe dream’ but never execute it is because of health insurance,” said Sam Huszczo, a chartered financial analyst in Southfield.

“To be responsible for your own health expenses for 20-plus years is asking for disaster.”

As a result, he sees his average client retiring at age 62.

Huszczo said some are more comfortable with turning to a phased-in retirement where someone who has excelled in one career chooses to switch to a less demanding job for another 10 years to 20 years.

Another hurdle: Retirees in their early 40s would have to wait about 20 years to be eligible for Social Security retirement benefits as early as age 62.

On top of that, Social Security benefits would be significantly reduced because of a shortened work history. To calculate retirement benefits, Social Security reviews an average of indexed monthly earnings during the 35 years in which you earned the most taxable income. Granted, someone who is super wealthy might not be worrying about a Social Security check down the road.

What’s a realistic retirement age?

Young says the vast majority of people are not going to be able to save enough to retire after working just 20 years or so in their careers. But at the other extreme, she doesn’t believe most people need to wait to retire until age 70, either.

“Suze’s got one extreme. The FIRE people have the other extreme,” Young said.

The steady, consistent plan to save 12 percent to 15 percent of pay toward retirement and aim for a balanced asset allocation can get many to a spot where they can retire in their 60s, she said.

Retiring in your 60s isn’t really going the way of the gold watch and the monthly pension check, experts say.

“Most of my clients retire in their mid- to late-60s,” said Robert Bilkie, president of Sigma Investment Counselor in Northville.

Many people may expect to retire at age 65. In reality, the median age is 62 _ where half retire below that age and half above, according to Craig Copeland, senior research associate with the Employee Benefit Research Institute.

“In many cases, they’re retiring because they’re forced to retire due to circumstances, either their own health or the health of the company,” Copeland said.

Telling someone that they should work until age 70, he said, might work for a person who is healthy, sits at a computer in an office and enjoys working for a company that’s making money.

Someone who expects to live well into their 90s might even want to delay collecting Social Security benefits until age 70 because you’d get 132 percent of the monthly benefit because of the delay.

When you reach age 70, your monthly Social Security retirement benefit stops increasing even if you continue to delay taking benefit.

“If everything is perfect, 70 should probably be the goal,” Copleland said. “But nobody’s life is perfect.”

Many things, including your health and job security, aren’t predictable. So if you spend money too freely in your 40s or 50s with the full intention of working until age 70, you could be in trouble.

“Maybe 70 is the goal but people should consider what if X, Y, or Z happens,” he said.

Who can really retire in their late 40s or early 50s?

Typically, it’s someone who has experienced a life-changing event, said Tom Pursel, senior vice president and private wealth adviser for Merrill Lynch in Troy.

Pursel only recalls seeing someone retire that young when they’ve started and then sold a successful business or received a sizable inheritance.

In general, he said, he’s seeing people retire after age 55.

Each situation can vary, though, based on one’s savings, health and opportunities for taking an early retirement.
“We do hear sometimes, ‘No man in my family has lived past age 70.’ Well, maybe taking it early makes sense,” Pursel said.

What people need to realize, he said, is that the earlier someone retires, the longer they typically need to make their money last.

Blanchett, who is 37, said he doesn’t believe it’s realistic for most people to think they can retire in their 30s or 40s.

“Are you willing to go back to work if things don’t go well?” he asked.”If you retire at 35, you can you go back to work at 45. But what will you be able to do if you’ve been out of the workforce for 10 years?”

Many stay-at-home mothers know the story all too well. They may be able to find a job after their children have grown but many times, the jobs aren’t paying as much as they would have if they stayed in the workforce.

Instead of dwelling on what could be an unrealistic retirement age, he said, it may be more important to figure out a way to save more money and remain in the workforce.

“People by and large tend to wish they would have saved more. So save more if you can,” Blanchett said.

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