The short answer is that you can retire whenever you want, but considering how much financial comfort and stability you want to have is a more useful way to approach your decision. Let's take a look at some of the biggest concerns to keep in mind as you decide when you'll be able to comfortably retire.
Will you have enough income after you retire?
This is the No. 1 question that will determine whether you're ready to retire. Despite the popular misconception that you need to aim for a specific dollar amount in savings (like $1 million), the real question is how much income you'll have. In other words, someone who has a large monthly pension but little in savings might be in better shape than someone with a few hundred thousand in the bank.
The average American should expect to need about 70%-80% of their pre-retirement income to sustain the same quality of life after retirement. The percentage can be higher or lower depending on your particular retirement vision, but it's a good starting point.
Plus, in retirement, your income can come from Social Security, other fixed sources such as pensions and annuities, and of course, your savings. So the first step is to determine where your retirement income will come from. Do you have a 401(k)? A traditional or Roth IRA? Money in a standard savings account?
When can you start collecting Social Security and how much will you get?
Social Security is designed to replace about 40% of a person's pre-retirement income. So while it won't likely be enough by itself, the retirement program is certainly a critical part of the equation.
Without getting too deep into the weeds, Social Security benefits are calculated based on your 35 highest-earning years. As of July 2020, the average American's Social Security retirement benefit is $1,469, and the maximum benefit at full retirement age is $3,011. To get a good estimate of how much you could get from Social Security, check out your latest Social Security statement or log into your mySocialSecurity portal at www.ssa.gov.
So when can you start collecting those benefit checks? The Social Security Administration (SSA) defines an official full retirement age based on your year of birth, though technically, any American who qualifies for a retirement benefit can start collecting at any point after the age of 62.
However, choosing to start collecting Social Security at any age other than your full retirement age will permanently adjust your benefits up or down to compensate. If you claim Social Security at age 62, you'll receive smaller checks for more years; alternatively, if you delay claiming until age 70, you'll receive larger checks over fewer years.
How much do you need in savings?
Here's a quick calculation. Most retirement planners agree that you'll need about 80% of your pre-retirement income to sustain the same quality of life after you retire, so take your current household income and multiply it by 0.80. Divide the result by 12 to get an estimate of your monthly income needs in retirement. Keep this amount as-is to simplify, or adjust it higher or lower according to your retirement ambitions. For example, if you plan to travel the world after you retire or pursue an expensive hobby, you may want to plan on additional income.
Next, subtract your estimated Social Security benefit, as well as any pension income you expect. What's remaining is the amount of income you'll need to generate from your savings each month, so multiply by 12 to determine how much you should plan to withdraw from your savings each year.
A standard rule of thumb says that you can reasonably expect to withdraw 4% of your savings in your first year of retirement, and increase this amount for cost-of-living adjustments in subsequent years, without having to worry about running out of money. While this rule is admittedly not perfect, it is a good estimate of retirement readiness.
To apply this rule, simply multiply the amount of retirement income you'll need from savings each year by 25. So, if you determine that you'll need $30,000 in annual retirement income from savings, you should aim for a $750,000 nest egg before you quit your job.
Related retirement topics
How Much Do I Need to Retire?
The end of work doesn't mean the bills stop. How much should you save for a great retirement?
Full Retirement Age
When can you retire and collect Social Security? It depends on when you were born.
When can you retire?
The bottom line is that you'll be able to retire when the income streams you create -- Social Security, your savings, and any other sources you might have -- are enough to support your desired standard of living after you leave your job. Of course, there's no one-size-fits-all answer here. Many retirees plan to travel the world after they retire, while others are perfectly content with living a simple (read: inexpensive) life. If you aren't sure if you're on track for the retirement you want, it's a smart idea to consult a financial advisor who can assess where you stand and suggest a savings and investment plan to get you where you want to be.
Expert Q&A on Retirement Saving
The Motley Fool: In 2019, the average retirement account savings for American households was $65,000 with the average American under 35 having $13,000 saved for retirement. Why do you think this average is so much lower than what experts typically expect Americans to have?
Rita Assaf: Coming out of the pandemic, we’ve actually seen some powerful signs that younger people are more optimistic and driven to save for the future, compared to older generations. In general, younger generations have had more exposure to workplace savings plans and we’ve seen a lot more democratization of investing. It’s now easier to get started to save and invest with mobile apps and access to information has spread as well as we see saving and investing topics in social media. Younger generations have also seen their parents and grandparents weather recessions and are much more aware of their financial life.
Additionally, younger generations are leading the way when it comes to taking action toward retirement saving, with the number of IRA account openings in Q3 2022 for Gen Z increasing by 83% when compared to Q3 2021 and the number of Millennial accounts increasing by 25%. Furthermore, Millennial Roth IRA accounts with a contribution increased by 5.8% year-to-date.
The Motley Fool: There are no hard and fast rules about when to retire or how much we should have saved, but what three pieces of advice would you give someone who is just starting their first retirement savings account?
Rita Assaf: Planning for retirement is the biggest goal we invest in throughout our lives. While it might seem daunting, it’s beneficial to start saving for retirement as early as you can to make sure your money has the greatest potential for growth over time. When thinking about retirement, it's important to set a goal and start saving early to maximize your efforts, as the growth potential of just one year’s contribution can have a significant impact on your retirement savings.
As a general rule, these are the three actions that can make the biggest impact on retirement readiness for those saving in their twenties or thirties:
- Save as much as you can: Young people today are 30 or more years away from retirement. At this point, your retirement plan should really be focused on determining how you are saving on a regular basis and what accounts those savings should be put into based on tax and investing considerations. To help determine that, Fidelity suggests aiming to save at least 15% of your pre-tax income each year, which includes any employer match, with a goal to save 10 times (10X) your pre-retirement income by age 67. Breaking this down by age, aim to save at least 1x your income by age 30, 3x by 40, 6x by 50, and 8x by 60.
- Increase contributions over time: If starting off saving 15% of more of your income isn’t possible, small increases over time can make a big difference. If you have access to a 401(k) with a company match, try to save to at least your company match level. If you don’t save to that level, it’s like leaving free money on the table. A great way to regularly increase your contributions to your retirement savings is to do it if and when you get a raise each year. Get in the habit of increasing your contribution rate by 1% each year until you get to the 15%.
- Review your asset mix: Getting your investment mix right—investing for growth— from the start, can make a big difference. You want to make sure your money is working for you and has potential for growth. Make sure you have the right mix of stocks, bonds and cash based on your how far you are from retirement, and how comfortable you are taking potential risk in your portfolio.