How to retire at 65
It’s possible with careful planning, experts say.
Dreaming of getting off the
9-to-5 treadmill and retiring at
65? To make it happen, you’ll need a big pile of cash – much of it coming from your own money you saved yourself.
The catch? To ensure that you’ll have enough savings to spend your post-work days living at a cottage near the sea, hopping on planes to visit grandkids or traveling to places on your to-do list, you’ll need to draw up a doable savings plan – and stick to it.
Retiring by 65, while not free of challenges, isn’t impossible, however.
“It is a reasonable goal,” says Jonathan Knapp of Creative Planning in Overland Park, Kansas.
But executing your financial plan is a requirement for a secure retirement.
❚ Start saving early: If there’s a general rule to retirement saving, it is this: “Save as much as you can as early as you can,” says Knapp, who once served as his firm’s head of financial planning. And for people who are behind on their savings or have yet to get started, Knapp offers both advice and support: “It’s never too late to start.”
So how much of your pay should you devote to retirement savings? Mutual fund giant T. Rowe Price recommends saving at least 15 percent of your gross income during your working years, including matching contributions from your employer. If that’s not possible, try to save 10 percent of your salary, advises Steve Janachowski, president and CEO at wealth advisory firm Brouwer & Janachowski in Mill Valley, California.
If money is tight, financial planners say it’s OK to set aside lesser amounts in your 401(k) or individual retirement account, or IRA. But they recommend that you increase your retirement savings as your pay increases or your financial situation improves.
“If you start saving in your 20s and 30s, you don’t have to start at 15 percent off the bat,” says Judith Ward, senior financial planner at T. Rowe Price. “Focus on smaller steps you can take.”
So how much money will you need to maintain your lifestyle when you stop working? According to “savings milestones” outlined by Fidelity Investments, workers should shoot for 10 times their annual salary by the time they retire. Along the way, 30-year-olds should have 1 times their salary saved, by 40 you should have 3 times your pay, at 50 you should have six times your salary and by age 60 you should have 8 times your pay saved, Fidelity recommends.
Financial planners stress that, if at all possible, employees who have a retirement plan at work, such as a 401(k), should set aside at least enough to take advantage of their employer’s matching contribution.
There’s also broad agreement that retirement savers of all ages should invest a large chunk of their savings in the stock market. The reason? Stocks have historically delivered the biggest gains compared with bonds and cash over longer periods of time, despite occasional bouts of volatility and extended periods of falling prices.
Workers that put their savings on autopilot via regular payroll deductions, invest in low-fee, tax-advantaged funds with a diversified basket of investments also put themselves in a better position to reach their future savings goals, investment pros say.
Accumulating enough money to retire, however, requires different strategies, depending on one’s age, annual income and personal circumstances.
Here’s advice for millennials, Gen Xers and baby boomers on how to stash away enough cash to exit the rat race at age 65 and be able to fund a decent standard of living:
❚ Millennials: While millennials between 18 and 34 might be strapped with student loan debt and earn smaller paychecks than older and more established workers, they have one big advantage: a lot of time – 30 to 45 years, in some cases – for their money to grow and to ride out rough markets.
Even small dollar amounts invested in 401(k)s or IRAs via an index fund or exchangetraded fund that tracks a broad stock index, such as the Standard & Poor’s 500, can swell to a sizable nest egg over three or four decades.
A member of this younger generation, for example, who invests $5,500 in a Roth IRA each year starting at age 22 will have an estimated account balance of $1.8 million at age 65 based on an average annual return of 8 percent, according to an analysis by Janachowski & Brouwer.
The power of “compounded growth,” or the ability of your money to earn more money over time, is a big reason why younger investors should “frontload” their savings if they can, says T. Rowe Price’s Ward.
Millennials will get the biggest bang for their investment buck if they invest 90 percent or 100 percent of their money in stocks, Ward says. In down markets, investors’ payroll deductions will buy more shares of stocks.
Millennials should be investing for “growth,” says Janachowski. But there’s no reason, he says, to take big risks in search of outsize gains.
He advises investors to buy low-cost index funds or ETFs that track the total U.S. stock market and funds that provide broad international stock exposure.
“Don’t get too fancy; that’s where most people screw up,” says Janachowski.
❚ Guidelines for Gen Xers:
Gen Xers, or Americans between the ages of 35 and 52, are in their prime earning years. That means now’s the time to sock away as much money in retirement accounts as your budget permits, says Rob Williams, vice president of financial planning at Charles Schwab.
“Your main focus should be maximizing your savings,” Williams says.
If you get a raise or receive a bonus, it’s better to funnel some of that money into your retirement account, he says.
“This is the time to define your goals,” Janachowski says. “What do you want to do in retirement? Where do you want to live?“
Now’s not the time to play it safe with your investments, Janachowski adds. The 15 years between 35 and 50 is a time to invest in stocks with strong price appreciation potential, such as innovative companies that are leaders in their field, he says.