There are certain milestones that people expect by certain ages. By 16, you hope to hit the road with your shiny new drivers license.
The first election year after turning 18, you can’t wait to head to the polls. For 21-year-olds, a champagne toast is in order. Eventually, everyone stops worrying about age-related milestones—we’re all on our own paths after all.
But then comes 65, the year many expect to retire. Easier said than done, right? Career, life, and family choices can all affect the age workers retire by.
Before diving into how someone can prepare for a financially comfortable retirement, let’s look at what the average retirement age in the USA really is.
65 is Not a Guarantee
Sixty-five may be the age most of us envision for retirement, but not all regions of America are hitting this goal. According to the U.S. Census Bureau’s American Community Survey :
• Hawaii, Massachusetts, and South Dakota residents retire at the average age of 66.
• Washington, D.C., residents aren’t retiring until 67.
• Residents of Alaska and West Virginia retire around age 61.
A lower cost of living may be what’s helping West Virginia residents retire so young. West Virginia was one of the top 10 most affordable states in the country in 2019, according to U.S. News & World Report .
While those previously mentioned states give a look at two ends of the average retirement age spectrum in the United States, many states have average retirement ages falling closer to what one might expect.
Colorado, Connecticut, Iowa, Kansas, Maryland, Minnesota, Nebraska, New Hampshire, New Jersey, North Dakota, Rhode Island, Texas, Utah, Vermont, and Virginia residents retire at an average age of 65.
Overall, the average retirement age in the U.S. is 64.
Expectations vs. Reality
Expectations can lead to disappointment. Any kid with an overly ambitious wishlist for Santa Claus knows that.
Now imagine a person spending most of their adult life expecting to retire at 65 and then realizing their retirement savings just isn’t enough. Ideally, that won’t happen, but it has happened to many.
The Employee Benefit Research Institute 2019 Retirement Confidence Survey Summary Report found that workers expect to retire at age 65, but as noted previously, the average retirement age in the US is 64. Retiring earlier than initially planned could lead to not having enough money to retire comfortably.
Especially, if a person doesn’t retire early by choice. Over four in 10 people retired earlier than they expected, mostly because of health problems, disabilities, or changes within their organizations.
It can be difficult for workers to exactly predict at what age they will retire due to circumstances that may be out of their control.
The right time to retire might have more to do with how much a person has saved rather than their age. According to the PGIM Investments 2018 Retirement Preparedness Study, there has been a shift to this way of thinking.
The survey found that half of Gen Xers and 62% of millennials reported they believe they will be ready to retire once they’ve saved enough money, not when they reach a certain age.
In order to bridge any financial gap caused by not having enough retirement savings, 51% of pre-retirees expect they will earn an income during their retirement by working either full time or part time.
While the survey found that respondents are aware of what they need their retirement savings to look like, there is a gap between their expectations and their actions. Seventy-nine percent of pre-retirees reported that they agree they should be doing more to prepare for their retirement.
However, only 48% reported having a strong retirement plan in place, with 19% of Gen Xers and 31% of millennials admitting to not saving for retirement at all.
A lack of awareness seems to be leading to a lack of preparedness: 25% of pre-retirees surveyed said they aren’t sure how much money they are currently saving for retirement.
It’s Never Too Early to Start Saving
Retirement can last 30 years or more. As lovely as that sounds, financial security is key to enjoying a relaxing retirement.
To retire comfortably, the IRS recommends having up to 80% of a person’s current annual income saved for each year of retirement. With the average Social Security monthly payment being $1,177, retirees may need to do a decent amount of saving to cover the rest of their future expenses.
Any day is a good day to start saving, but saving for retirement while a person is young could help put them on the path toward a more secure retirement and might allow them to take advantage of compounding interest.
Compounding interest can take small investments and grow them into larger ones with the earned interest. That is to say, the money in a savings account, individual stocks, or mutual funds will earn interest, then that interest goes on to earn more interest. As savings grows, interest grows with it.
The Department of Labor (DOL) estimates that for every 10 years a person waits to begin saving for retirement, they will have to save three times as much every month to play catch up.
One of the first steps a person could take toward their retirement saving journey is to estimate how much money they need to save. According to the DOL, just 40% of Americans have calculated the retirement savings they will need. Once potential retirees have an idea of how much to save for retirement, they could start making progress toward that goal.
It might be worth considering what retirement savings options may be available, whether that is an employer-sponsored 401(k), an IRA, or a simple savings account. Contributing regularly is key, even if big contributions can’t be made to retirement savings right now.
Making small additions to savings can add up, especially if extra money from finishing car payments, getting a holiday bonus, or earning a raise can be diverted to a retirement savings account.
If an employer offers a 401(k) match, it might be beneficial to take advantage of that feature and contribute as much as the employer is willing to match.
Along with receiving free money from an employer, there are also tax benefits of contributing to a 401(k). Contributions to a 401(k) happen pre-tax—that lowers taxable income, which means paying less in income taxes on each paycheck.
In addition, 401(k) contributions aren’t taxed when deposited, but they are taxed upon withdrawal. Withdrawing money early, before age 59½, also adds a 10% penalty.
If access to an employer-sponsored 401(k) plan isn’t available, or even if it is, investors might want to consider putting money into an IRA. IRAs allow investors to put up to $6,000 a year into their account.
There are two options for opening an IRA—a traditional IRA or a Roth IRA, both of which have different tax advantages.
Any contributions made to a traditional IRA can be either fully or partially deductible, and typically, earnings and gains of an IRA aren’t taxed until distribution.
For Roth IRAs, earnings are not taxable once distributed if they are “qualified,” which means they meet certain requirements for an untaxed distribution.
If an investor needs a little help sticking to a retirement savings plan, they could consider setting up an automatic monthly deposit from a checking or savings account into an IRA.
Late to the Retirement Savings Game?
Starting to save for retirement late is better than not starting at all. In fact, the government allows catch-up contributions for those over the age of 50. Catch-up contributions of up to $6,500 are allowed on a 401(k), 403(b), SARSEP, or governmental 457(b).
A catch-up contribution is a contribution to a retirement savings account that is made beyond the regular contribution maximum. Catch-up contributions can be made on either a pre-tax or after-tax basis.
As retirement gets closer, future retirees can plan their savings around their estimated Social Security payments. The official Retirement Estimator tool provided by the U.S. Social Security office could help by basing the estimate on an individual’s actual Social Security earnings record.
While this estimate is not a guarantee, it might give a retiree an idea of how much they might consider saving to supplement these earnings.
Social Security benefits can begin at age 62, which is considered the Social Security retirement age minimum. However, full benefits won’t be earned until full retirement age, which is 65 to 67 years old, depending on birth year.
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