The average retirement age has been growing steadily over the past 5 years. In 2010, the average retirement age was 59 years old. Today, that age has climbed to 62 years old, but in all honesty, I think the average age should be much higher.
Given our current economic situation, you might think that I would caution people against retiring because there may be another recession on the way. Or, you might assume that I would encourage people to “make hay while the sun’s shining” (which is country lingo for, “work while you can because you might not have the same earning potential later in life”). While these are good thoughts, they have nothing to do with my opinions of a young retirement at age 62.
Here is the main reason why I’m freaked out for 62 year old retirees. Take a look at the chart below:
The average age of a retiree is 62 years old. For those that are 65-74 years old, they (on average) have a total of $148,900 in their retirement account. Why on earth are these people retiring when they have less than $150,000 saved up? For many, it’s because they think retirement has something to do with their age, and not the actual dollars that they have saved in an account.
Age 62 Doesn’t Automatically Mean Retirement
I’ve heard it many times. Financial advisors have a client come into their office at age 60 and proclaim that they’re going to retire when they turn 62. They have dreams of relaxing on the beach and drinking something that has an umbrella in it, but have absolutely no idea what it’s going to cost or if it’s even possible with the money that they have saved.
More often than not, the advisors warn these people that their funds are not sufficient for even a modest retirement. Instead, they advise their new clients to continue working, to save aggressively, and to consider retirement in their late 60s, rather than in just a couple of years.
Just because you’re age 62 doesn’t mean that you should retire. If you don’t have sufficient funds to provide for yourself, then you’ll likely be living in some crummy apartment in your old age, eating macaroni and cheese because it’s cheap and it’s simply all you can afford. If you don’t have the money to retire, then please don’t… I don’t care if you think you’re old. If you need more money, then your decision should be simple – keep working.
Retirement is Dictated by Your Earnings
If you currently need $30,000 per year to survive, then how much money do you need to come in each year from your investments? This is no trick question. The answer is: at least $30,000 per year.
The next question is, “Where does that money come from?”
For many, this money would stem from two places: first from Social Security, and second from their pot of retirement money (which we have already established isn’t all that large). But is this the only way to retire? Certainly not.
The date of your retirement is not dictated by the government or by your employer. Instead, it is the result of your available income outside of your job. For those that only invest in their retirement fund, this is the only source of income that they can depend on (besides Social Security – for however long that lasts), but what if you could develop other sources of income while you were young? If those earnings happened to grow larger than your current job, then you could effectively retire, couldn’t you? Ahhhh – so instead of striving to merely live until you’re 62, perhaps you should invest heavily, and diversify beyond a simple 401k.
How to Retire Young
If retirement is dependent on money and not age, how can someone put themselves into a position to retire early? Here’s the extreme answer: pay off all your debts, live on less than 25% of your income, and keep that same lifestyle as long as you live. There are quite a few people that have used this method to retire in their early 30’s and they’re still retired today, but it’s obviously not for everyone (including me).
If you don’t want to retire early with very little money, then consider this: building a passive income source and then doing what you love.
The most common way to build a passive income is through real estate investing. If you live frugally for a few years, it’s possible to save up enough money to buy a rental property with cash (I’ll be living proof of this very shortly). Buy a $100,000 home, rent it out for $1,000 a month and you’ll be earning a passive income of $12,000 per year. Do this five more times and you’ll have an income that might even replace that of your day job. With $600,000 of equity in the homes, your investments will be producing $60,000 per year and will likely grow with inflation as well (as you raise the rents). Of course, this is an extremely simplified example, but I hope you get the picture. Develop a passive income that replaces your work income, and you can quit your job and call yourself “retired”.
Do this when you’re 30 and you’ll be a phenom. Accomplish this in your 40s and people still won’t believe your “good fortune”. Even if this takes you into your 50s, you can still retire early, and best of all, you’ll be doing so with a solid cash flow, and with assets that total far more than $150k.
Have you ever thought about retiring early? What’s your plan?