Retirement has often been assumed to take place in our mid 60s. Early retirement is generally assumed to be anything before 65. Let's examine assumptions about the timing of retirement as well as our definition of what retirement means.
Old assumptions about retirement finance held that if you saved between 10 percent and 20 percent of what you make, you'd have three financial sources for retirement: Social Security, personal savings, and your pension.
The pension generally was a monthly check you'd get for the rest of your life after working 20 or 30 years for one company. That type of plan is rare today, and has been replaced by plans where the employee contributes to it and directs how it is invested.
When Social Security was founded, people retired in their mid 60s and generally didn't live past 70. Now, a reasonable life expectancy is closer to 80, and some people live into their 90s. So we need to save more now during our working years just to retire in our 60s, because we'll likely live longer than our predecessors.
And we might not have the retirement income from former employers and the government that those before us did.
The story doesn't need to have an unhappy ending, though. Let's look at what we believe retirement is.
In those earlier days, when people were in retirement less than 10 years, on average, just resting in the rocking chair might have defined retirement. But people who stop their careers when they're 65 now could have 15 to 20 years in retirement. That's a lot of time in a rocking chair. It's even a lot of time to golf or travel in an RV. Besides a paycheck, work gives people a sense of structure in their lives as well as a sense of purpose. So having some kind of work after ending our primary career can help us stay engaged in a meaningful life, as well as defray how much of our nest egg we're spending.
This same approach also works if you want to retire early. Retirement doesn't have to mean completely quitting the workforce. It can mean making enough to cover your living expenses and provide a little financial cushion for emergencies. That allows your nest egg to continuing growing before you start dipping into it. Then you can taper off your part-time work and have some of your living expenses covered by the part-time job and some covered by withdrawals from your retirement nest egg.
But even to do a gradual retirement, you need to put away money for retirement pretty aggressively - at least 20 percent to 30 percent of what you make. If you're going to work for 25 years and live off what you save for another 25 years, common sense will tell you that you need to be saving a lot.
Linda Leitz is a certified financial planner. Contact her at email@example.com.