We are looking at a new dust-up in the retirement universe. Is 70 the new 65? Or is 35 the magic number?
TV personality Suze Orman says don’t dream about retiring a minute before you hit 70, while Twitter showman and blogger “Mr. Money Mustache,” aka Pete Adeney, is promoting a lifestyle through the FIRE movement — which stands for “Financial Independence, Retire Early” — which might enable you to leave your day job by your 30s or 40s.
Magic numbers do drive blogs and podcasts. The theory that you can take control of your money — as well as your time and energy — so that you can ultimately walk away from the rat race is hugely appealing.
And I would imagine that the FIRE movement isn’t hurt by the incredible steady returns for the stock market in the past few years.
Yet is it really possible to save 40 percent or 50 percent of your pay toward retirement when you are in your 20s or 30s? And live debt-free as early as possible? Maybe, if you are extraordinarily frugal and live an extremely modest lifestyle.
The whole focus of the movement is to get out of a work-to-buy, spend-to-save culture. It’s not easy, even on a small scale. You would need an even bigger level of savings because if you stop working in your 40s, you are not going to be building up a significant retirement benefit from Social Security, said David Blanchett, head of retirement research for Morningstar Investment Management in Chicago.
While some might be able to retire earlier, plenty of people aren’t able to do that. “Like everything else, there’s no one number for everyone,” Blanchett said.
One guideline suggests you need 10 times the last year of your salary saved for retirement if you’re retiring in your 60s. To retire in your 30s or 40s, some suggest, you might need to save up 30 times or more of your living expenses before you retire. If you’re spending $40,000 a year, that’s $1.2 million.
But remember, you might need much more money because you could have higher expenses in retirement if you suddenly need to pick up the cost of your own health care, instead of receiving coverage from your employer. Medicare doesn’t kick in until age 65.
“The reason most people have this ‘pipe dream’ but never execute it is because of health insurance,” said Sam Huszczo, a chartered financial analyst in Southfield. “To be responsible for your own health expenses for 20-plus years is asking for disaster.”
As a result, he sees his average client retiring at age 62.
Huszczo said some are more comfortable with turning to a phased-in retirement where someone who has excelled in one career chooses to switch to a less-demanding job for another 10 to 20 years.
Another hurdle: Retirees in their early 40s would have to wait about 20 years to be eligible for Social Security retirement benefits that would be reduced because of a shortened work history.
Jean Young, senior research associate in the Vanguard Center for Investor Research, said the vast majority of people are not going to be able to save enough to retire after working just 20 years or so in their careers. But at the other extreme, she doesn’t believe most people need to wait to retire until age 70, either.
“Suze’s got one extreme. The FIRE people have the other extreme,” Young said.
The steady, consistent plan to save 12 percent to 15 percent of pay toward retirement and aim for a balanced-asset allocation can get many to a spot where they can retire in their 60s, she said.
Those who can retire in their late 40s or early 50s usually have experienced a life-changing event, said Tom Pursel, senior vice president and private wealth adviser for Merrill Lynch in Michigan. Pursel only recalls seeing someone retire that young when they’ve started and then sold a successful business or received a sizable inheritance.
The median retirement age is 62 — where half retire below that age and half above, said Craig Copeland, senior research associate with the Employee Benefit Research Institute. “In many cases, they’re retiring because they’re forced to retire due to circumstances, either their own health or the health of the company.”
Telling someone that they should work until age 70, he said, might work for a person who is healthy, sits at a computer in an office and enjoys working for a company that’s making money.
Someone who expects to live well into their 90s might even want to delay collecting Social Security benefits until age 70 because you would get 132 percent of the monthly benefit because of the delay.
“If everything is perfect, 70 should probably be the goal,” Copeland said. “But nobody’s life is perfect.”
Many things — including your health and job security — aren’t predictable. So if you spend money too freely in your 40s or 50s with the full intention of working until age 70, you could be in trouble.
“Maybe 70 is the goal, but people should consider what if X, Y or Z happens,” he said.
Tompor is a columnist for the Detroit Free Press.