What is retirement?

Key points

• Retirement is the time when someone permanently leaves the workforce, often in their mid-60s.
• While people have to meet a certain age to qualify for retirement benefits, retirement is actually less about a specific age and more about having enough money in the bank to support yourself during retirement.
• The amount you’ll need to save for retirement depends on the number of years you have to save and how much you hope to spend per year during retirement.

Many people spend years looking forward to the day when they can stop working for good. Maybe they’ll use that time to travel the world or pick up hobbies they’ve never had time for. Others are simply looking forward to having a bit of time to relax.

Unfortunately, many people assume retirement is a given. But the fact is that retirement income isn’t guaranteed, nor does retirement happen at a certain age for everyone. To help address some of this confusion, this article will explain what retirement is, how it works and how to prepare for it.

What is retirement?

Retirement refers to the time when someone permanently leaves the workforce, usually in the later years of their life. Retirement is often synonymous with the idea of financial independence, which is when your savings and investments are sufficient to support you for the rest of your life.

“More than golden years, retirement is the beginning of the distribution phase of investing and it requires paying more attention to losses, especially from the market, fees, and taxes,” says Doug Amis, a certified financial planner and president of Cardinal Retirement Planning.

Understanding retirement

Many of us think of retirement as a certain age. And it’s true that certain retirement benefits are associated with a specific age. For example, in general, the minimum age to start collecting Social Security benefits is 62, but you’ll have to be 66 or 67 years old to collect your full benefits.

There’s also a minimum age you must be to collect other types of benefits. The IRS penalizes people who withdraw from their tax-advantaged retirement accounts before age 59½, unless the withdrawals fall under certain exemptions. Similarly, plenty of companies that offer pension plans require that employees reach a certain age before they can start collecting benefits.

But it’s important to understand that retirement isn’t an age. Instead, it’s a point at which your finances are in a place where you can permanently leave the workforce. Sure, many people find themselves able to retire in their 60s around the time they can start collecting Social Security, but others retire much earlier in life, and others still never reach the point where they can retire.

Over the past decade, retirement has taken on a very different meaning. More people have become dissatisfied with the workforce and have looked for ways to exit it early to devote their time to things that are more important to them.

FIRE — short for financial independence, retire early — is a movement that preaches aggressive saving and investing for the purpose of retiring as early as possible. Many people pursuing FIRE invest more than half their income. These days, it’s not difficult to find stories of people reaching FIRE in their 30s, 40s and 50s, leaving the workforce years — or decades — earlier than planned.

The FIRE movement has gone a long way in showing workers that retirement truly isn’t an age, but a number in your investment accounts.

How much to save for retirement

One of the most important questions workers must ask themselves is how much they’ll have to save for retirement. It used to be the case that retirees could survive on their Social Security and pension benefits alone, but this is rarely the case anymore.

“In our experience, there are fewer benefits offered to retirees than of prior generations,” Amis says. “There are fewer and fewer retirees that are able to retire with pension benefits, let alone other perks like permanent life insurance, group long-term care policies or health insurance.”

Instead, it’s often up to individuals to save for their own retirement.

There are different guidelines you can follow for just how much to save, but many advisors recommend saving at least 15% of your income into a retirement or brokerage account.

In terms of how much you’ll ultimately want to have saved for retirement, you’ll have to think of how much you want to spend during retirement. Many people’s retirement spending will be between 55% and 80% of their retirement income. But for those who plan to travel the world when they retire or take on other expensive goals, it could be higher.

According to Amis, rather than taking a one-size-fits-all approach to your retirement savings, it’s important to look at your specific situation.

“The rule of thumb to have 25 times your annual expenses, or to take out only 4% of your portfolio per year during retirement, doesn’t take into account unexpected expenses,” Amis says. “Even if you plan to forgo a luxurious retirement, surprise expenses to maintain your home or health can put a retirement portfolio at risk.”

The good news is there are plenty of online retirement calculators — such as this calculator from Personal Capital — that can tell you how much you should save based on several key factors.

How to save and invest for retirement

The best way to start saving for retirement is using tax-advantaged retirement accounts, such as a 401(k) plan offered by your employer or an individual retirement account (IRA) that you open with a brokerage firm.

Retirement plans like 401(k)s and IRAs offer serious tax advantages, including allowing you to save on taxes either in the year you contribute to the plan or when you withdraw the money.

In addition to tax-advantaged retirement accounts, you can also save in a taxable brokerage account. While your gains in these accounts may be taxable, they offer some advantages of their own. For example, you can take advantage of long-term capital gains taxes, which could result in a tax rate as low as 0%. They also have the benefit of allowing you to withdraw money anytime without waiting until a certain age.

“Like investing with a diversified portfolio, saving for retirement across multiple types of taxable, tax-free and tax-deferred accounts is key to having the flexibility to better manage your tax liabilities in retirement,” Amis says. “If you have more tax diversification, you may be able to stay in a lower marginal bracket and capture lower tax rates for retirement income and capital gains.”

What to do if you can’t afford to retire

Unfortunately, many people reach retirement age and find they don’t actually have enough money to retire. Perhaps they weren’t able to set aside enough money during their working years, or maybe they just didn’t know they needed to.

If you are nearing retirement age and don’t have enough money, it’s time to do damage control. Sit down with your budget and see what you can cut back on to put more into your retirement accounts. Most types of retirement accounts allow higher contributions for older workers, so making extra room in your budget can make a big difference.

Another option is to find another source of income during retirement. Even if you don’t have any retirement savings, you may still qualify for Social Security retirement benefits. While that’s not generally enough to live on, it could reduce the amount you have to bring in from other sources. As a result, you could still leave your full-time job and find a part-time job to provide the rest of the income you need.

No matter how near or far you think retirement is, now is the time to start planning. Saving for retirement might seem unnecessary now if it’s decades away. But starting to save today can prevent a situation where you’re near retirement and learn you won’t be able to leave the workforce.

Frequently asked questions (FAQs)