I recently read an article that says people in their 30/40s feel they may never be able to retire.
This is triggered by rising cost of living, smaller pension pots, and older pension access ages.
For those of you who are worried about never retiring, I want to show you that there is hope:
- Step 1: Check your 401ks/pensions and assess how much could may have at retirement.
- Step 2: Check your monthly cashflow: how much you earn, spend, save, pay off debt, etc.
- Step 3: Assess how much you can invest monthly and how much it’ll be worth at retirement.
- Step 4: Assess to see if you may be able to not only retire comfortably, but even retire early.
In this article, we discuss how you can get on top of your pensions and standard retirement.
We talk about how much you need to invest to make sure you have a comfortable retirement.
We then discuss whether you are on track for not only a comfortable but an early retirement.
How much could you have at Retirement with your Pensions?
The first thing is to assess where you currently are with regards to your pensions/401k(s).
What I mean is how much you currently have and how much you might have at retirement.
Let’s say that if you’re an individual you have $10k in pensions and if you’re a couple: $20k.
You then must know how much you, your employer, and the government contribute a month.
When you have the details, you can then plug them into the MYB Realistic Pension Calculator.
Assuming a $50k salary and 10% return, an individual might have $1.2 million at retirement.
This is assuming that the individual is currently 30 and looking to retire by age 60 i.e. 30 years.
Using a 5% withdrawal rate, this would provide a gross income of $62k/year or $5.2k/month.
For a couple, this would be double meaning a gross income of $124k/year or $10.4k/month.
I say gross income because pension income is taxed, so how much you receive would be less.
How much can you Invest with your Take Home Pay?
The beauty of pensions is that they are funded from your gross pay, not your take home pay.
In other words, this money is taken from your income and never enters your bank account.
What this means is with your take home pay, you can also invest towards your retirement.
Unlike pensions which take a set percentage a month, you must decide what this sum will be.
You must know your monthly income and expenses, and any money for saving/paying debt.
For example, an individual might have a take home pay of $3k a month and expenses of $2k.
Let’s say they use $500/month for saving/paying debt, meaning they can invest £500/month.
For a couple, they might have a combined take home pay of $6k/month and expenses of $4k.
Again, let’s say they use $1k for saving/paying debt, meaning that they can invest $1k/month.
Once you have a sustainable figure, you can see how much this could be worth at retirement.
How much could your Investments be worth at Retirement?
To do this calculation, we need to use another type of tool: MYB Early Retirement Calculator.
We use the figures identified for an individual i.e. $500/month and a couple i.e. $1000/month.
We’ll assume they are starting at age 30 with $0 and investing for the next 30 years to age 60.
We’ll assume a 10% average rate of return over those 30 years (if invested in index funds).
Make sure this is invested in tax advantaged accounts (ISA in the UK or Roth IRA in the US).
For an individual investing $500/month over 30 years, they could have over $1 million by 60.
Using a 5% withdrawal rate, that would give them $54k/year or $4.5k/month in retirement.
For a couple investing $1k/month over 30 years, they could have over $2 million by age 60.
Using a 5% withdrawal rate, that would give them $109k/year or $9k/month in retirement.
And because these are in tax advantaged accounts, they would get to keep all of the money.
Could you Retire Early?
As you can see, over a 30 year period, an individual or couple could retire quite comfortably.
For an individual: $2 million in investments by 60 and for a couple: $4 million in investments.
For an individual: around $10k/month from investments and for a couple: $20k/month.
By age 60, I think a monthly income of $10-20k would be more than sufficient in retirement!
However, there is another option instead of waiting to 60 to retire: and that is to retire early.
This involves starting to withdraw your money once your investments reach a target figure.
For example, an individual may want to retire by age 45 with the money in their ISA/Roth IRA.
However, they could only withdraw $2k/month for it to last until they access their pensions.
Similarly, a couple could withdraw $4k/month so that it lasts until they access their pensions.
As you can see, it’s possible to retire early, but just not as comfortably as waiting for 30 years.
Say Hello to your Retirement
As you can see, it’s not all gloom for 30/40 year olds who think they’ll never be able to retire.
Once they start investing both privately and into pensions, the future may seem quite bright.
Note that I’ve started my assumptions starting at age 30, some start investing from their 20s.
This means they’d be in an even better position by the time they come to retire in their 60s.
On the other hand, some don’t start investing from their 20s, some might wait until their 40s.
If that’s your situation, then you’d need to adjust your calculations and assumptions as such.
If you invest both privately and into pensions, you could retire quite comfortably in your 60s.
As well as that, you could even decide to retire early (in your 40s) instead of waiting until 60.
However, you may find that you won’t have enough invested by your 40s to retire completely.
That’s ok – you can work part-time and make up the rest with your investment withdrawals.
To find out more about early retirement, check out our articles on retirement and investing.
Do you know what your FIRE Score is? Take our FIRE Quiz to see how close you are to FIRE.
Are you on the path to early retirement? How is it going? Feel free share in the comments!
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