When you think of retirement, you probably think of a silver haired person in their 60’s and up. Someone who has reached financial independence and no longer needs to work. But retirement is a number, not an age.
The Four Percent Rule
According to the 4 Percent Rule, an investor can pull four percent of their assets every year and theoretically not run out of money for 30 years or more. Four percent is considered a “safe withdrawal rate.” Many experts say you can withdraw more, but that’s for another conversation.
Assumptions
I think there’s this assumption that retirement comes later in life and just kind of naturally happens. It’s assumed that one will accumulate enough assets and money to be able to live without having to work.
It doesn’t just happen though. Here are a couple case in points.
45 Year-Old
I think most people would agree that 45 is very young to retire. If you have a 45 year-old with five million in assets who only spends $75,000 per year, they are financially independent provided they can access their funds.
That means he or she can choose to retire because they have reached the financial independence marker. It doesn’t matter that they are only 45 because financial independence is a number.
Of course this 45 year-old may choose to continue working and not retire, but they can.
65 Year-Old
65 is right around the “normal” retirement age. Just because this age is reached doesn’t mean retirement though.
Let’s use a hypothetical of a 65 year-old who has no assets, $30,000 in credit card debt, and $15,000 left to pay on a car. Even if they are eligible to take social security soon, there is no way they are going to make it financially every month.
The numbers don’t add up so this person would need to continue working at least part time. Age doesn’t matter other than having the ability to take Social Security.
Conclusion: Make a Plan
Don’t think that everything will magically “work out” as you get older. There needs to be a clear plan to make things work out.
Notice the language here, “make” work out. Hope is a good thing, but not a strategy. There has to be a plan to get there.
