Detailed Explanation
Retirement is the life phase when you’re no longer dependent on employment income. Successful retirement requires accumulating enough assets to support your desired lifestyle for 20-30+ years without a regular paycheck.
Retirement Account Types
| Account | Tax Treatment | 2024 Contribution Limit |
|---|---|---|
| 401(k)/403(b) | Pre-tax in, taxed out | $23,000 (+$7,500 if 50+) |
| Traditional IRA | Pre-tax in, taxed out | $7,000 (+$1,000 if 50+) |
| Roth IRA | After-tax in, tax-free out | $7,000 (+$1,000 if 50+) |
| Roth 401(k) | After-tax in, tax-free out | $23,000 (+$7,500 if 50+) |
The 4% Rule
A guideline for sustainable withdrawals: withdraw 4% of your portfolio in year one, then adjust for inflation. Based on historical data, this has a high probability of lasting 30 years.
FI Number = Annual Expenses × 25 (the inverse of 4%)
Retirement Income Sources
- Investment portfolio: Your primary source, drawn down over time
- Social Security: Typically 20-40% of pre-retirement income for most retirees
- Pension: If available, provides guaranteed income
- Part-time work: Many retirees work part-time by choice
Examples
Retirement Savings Milestones
| Age | Target Savings |
|---|---|
| 30 | 1× annual salary |
| 40 | 3× annual salary |
| 50 | 6× annual salary |
| 60 | 8× annual salary |
| 67 | 10-12× annual salary |
Retirement Number Calculation
- Annual retirement expenses: $60,000
- Retirement nest egg needed: $60,000 × 25 = $1,500,000
- Year 1 withdrawal (4%): $60,000
Compound Growth Example
$500/month invested from age 25 to 65 at 8% return:
- Total contributed: $240,000
- Ending balance: $1,745,000+
Why It Matters
Retirement planning is perhaps your most important financial goal:
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Time Is Everything: Starting at 25 vs 35 can mean $500,000+ more at retirement-same monthly contribution.
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No Do-Overs: Unlike other goals, you can’t delay retirement indefinitely. Your body and mind may not cooperate.
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Decades of Expenses: You’re funding potentially 30 years of living without employment income.
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Healthcare Costs: Medical expenses increase significantly with age-Medicare doesn’t cover everything.
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Social Security Uncertainty: Future benefits may be reduced; don’t rely on it entirely.
Regularly tracking retirement projections and adjusting contributions ensures you stay on track for the retirement you want.