![]() That’s now known as the 4% rule, which is one of the most common modern benchmarks for financial independence. In simple terms, that means you have enough to retire once you save 25 times your annual expenses. They found that an investment portfolio split between stocks and bonds would survive inflation-adjusted withdrawals of 4% in almost all of the 30-year periods from 1925 to 1995. In the 1990s, a group of college professors performed what’s now known as the Trinity Studies. That doesn’t really apply to people who retire early, though, since they usually save significantly more than 20% of their salaries in the first place. ![]() If you save 20%, you spend 80%, implying that you’d need to support that in retirement. My theory for the origin of the 80% guideline is that traditional retirement advice also suggests saving 20% of your salary. □ For example: If you make $10,000 a month while working and expect to spend $2,000 a month as a retiree, why would you need $8,000 per month in retirement? You’re not saving for anything anymore, so there’d be no reason to build up a portfolio to support the extra income. You only need to save up enough to cover your spending in retirement, but you can even save $10,000 in six months! The truth is that there’s no direct correlation between your working salary and retirement needs. Like the 65-year-old retirement age, the reasoning behind that number is arbitrary at best. Traditional financial wisdom says that you’ll need 80% of your working income to support yourself in retirement. □ Want to learn more about where you should put your retirement funds? Take a look at our guide to retirement accounts: An Introduction to Tax-Advantaged Retirement Accounts. Thanks to the internet, it’s never been easier for the average citizen to create a portfolio of income-producing assets. Fortunately, it’s entirely possible to do so without Social Security. You can retire far earlier as long as you can fund your lifestyle without working. It’s no safer or riskier mathematically than retiring at any other age. Other than gaining full access to Social Security, there’s no tangible reason you need to work into your 60s. The American government decided to let people access Social Security at 65, and it’s been synonymous with retirement ever since. The majority of existing pension plans and social benefit plans at the time (in America and the rest of the world) began paying out at age 65. Traditional retirement is also a good way to get rid of the expensive older workers and make room for younger, cheaper labor.īeyond those cynical notions, the number is arbitrary. Only 54% of adult men in the 1940s would live to see their 65th birthday. Have you ever wondered where the traditional American retirement age of 65 comes from? My inner hippie suspects it was one way for “the Man” to minimize costs back when Social Security was established.
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