When retirement age approaches, most Americans ask themselves: when is it time to end the labor process and finally enjoy a well-deserved rest? Despite the fact that Americans are real workaholics, they value relaxation no less than work.
The question of when to retire is one of the most difficult things in life (much more complicated than marriage) because to solve it one has to take into account a huge number of circumstances and answer so many questions!
But you will have to decide this question on your own since no one can determine when it is time for you to stop working. To solve this problem, you can attract loved ones, consult financial specialists, but the future pensioner must make the final decision since he or she will have to solve the problems that arose as a result of untimely retirement.
Nevertheless, I dare to give some advice to those who are going to retire and to those who intend to thoroughly prepare for it, so that later they will not be hurt and offended for aimlessly worked years. Indeed, as sociologists say, if you have accumulated enough money, you may refuse to work at the age of 50 and even 40.
American economists have calculated that in order for a pensioner to live on a carefree pension, he or she needs to acquire retirement savings of at least one million dollars. Carefree means not thinking about tomorrow, not worrying that a serious illness will gobble up all accumulations. Carefree means allowing yourself a lot of things that you have not allowed before, for example, vacation abroad, which is so loved by retired Americans.
A million in pension accounts is quite a possible amount for an American who has worked for 30-35 years. However, the recent financial crisis has led to the fact that some Americans have failed to raise the coveted million and are forced to be content with what they managed to accumulate. And if there is not much money in the pension fund, then you have to act accordingly.
To begin with, let’s find out what pension savings in the USA look like.
Pension savings of Americans usually consist of two parts – a state pension (social security), assigned by age, and their own pension savings (401K funds, various types of IRA, as well as other investments in anticipation of receiving money after retirement).
As for the state pension, according to the Ministry of Finance, the average American receives about half of his or her salary and depends on the number of years worked, the salary received and his or her contributions to the federal pension system. The national average state pension is $1,100-1,300 per month. In New York, its level is much higher and amounts to over 40 thousand dollars a year.
However, one should bear in mind that this indicator was affected by the pensions of civil servants, teachers, police and firefighters, whose state pension is much higher. The real social security pension for the average resident of the Big Apple City is approximately 22-24 thousand dollars a year.
As you know, in order to live in such a city, paying your bills, this amount is extremely small. And such a low state pension is one of the reasons that pensioners are moving to other states, where the climate is better and life is much cheaper.
So, is extremely difficult to live on a state pension if you are not a government official, not a poor man using a full set of state benefits, not a police officer or a fireman. The main part of Americans’ retirement savings is their savings in pension funds.
401K plan is one of the main types of pension funds (and the most profitable one).
This plan allows you to deduct tax-free funds from each salary, and in some cases, the employer will pay a comparable amount to your account, which increases the deduction by one and a half to two times.
This plan has one more advantage: any participant can take a low-interest loan for his or her emergency needs (buying a house, educating a child in college), and then repay this debt on a monthly basis. But at the same time, you pay the debt to yourself since all the funds given are returned to your pension fund.
In addition, in such a fund, participants can choose their own way of investing their funds. Some Americans prefer conservative investment plans that bring 4-6% of annual income, while others choose more aggressive plans that promise from 10 to 24%. The choice is always individual, the main thing is to remember that closer to retirement it is better not to invest your savings in plans promising large profits – you can lose most of your savings.
If you have the opportunity to get such a plan at work, do not refuse it – you will be able to accumulate a substantial increase in pension. For example, Bob M., an Arizona resident, began saving money at the age of 30. Over 32 years of work, he managed to raise about half a million dollars. When he retired at age 62, he transferred most of this amount to an individual retirement account (IRA), part of it he spent on paying a mortgage, and part of it was left as an addition to his state pension. Now he lives with his wife for 40 thousand dollars a year and enjoys his life.
By the way, many Americans use most of their 401K pension fund to pay the mortgage. Economists believe this is wrong since taking the entire amount from the pension fund right away is not profitable because of high taxes, however, such payment of a mortgage allows pensioners to refuse to move and sell their own home, which means that one of the most serious problems is housing.
If you don’t have a 401K plan at work, it’s okay, about 55% of Americans put money into the individual retirement accounts (IRAs) mentioned above. Some of the IRAs allow saving money starting from a certain age, removing these investments within certain limits from taxes. Others, for example, IRAROTH, allow you to save money, but at the same time, these investments are taxed.
Such expenses should be treated like investments; upon retirement, you can use these funds without paying taxes, and thus reduce the financial burden on your budget.
And yet, how much can be enough for a comfortable pension, and when should you stop working?
Recently, the trend of early retirement is gaining fashion. About 60% of today’s Americans prefer not to wait for their term but to apply for a pension earlier.
Such early retirees fall into several categories.
- Some of them are Americans who lost their jobs during the crisis and have not been able to find it since. And their pension is the best option;
- The second group consists of those who worked hard physically: auto mechanics, builders, farmers and others. They are so exhausted that they simply are not able to continue working;
- And finally, the third group includes those who believe that they have accumulated enough to live on retirement. This group of Americans, who have worked for 30-35 years, makes up about 40% of early retirees, one-third of them are middle class with higher education.
In my opinion, most Americans should not expect a full retirement. First, despite the increase in average age, no one knows how much he or she will live. And if there is a financial opportunity to stop working, it is necessary to do this in order to take the time for yourself and your family. Secondly, pensioners forget that they can earn extra money even with a small pension. At the same time, for every two dollars earned, their pension will be reduced by one dollar. So even if you have a small salary, it makes sense to retire early and continue to earn extra money.
But all these nuances need to be precisely calculated. And before you go on early retirement, you need to accurately figure out how much you will receive and how much you can live on. To determine the magnitude of your state pension, you can use a social security system calculator: http://www.socialsecurity.gov/retire2/agereduction.html.
Even if you have a state pension plus small savings in a pension fund, you can live quite well. You just need to follow some advice:
- Try to pay the mortgage;
- Change your residence to a more affordable one. If you rent an apartment, then it is quite possible to reduce its size;
- You must move to a state or district with an acceptable price level for your income. In the country, especially in the south, there are dozens of towns where you can live decent life even with a state pension;
- Get rid of the car if you do not really need it. Think about the cost of car insurance alone. Maybe, if necessary, it makes sense to call for a taxi or use car service, which ultimately will cost you much less;
- Try to reduce your taxes by structuring payments from your retirement fund. Small amounts from a pension fund may have little effect on the amount of your taxes;
- Try to avoid fines for using the pension fund too early or too late;
- Reduce your medical expenses as much as possible. This is possible through the purchase of additional insurance for Medicare;
- Go on vacation out of season;
- Do not forget that senior citizens can always count on the discounts they are entitled to;
All these rather simple measures will help the family of pensioners to live on 23-27 thousand dollars a year.
Before retiring, a few more social problems need to be addressed.
For example, think: are you ready to leave your job? It’s not about earnings. The thing is that many retirees begin to feel restless, useless, and, as a result, they get malaise, illness and depression. So, as a future retiree, you should understand what you are going to do in your free time.
You should also understand how your spouse will react to retirement, especially if her or his retirement age begins much later. According to sociologists, this is a significant issue, almost 5% of American families break up when they retire when no one really expects this.
If you understand how to solve these problems, then you are quite ready for a well-deserved rest. Enjoy it!