When it comes to saving for retirement, most Americans are woefully underprepared. After all, the typical American only has around $57,000 saved for retirement, a number that pales in comparison with the over $200,000 Americans will need to spend on healthcare alone in retirement.
Maybe you're one of the lucky few who has a lot saved up and a plan. If so, get ready to move the goalposts -- because you may retire sooner than you think.
Plans vs. reality
The typical (in this case, median) American retired at 62, according to the Transamerica Center for Retirement Studies' survey of American Retirees and pre-retirees (link opens a PDF).
Workers aged 50 and older are planning to retire a little later in life, at a median age of 67, according to the same survey. With the shift in Social Security benefits to a later retirement age, and with the demise of traditional pensions (meaning the average American has to do more personal saving for retirement, something we as a country are well behind in), it makes sense that people would be waiting longer to retire.
But there's only one problem with that: Retirees had planned to retire later than 62, too.
In fact, 60% of current retirees retired sooner than they'd planned, according to the Transamerica survey. And of that group, only 12% retired because they believed they had enough money for retirement (and, to be fair, another 4% because they received a windfall, such as an inheritance). Twenty-seven percent retired because of "organizational changes at my place of employment", 27% because of ill health, and 26% because they lost their jobs.
Don't assume you're immune
The conventional wisdom has been that blue-collar workers are disproportionately affected, as aging makes it more difficult to perform demanding physical tasks. The assumption goes that those workers are more likely to be laid off as they become unable to perform daily at their jobs, and that white-collar professions are largely insulated because of the lower physical demand. However, new research (link opens a PDF) out of the Center for Retirement Research at Boston College shows that it's not that simple. The study calls out a number of non-physical abilities that also decline well before full retirement age. Here's an example, quoting from the study:
'[F]luid' cognitive abilities, such as episodic memory, working memory, and reaction time -- which people need to acquire new information and make decisions -- steadily decline with age starting in one's twenties or thirties.
Because of these and other issues, a number of workers in white-collar professions, such as practicing nurses and police detectives, may have difficulty extending their work ever later in life. Your profession could be affected, too -- and even if not, there's always the possibility that your white-collar employer offers you an early buyout and you find yourself retiring years earlier than expected.
Here's what this means for you
The simplest, easiest way to prepare for the possibility of early retirement is to shift your plan so you have some extra wiggle room. If you were planning to retire completely at 67, re-run the numbers and see what happens if you lose your full-time job at 62 and then do part-time work for a few years. If you're in your 50s, now might be a great time to take advantage of job cross-training opportunities that could either help forestall a possible buyout later or give you marketable skills that you can use to do a slower, working transition to retirement after ending your main career.
Another prong of your plan should be to look at your total savings and consider how much more you need to be able to retire. Use the commonly used 4% retirement rule to consider whether you can live off 4% of your savings in your first year of retirement, and then adjust upward for inflation in future years. If the numbers don't look favorable, consider upping your retirement contributions by socking money away in a traditional or Roth IRA. You're limited to $5,500 a year in contributions unless you're 50-plus -- at which point you can take advantage of the catch-up contribution and put away $6,500 a year.
Finally, a sudden, early retirement often leads people to file immediately for Social Security -- and, perhaps not surprisingly, the typical American files for Social Security at 62. You'll want to consider your specific circumstances, but you can boost your annual Social Security income by about 8% a year for each year you delay taking Social Security between 62 and 70.
And speaking of Social Security ...