There once was a time was when retirement meant leaving your job permanently, either when you reached a certain age or you’d accumulated enough wealth to live without working. Today’s retirement definition is changing, and it can vary widely depending on your vision and your individual financial situation.
It’s important for each person to develop their own retirement definition. That can help you establish a roadmap for getting from point A to point B, with the money you have, and in the time frame you’re expecting.
Key Points
• Retirement’s definition may vary based on individual financial situations and personal visions.
• Retirement has both financial and lifestyle aspects that need to be considered in its definition.
• Being retired means relying on savings, investments, and perhaps federal benefits for income instead of a regular paycheck.
• Retirement doesn’t necessarily mean individuals completely leave the labor force, as some retirees may have part-time jobs or pursue new careers.
• Retirement statistics show that a significant portion of retirees rely on Social Security, and savings levels vary among individuals.
Retirement Definition
Retirement’s meaning may shift from person to person, but the bottom line is that retirement has a financial side and a personal or lifestyle side. It’s important to consider both in your definition of retirement.
Retirement and Your Finances
Being retired or living in retirement generally means that you rely on your accumulated savings and investments to cover your expenses rather than counting on a paycheck or salary from employment. Depending upon your retirement age, your income may also include federal retirement benefits, such as Social Security and other options.
Retiring doesn’t necessarily mean you stop working completely. You might have a part-time job or side hustle. You may choose to start a small business once you retire from your career. But the majority of your income may still come from savings or federal benefits.
Retirement and Your Lifestyle
Some people embark on a new life or a new career in retirement, complete with new goals, a new focus, sometimes in a brand-new location. But retirement doesn’t have to be a period of reinvention. It depends on how you view the purpose and meaning of retirement. Many people enjoy this period as a time to slow down and enjoy hobbies or priorities that they couldn’t focus on before.
Consider the notion of moving in retirement. While strolling on sandy, sunlit beaches is depicted as a retirement ideal, many people don’t want to move to get there. In fact, 53% of retirees opt to remain in the house where they were already living, according to a 2022 study by the Center for Retirement Research.
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Qualified Retirement Plan Definition
A qualified retirement plan provides you with money to pay for future expenses once you decide to retire from your job. The Employment Retirement Security Act (ERISA) recognizes two types of retirement plans:
Defined Contribution Plans
In a defined contribution plan, the amount of money you’re able to withdraw in retirement is determined by how much you contribute during your working years, and how much that money grows as it’s invested. A 401(k) plan is the most common type of defined contribution plan that employers can offer to employees.
There are other kinds of retirement plans that fall under the defined contribution umbrella. For example, if you run a small business, you might establish a Simplified Employee Pension (SEP) plan for yourself and your employees. Profit sharing plans, stock bonus plans, and employee stock ownership (ESOP) plans are also defined contribution plans.
A 457 plan is another defined contribution option. They work similar to 401(k) plans, in that you decide how much to contribute, and your employer can make matching contributions. The main difference between 457 and 401(k) retirement accounts is who they’re designed for. Private employers can offer 401(k) plans, while 457 plans are reserved for state and local government employees.
Defined Benefit Plans
A defined benefit plan (typically a pension) pays you a fixed amount in retirement that’s determined by your years of service, your retirement age, and your highest earning years. Cash balance plans are another type of defined benefit plan.
Generally speaking, defined benefit plans have been on the wane in the last couple of decades, with more of the responsibility for saving falling to workers, who must contribute to defined contribution plans.
Retirement Statistics
Retirement statistics can offer some insight into how Americans typically save for the future and when they retire. Here are some key retirement facts and figures to know, according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2021 – May 2022:
• 27% of adults considered themselves to be retired in 2021, though some were still working in some capacity.
• 49% of adults said they retired to do something else, while 45% said they’d reached their normal retirement age.
• 78% of retirees relied on Social Security for income, increasing to 92% among retirees age 65 or older.
• 55% of non-retired adults had savings in a defined contribution plan, while just 22% had a defined benefit plan.
• 40% of non-retirees felt that they were on track with their retirement savings efforts.
So, how much does the typical household have saved for retirement? According to the Transamerica Center for Retirement Studies, the estimated median retirement savings among American workers is $54,000. Just 27% of adults who are traditionally employed and 24% of self-employed individuals have saved $250,000 or more for retirement.
Retirement Age
In simple terms, your retirement age is the age when you decide to retire. For example, you might set your target retirement date as 62 or 65 or 66 — all of which are related to Social Security benefits in some way.
Social Security has largely shaped how we view retirement age in the U.S. because that monthly payout is what enables the majority of people to leave work. As noted above, some 92% of retirees age 65 and older say they depend on Social Security. While retiring at 62 is the earliest age when you can claim Social Security, that’s not your “full retirement age.”
Your full retirement age depends on the year you were born. If you were born between 1943 and 1954, your full retirement age is 66. If you were born from 1955 to 1960, it increases until it reaches 67. And if you were born in 1960 or later, your full retirement age is 67. Claiming Social Security at your full retirement age gives you a higher monthly benefit vs. starting at age 62, which is considered a reduced benefit.
Every year you delay getting benefits gives you a little bit more — about 8% more — up until age 70. There’s no additional amount for claiming after age 70.
Saving for Retirement
Saving for retirement is an important financial goal. While Social Security may provide you with some income, it’s not likely to be enough to cover all of your expenses in retirement — particularly if you end up needing extensive medical care or long-term care. In 2022, according to the Social Security Administration, the average monthly benefit amount was $1,542.22.
Financial experts often recommend saving 15% of your income for retirement but your personal savings target may be higher or lower, depending on your goals. The longer you have to save for retirement, the longer you have to take advantage of compounding interest. That’s the interest you earn on your interest and it’s one of the keys to building wealth.
Selecting a retirement plan is the first step to getting on track with your financial goals. When saving for retirement, you can start with a defined benefit or defined contribution plan if your employer offers either one. Defined contribution plans can be advantageous because your employer may match a percentage of what you save. That’s free money you can use for retirement.
If you don’t have a 401(k) or a similar plan at work, or you do but you want to supplement your retirement savings, you could open a retirement investment account, otherwise known as an individual retirement account (IRA).
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Retirement Investment Accounts
A retirement investment account is an account that enables you to save money for the future, but it isn’t considered a federally qualified retirement plan, like a 401(k). IRAs are tax-advantaged investment accounts that you can use to purchase mutual funds, exchange-traded funds (ETFs), and other securities.
There are two main types of IRAs you can open: traditional and Roth IRAs. A traditional IRA allows for tax-deductible contributions in the year that you make them. Once you retire and begin withdrawing money, those withdrawals are taxed at your ordinary income tax rate.
Roth IRAs don’t offer a deduction for contributions because you contribute after-tax dollars. You can, however, make 100% tax-free qualified withdrawals in retirement. This might be preferable if you think you’ll be in a higher tax bracket once you retire.
Both traditional and Roth IRAs are subject to annual contribution limits. The annual limit for 2022 is $6,000, or $7,000 if you’re 50 or older (the extra amount is often called a catch-up provision). There’s an increase for 2023 to $6,500 for the base amount; the catch-up provision is still $1,000 more, for a total of $7,500.
You can open an IRA online, or at a brokerage, alongside a taxable investment account for a comprehensive retirement savings picture.
Pros of Retirement Investment Accounts
Opening an IRA could make sense if you’d like to save for retirement while enjoying certain tax benefits.
• If you’re in a higher income bracket during your working years, being able to deduct traditional IRA contributions could reduce your tax liability.
• And not having to pay tax on Roth IRA withdrawals in retirement can ease your tax burden as well if you have income from other sources.
• IRA accounts often give you more flexibility in terms of your investment choices.
Cons of Retirement Investment Accounts
While IRAs can be good savings vehicles for retirement, there are some downsides.
• Both types of accounts have much lower contribution limits compared to a 401(k) or 457 plan. For example, the maximum you can contribute to a 401(k) in 2022 is $20,500, with an additional $6,500 catch-up provision. For 2023, you can contribute $22,500 per year, plus an additional $7,500 if you’re 50 and up.
• With traditional IRAs, you must begin taking required distributions (RMDs) based on your account balance and life expectancy starting at age 72 (401(k)s have a similar rule). If you fail to do so, you could incur a hefty tax penalty.
• Roth IRAs don’t have RMDs, but your ability to contribute to a Roth may be limited based on your income and tax filing status.
Investing for Retirement With SoFi
However you choose to define your retirement, making a financial roadmap will help you get the retirement you want.
SoFi Invest offers traditional and Roth investment accounts to help you build the future you envision. You can also open a SEP IRA if you’re self-employed and want to get a jump on retirement savings. Another way to keep track your retirement savings is to roll over your old accounts to a rollover IRA, so you can manage your money in one place.
SoFi makes the rollover process seamless and straightforward. There are no rollover fees, and you can complete your 401(k) rollover without a lot of time or hassle.
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FAQ
What is the meaning of retirement?
Retirement generally means leaving your job or the workforce, and living off your savings and investments, but that definition is changing for some. Some people may choose to continue working in retirement, though it may not be their primary source of income. Others may shift their work to focus more on lifestyle changes.
How common is retirement?
According to the Federal Reserve, about 27% of adults considered themselves to be retired in 2021, though some were still working in some capacity. Of these, 49% said they had retired to do something else, while 45% said they’d reached their normal retirement age.
How does retirement work?
When someone retires, they stop working at their job. Or, in the case of a business owner, they hand the business over to someone else. At that point, it’s up to them to decide how they want to spend their retirement, which might include taking care of family, traveling, working part-time, or exploring new hobbies. Their sources of income might include savings, investments, a pension, and Social Security benefits.
Photo credit: iStock/Alessandro Biascioli
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