Tuesday, November 20, 2007

Retire on Your Schedule

As a technical professional living in an industrialized nation today, choices are available to you that many others do not have. Concerning marriage, children, and jobs, you can choose when, where, and what you want to do. In addition, if you plan appropriately, you can decide when and how to retire.

Although Social Security and Medicare benefits have made most Americans think about retirement as something that occurs in their mid-sixties, no natural law dictates this practice. Many people choose to work much longer. Only 58% of Americans over the age of 65, for example, consider themselves completely retired. Others choose to retire much earlier.

Throughout much of history, retirement occurred only when someone became too frail or sick to work. This is still true today in less-developed countries. Improvements in productivity and work environment during the 20th century, however, have led to a mid-sixties retirement norm. Although available data for people retiring in their fifties or younger is difficult to obtain, Figure 1.1 illustrates the trend toward lower mean retirement age in the United States from 1950 to 2000. By 2000, the average age at retirement was less than 62, with many Americans retiring in their fifties or earlier.

Although countless surveys indicate that most Americans are looking forward to retirement, the same studies reveal ignorance about the requirements for successful retirement. This may be due in part to different motivations for retiring. Some people want to pursue other interests but are limited by job constraints. Some people want to escape a work environment they do not enjoy. Others feel like “wage slaves” and long for freedom to do whatever they want. Another part of the problem may have to do with the broad range of lifestyles that people imagine for their ideal retirement. Retirement can involve traveling the globe, simply sitting on the porch in a rocking chair, finding seclusion, volunteering, or working because you want to, not because you have to.

Regardless of your personal definition and views on retirement, it is a fact that close to 80 million Americans will be either close to retirement or in retirement within the next 20 years. At a time when an unprecedented number of people will reach traditional retirement age, we are also facing funding issues for Social Security and Medicare, witnessing the default of numerous corporate pension plans, and experiencing a personal saving rate of near zero. If aging engineers are to have any chance of enjoying a successful retirement, both financial and social preparation must be completed.

Retirement planning is helpful at any age, but saving early is especially valuable. An early start to saving is the best path to accumulating the resources you will need for a successful retirement. Young technical professionals who begin saving a fraction of their salary at the beginning of their career will be able to retire on their own schedule.

This figure considers a technical professional with a starting salary of $50,000 per year. An average salary increase of 5.5% per year (3.5% inflation, 2% experience bonus) is assumed. This data is consistent with the IEEE salary survey data for a BSEE graduate with no experience. The salary increase assumptions underestimate the experience of most electrical engineers since they ignore salary increases for promotions into positions of higher responsibility. Similarly, salary increases for obtaining advanced degrees are not considered in the salary increase rates. For example, an individual who obtains an advanced degree after starting work and moves into technical management after several years might expect an average salary increase of 8% or higher over the 30-year period illustrated in Figure 1.2.

The hypothetical engineer of Figure 1.2 invests 10% of pretax salary each year and takes advantage of a 3% company 401(k) match. The assumed average return on all investments is 7% over the 30-year period. Three cases are illustrated: (a) a person who begins saving as soon as he or she starts working, (b) a person who waits 5 years to begin saving, and (c) a person who waits 10 years to begin saving.

Even though Figure 1.2 is a simplified case that considers only fixed annual raises, and returns (without variations from year to year) it clearly illustrates the value of starting early. After 30 years, the engineer who starts saving from the first day on the job will have $480,000 more than the colleague who put off saving for 10 years.

As in the case of engineering projects, early planning is invaluable. It is not too late for the slow starter who begins to save in year 10 of his or her career. The time advantage of the early investor can be made up, for example, by increasing the saving rate from 10% to 17.7% once saving starts in year 10. Such a plan reduces disposable income by 7.7% for 20 years, but will result in identical portfolio value in year 30. Achieving a higher rate of return (at least 11.3%) can also compensate for the late start. In the investment world, however, higher returns are always associated with higher risk. Finally, the slow starter could choose to work for 6 years longer to make up the difference in savings.

For the engineer who wants to work beyond normal retirement age, starting to save early may seem of little value. It is worth noting, however, that although 68% of currently working Americans expect to work for pay in some capacity after they retire; only 32% of current retirees actually have worked for pay after retirement. This statistic might indicate that working seems less attractive to the 65+ year old than it did to the 25 year old. It may also be that there are not enough jobs available for 65+ year olds.