Retirement - Financialist
Retirement – Financialist

All of us have a limited working life but our life doesn’t end when we stop working. However, our regular income from salary or business does come to an end or gets reduced.

We need to be aware of our lifestyle expenses and how much do we need to maintain our desired lifestyle post-retirement. These are common questions that are addressed one by one in the below sections.


Retirement Age 

This concept covers many different ideas related to legal or statutory age, the benefits it brings, and other such concepts

Retirement Age: In most countries, there is a legal or statutory retirement age. At this age, any government employee is mandated to retire.

At this age, the individual is entitled to get a superannuation fund or a state pension, or similar benefits. This is generally a percentage of his last salary.

Some countries give a lump sum payment while some allow periodic installments. When these installments are of equal amounts, it is known as an annuity.

Each country has a different retirement age. However, there is no fixed retirement age for self-employed individuals.

Retirement Age In the USA: in the US an individual can retire at the age of 62 and start receiving social security benefits. However, he chooses not to take these benefits until the age of 70, then the number of his benefits would increase.

It is expected that the retirement age will be increased to 67 by 2023 

Full Retirement Age: Full retirement age is the age at which you are eligible to receive unreduced social security benefits. Those who were born in the period 1943-1954 reach their full retirement at the age of 62 and for those born from 1955 onwards, should add 2 months for each year in excess of 1954.

So a person born in 1956 will reach full retirement at 62 years and 4 months. The full retirement age is 67 for individuals born after 1960. You can find more information on this on the social security website of the US Government.

SECURE Act Retirement Bill

It came into force on December 20th, 2019. The bill aimed to improve retirement prospects. Some important highlights are:

  • Easing small business to provide their employees with 401K
  • Tax credits to employers for creating 401K or SIMPLE IRA for their employees 
  • Part-time employees to get retirement benefits if they met certain conditions
  • RMD age limit increased from 70 ½ to 72 (more on this under IRA)
  • Encourage annuities in 401K
  • Removal of stretch IRA

There are more changes, it is best to consult a financial advisor or check the public release document.





401K is a section of IRS which deals with the tax-advantaged retirement savings of an individual. Most employers give their employees the option to invest in the same.

Both the employer and the employee contribute to this account. It is simply setting aside some money that is saved for retirement. It is a defined contribution plan.


  1. 401k Limits 2020: As per the announcement of the IRS IR-2019-179 dated November 6, 2019, the employees could contribute up to $19,500 for those who are not of 50 years of age in 2020. This was an increase from $19,000 for 2019. Those who are 50 old or older can contribute up to $26,000 inclusive of $6,500 of catch up contribution. 


The amount in the 401K accounts are not easily accessible so putting in all the savings in it is not advisable. Pre-mature withdrawal attracts a penalty.

If it is a traditional 401K then the contribution is made from the pre-tax income so the withdrawals are taxed. If it is a Roth 401K then the contribution is made from post-tax income so withdrawal is not taxed.


  1. 401k Max Contribution: Employers can contribute to the 401K account of the employee too but the total contribution in 2020 can’t exceed $57,000 inclusive of both employer and employee contribution. This is the limit for employees below 50 years of age. The maximum contribution is $63,500 for those eligible for catch-up contributions.



Types of Retirement IRA

IRA stands for Individual Retirement Account. It is a tax-advantaged solution to save for your retirement.

  1. IRA: Similar to the 401K, this is another solution for retirement savings. Generally, it is termed as a Traditional IRA. IRA is an individual account and unlike 401K, it doesn’t need to be established by your employer. 

The money set aside in the IRA account is invested in various assets such as stocks, bonds, mutual funds, and so on. If you are aware of investing, then you may opt for a self-directed IRA.

There you will decide where your IRA should be invested. However, if your investing knowledge is not up to the mark, you may opt for a manager run IRA. 

There are a lot of service providers offering IRA accounts, these include banks, brokers, and other institutes. There are rules for which income qualifies for IRA contributions, so make sure you have read them properly.

Withdrawal from IRA prior to the age of 59 ½ will lead to a penalty of 10%


  1. Traditional IRA: The contribution to a traditional IRA is made from pre-tax income. This means that the contribution reduces the taxable income. And for this reason, the withdrawals at the time and after retirement are taxable. So in a way, it is a Tax-Deferred account. 

The contribution to the traditional IRA is limited to $6,000 in the year 2020 for individuals below 50 years of age. It is $7,000 for above 50 years of age contributors eligible for a catch-up.

Starting from the age of 72, the individuals are mandated to withdraw their required minimum distribution (RMD) installments. Non-withdrawal attracts a penalty.


  1. Roth IRA: The contribution to Roth IRA is made from post-tax income. This means that the contributions are not tax-deductible. Therefore, the withdrawals are not taxes. The intuition is simple that you either pay the tax at the time of contribution or at the time of withdrawal. Even the investment gains are not taxed. 

Further, the RMD rule doesn’t apply to Roth IRA. The contribution limit is the same as in traditional IRA, however, there is a restriction on the maximum contribution based on the income of the contributor.

  1. Roth IRA Contribution Limits: The contribution to Roth IRA is limited to $6,000 in the year 2020 for individuals below 50 years of age. It is $7,000 for above 50 years of age contributors eligible for a catch-up.
  1. Roth IRA Income Limits: As mentioned before, there is a restriction on the maximum contribution made to the Roth IRA account based on the income of the contributor. The income considered is the Modified adjusted gross income or MAGI. The rules for calculating it are given on the IRS website.  The below table explains the contributor wise limits: 


Type of contributor MAGI for 2020 Allowed contribution
Single or head of the household Below $124,000 Up to the maximum limit
Between $124,000 & $139,000 Reduced contribution
Above $139,000 No contribution
Married/Joint Return/Qualified person whose spouse has deceased Below $196,000 Up to the maximum limit
Between $196,000 & $206,000 Reduced contribution
Above $206,000 No contribution
  1. Backdoor Roth IRA: As you might have understood from the Roth IRA Income limits, higher-income individuals are not allowed to contribute to it. However, there is no such limit for a traditional IRA. Also as we know that investment income is not taxable in the Roth IRA, many individuals prefer it to the traditional IRA.

There is a way to invest in the Roth IRA even if you have a high income.

This is done by initially opening a traditional IRA account and then converting it to Roth after paying the required taxes because the contribution to Roth is from after-tax income while those to traditional IRA are from pre-tax income. This conversion is known as the backdoor Roth IRA.




Looks easy, doesn’t it? But there is a catch. Not all transfers are allowed. Those which are allowed are:

  • Rollover conversion: Money received from IRA is deposited to Roth within 60 days


  • Trustee-Trustee conversion: IRA provider directly sends money to Roth


  • Same trustee transfer: IRA and Roth are in the same financial institution


  • Pro-Rata rule: IRS calculates the amount on which you have to pay the tax on conversion using this rule.
    • It combines all your traditional IRA accounts
    • Calculates how much of the total contribution was from pre-tax income, let’s say it is 60%
    • Now no matter how much of it you convert to Roth, 60% of the converted amount will be taxable.
    • You can’t just convert the after-tax amount
    • IRS looks at year-end balances and not the balance at the time of conversion


When not to convert: It might not always be beneficial to convert to Roth IRA because

  • Lack of funds to pay taxes: If you don’t have additional funds to pay taxes and you have to withdraw from the IRA account, it reduces your investment growth in the future, and if you are below 59 ½ of age, then attracts 10% penalty


  • The first withdrawal is within 5 years: Converted money can’t be withdrawn within 5 years. You might have to pay taxes plus a 10% penalty


  • Higher tax bracket: Withdrawal from a traditional IRA might put you in a higher tax bracket. If that is the case then only covert as much that would not put you in the higher bracket.


  1. Roth Vs Traditional IRA: Below table summarizes the difference:


Point of difference Traditional Roth
Contribution Made from pre-tax income and are tax-deductible, so reduces the tax liability in the year of contribution Made from after-tax income
Withdrawal Taxable because the contribution was not taxed Not taxed if withdrawn at the age of 59 ½ or later as the contribution was taxed
Investment Income Taxed similar to withdrawals Not taxed
Who can contribute? Any individual having qualified earned income Any individual having qualified earned income below the income levels set by the IRS
RMD Withdrawal is mandatory at the age of 72 and after that No such requirement
Penalty No penalty on withdrawal after 59 ½ but before that might attract a 10% federal penalty Any withdrawal within 5 years of contribution can attract a 10% federal penalty even if the withdrawal is after 59 ½ years of age
Suitability Those individuals who will be in the same or lower tax bracket at the time of withdrawal Those individuals who will be in the higher tax bracket at the time of withdrawal
  1. SEP & SIMPLE IRA: Other IRA’s are for salaried individuals. SEP IRA is self-employed. The withdrawal rule is the same as that of a traditional IRA. In 2020 the contribution limit was set at 25% of compensation or $57,000 (whichever is less).


Some employers or small business owners open SEP IRA accounts for their employees also. The contribution they make is tax-deductible. However, employees can’t contribute to it. For this very reason, there is another option available known as a SIMPLE IRA. 

The employer must contribute to a SIMPLE IRA account, but employees can contribute too. Even employee’s contributions are tax-deductible similar to those of employers. 

The limit for SIMPLE IRA employee contribution is $13,500 for employees below 50 years of age and those of more than 50 years of age get a $3,000 catch-up contribution.




Meaning: We have discussed withdrawal several times in the above sections. However, would it be logical to withdraw all the amounts at once in a lump sum?

Well, most people will disagree. This is so because they would prefer to withdraw only as much as they need to maintain their desired lifestyle and let the rest grow. This is the reason where the concept of annuity arises. 

Annuity means a fixed installment withdrawn periodically to meet the expenses. There are various types of installment payments.

Types: Let’s first look at some basic theoretical types of annuities:




Let’s understand each with the help of an example. Suppose Mr. Smith required $80,000 per year for 20 years to maintain his desired lifestyle post-retirement.

He wants to know how much should he have in his retirement account to meet this requirement.

  • If he requires this amount at the start of every year, then it is an Annuity due
  • at the end of every year, then it is an Ordinary Annuity 
  • When instead of 20 years, he required this amount every year till he is alive, then it is perpetuity because perpetuity goes on indefinitely

Now you must be wondering how to come up with the amount in the account at the time of retirement then there are specific formulae for the same based on the kind of annuity you choose.



Annuity Formula & Calculator:

There can be a few types of questions about annuities: 

  1. How much money should the individual have at the time of retirement to be able to withdraw a given periodic sum?
  2. How much can he withdraw periodically if the retirement account has a given sum at the time of retirement?
  3. How much to contribute each period to accumulate the desired corpus at the time of retirement?

All these are questions related to annuity. Let’s take up examples to understand the calculations. 


  1. Ordinary Annuity: Mr. Smith needs $85,000 for 20 years post-retirement. He expects to generate an annual rate of 5% in 20 years, he wants to know what is the amount needed at the time of retirement. This is a simple annuity of finding out the Present Value of the withdrawals at the time of retirement.


Calculations are as follows:

Annual Payment PMT  $          85,000.00 
Rate Of Interest r 5.00%
Number of Years n 20
Annual Compounding frequency 1
Present Value PV To be calculated


Retirement Account
Retirement Account

So the retirement account should have $1,059,287.88 to meet the desired requirement. If the reverse is required to be calculated i.e. the PV is given and possible annual withdrawals are to be calculated, it can be done using the same formula.

However, if withdrawal frequency is other than annual, such as monthly or quarterly, or semi-annually then the above formula slightly changes:

Retirement Account PV
Retirement Account PV


Here the frequency value will be 2 for semi-annual, 4 for quarterly & 12 for monthly i.e. the number of withdrawals per year.

Now let’s look at a different annuity calculation. Suppose Mr. Smith wants to know how much to contribute at the end of each year for 30 years to generate $1,059,287.88 at the time of retirement. The following information is given:


Annual Payment PMT To be calculated
Rate of Interest r 5.00%
Number of Years n 30
Annual Compounding frequency 1
Future Value FV $1,059,287.88


Future Value Retirement
Future Value Retirement


So an annual contribution of $15,943.80 will enable him to withdraw $85,000 per year for 20 years post-retirement. If the contributions are made at a different frequency then the formula is adjusted:

Future Value Equation Retirement
Future Value Equation Retirement


  1. Annuity due: Continuing with the same example, if Mr. Smith needs $85,000 at the beginning of each year for 20 years post-retirement and the rest everything remains the same, then the calculation changes as follows: 


Annual Payment PMT  $          85,000.00 
Rate Of Interest r 5.00%
Number of Years n 20
Annual Compounding frequency 1
Present Value PV To be calculated


PV Retirement Account
PV Retirement Account


More is required to be accumulated because, in the ordinary annuity case, the retirement account was compounded for one additional period before the first withdrawal but in this case that happens immediately.

Similarly, if the contributions are made at the beginning of each year then the calculation changes as follows:

Annual Payment PMT To be calculated
Rate of Interest R 5.00%
Number of Years N 30
Annual Compounding frequency 1
Future Value FV $1,112,252.27


FV Equation - Retirement
FV Equation – Retirement

So an annual contribution of $15,943.80 will enable him to withdraw $85,000 per year in the beginning for 20 years post-retirement. 


Similar adjustments are required for shorter frequency contributions and withdrawals in case of an annuity due. The rate is divided and the number of years is multiplied by the frequency everywhere in the PV and FV formulas.

  1. Perpetuity:  Well this is the simplest of them all and there is no difference between at end of the year and beginning of the year withdrawal. However, the contributions are not made perpetually because of the normal logic that you will contribute only up to your retirement. 

If Mr. Smith has to withdraw $85,000 perpetually then he should have the following amount in his retirement account:


PV Calculation -
PV Calculation –

The underlying mathematical concept is of the sum of an infinite geometric progression. That’s a mouthful, so just remember the above formula, and you are sorted.


Other Common Annuities & Related Terminology in the USA

  • Deferred Annuity: If the annuity begins after the passage of a certain period post-retirement, it is known as a deferred annuity. Ordinary annuity beginning one year after retirement is not a deferred annuity


  • Variable Annuity: Variable annuity doesn’t guarantee a fixed return. Its return varies on the performance of the investment portfolio.

The variable annuities most suitable for the retirement account are deferred ones. These give the investor a chance to profit from market uptrend but it is also affected by the market downturns.


  • Immediate Annuity: Unlike deferred annuities, immediate annuities provide income almost instantly after the purchase of the annuity. There are all sorts of options available, such as fixed, variable, or inflation-adjusted. 


  • Indexed Annuity: The payment of such an annuity depends on the performance of a stock index such as the S&P 500. This is similar to a cross or a hybrid between a fixed and a variable annuity. Fixed because the percentage or return depends on a fixed multiple of return on the underlying index for example 2x the return of S&P 500. Variable because the amount of return varies along with the performance of the underlying index.


  • Annuity Rates: Annuity rates vary from product to product. The riskier the investment portfolio, the higher is the return. So the return on MaxRate version 1 under 100k is 1.8% and the investment is made in investments with a credit rating of A 


  • Mega Millions Annuity: Mega million is a lottery. You buy the ticker for $2 and pick 6 numbers. On winning different categories of prizes you are entitled to a prize. You can opt for the lump-sum payment or a 29-year annuity and has 30 payments in total. The amount paid is before taxes and is subject to the taxes of the state where you live.


  • Charitable Gift Annuity Rates: In a Charitable Gift Annuity the donor pays a charity some cash or property and in return receives tax deductions and annuity payments. Rates vary as follows:
    1. Charity
    2. Amount of the donation
    3. Donor’s age when gifting higher the age, higher is the return


  • Pacific Life Annuities: Pacific Life is a financial intermediary which provides different products such as annuities, mutual funds life insurance, and so on.  It provides Variable Annuity, Immediate Annuity, Fixed Indexed Annuity, Deferred Income Annuity



When To Retire & How Much To Save To Retire

Well, these are two frequently asked questions and are interrelated. As considered in the above annuity examples, a few things need to be considered deciding how much to save for retirement:




  • Expected annual or periodic expenses: As in the above example, it was known that Mr. Smith would need $85,000 per year you need to estimate your expenses too. It depends on where you would be living post-retirement, your health condition, your desired lifestyle, and so on. 


  • Expected inflation: As we know that things become expensive in the future and the same amount of money fetches little in the future, you need to consider the expected inflation.


  • Any future goals: Some people wish to leave a certain amount to a charity of their liking after they die. If you have any such future goals then your investment plan should incorporate that.


  • People dependent on you: You might want to leave a corpus of wealth for your children or grandchildren. This should be included in your investment plan.


These are only some factors that impact how much to save. There can be more based on your subjective needs. Once all of these are estimated, you can calculate when to retire.




  • Current income & Expected increment: With your given level of income and expected increments, you can calculate the maximum amount you can accumulate over a given period.


  • Required corpus at retirement: From the previous analysis of how much to save, you might know how many years will it take you to accumulate that amount.


  • Statutory retirement requirements: If you are self-employed, then you can retire anytime you wish, but if you are salaried, then you have to retire at a certain age. You may retire early if your needs are met or maximize the time employed.



Related FAQ

  • Average Retirement Savings: Although there is no fixed answer, according to Government Accountability Office (GAO), as of 2017, you must have $107,000 savings if you are aged from 55 to 64 and you own an inflation-protected annuity. 


  • Average Retirement Savings by Age: Below table summarizes this based on various reports of GAO & Fidelity investments


Age group Financial position Retirement Savings
  • Beginning of a career
  • Low income
  • Student loan
  • Long time to retirement
  • Median savings is $16,000
  • Save at least 15% of before-tax income
  • Invest in riskier options 
  • Higher-income
  • Marriage, kids, home loan
  • The student loan may still exist
  • Other lifestyle expenses
  • Median savings is $45,000
  • Save at least 18-23% of before-tax income
  • Still possible to invest in riskier options 
  • Peak of career
  • Highest possible salaries
  • Expenses are higher
  • Short time to retirement
  • Median savings is $63,000
  • Total savings should be 3x of annual income
  • Low-risk investment
  • Close to retirement
  • Still some time to save
  • Lesser expenses
  • Reducing Income
  • Median savings is $117,000
  • Total savings should be 6x of the annual income
  • Lowest risk investment
  • How To Retire Early: Factors affecting early retirement are expenses, lifestyle needs, retirement location, financial situation, dependents, and all those considered in the analysis of how much to save and when to retire.


Where to Retire & What to do



  • Best States To Retire: Below are some states you can think of retiring to
    1. Florida:  Tops every list, sunny beaches, the highest percentage of people over 65 years of age, high quality of life, great healthcare 
    2. Wyoming: Fly fishing, Highly affordable, Good healthcare
    3. Delaware: Highly affordable, the average healthcare
    4. Virginia: Average on all parameters but a tax haven
    5. Wisconsin: Ice-fishing, Packers games, great quality of life, average health care, and affordability



  • Things To Do In Retirement: Some things you wanted to do all your life but never had the time
    1. Relax and enjoy
    2. Golf, fish, bask in the sun
    3. Travel or move to a better state
    4. Spend time with your family
    5. Exercise more