When to Retire
Many factors should be taken into consideration as you decide when to retire.
Deciding when to retire may not be one decision, but a series of decisions and calculations.
You need to estimate not only your anticipated expenses, but also what sources of retirement or disability income you’ll have and how long you’ll need your retirement savings to last.
Your health and life expectancy should be taken into account. You also have to consider when you want to start receiving Social Security or pension benefits, and when you’ll start to tap your retirement savings.
Each of these retirement factors may affect the others.
Retiring early means fewer earning years and less accumulated savings. It also means more years you’ll need your retirement savings to produce income.
And your retirement could last quite a while. According to a National Vital Statistics Report, people today can expect to live more than 30 years longer than they did a century ago.
Not only will you need your retirement savings to last longer, but inflation will have more time to eat away at your purchasing power. If inflation is 3% a year (its historical average since 1914) it’ll cut the purchasing power of a fixed annual income in half in roughly 23 years.
Factoring inflation into the retirement equation, you’ll probably need your retirement income to increase each year just to cover the same expenses.
There are other considerations as well. For example, if you expect to receive pension payments, early retirement may adversely affect them. Why? Because the greatest accrual of benefits generally occurs during your final years of employment, when your earning power is presumably highest. Early retirement could reduce your monthly benefits. It’ll affect your Social Security benefits, too.
Also, don’t forget that if you hope to retire before you turn 59½ and plan to start using your 401(k) or IRA savings right away, you’ll generally pay a 10% early withdrawal penalty, plus any regular income tax due (with some exceptions).
Finally, you’re not eligible for Medicare until you turn 65. Unless you’ll be eligible for retiree health benefits through your employer or take a job that offers health insurance, you’ll need to calculate the cost of paying for insurance or health care out-of-pocket, at least until you can receive Medicare coverage.
Postponing retirement lets you continue to add to your savings.
That’s especially advantageous if you’re saving in tax-deferred accounts and if you’re receiving employer contributions. For example, if you retire at age 65 instead of age 55, and manage to save an additional $20,000 per year at an 8% rate of return during that time, you can add an extra $312,909 to your retirement fund (This is a hypothetical example).
Even if you’re no longer adding to your retirement savings, delaying retirement postpones the date that you’ll need to start withdrawing from them. That could enhance your nest egg’s ability to last throughout your lifetime.
Postponing full retirement also gives you more transition time. If you hope to trade a full-time job for running your own small business or launching a new career after you “retire,” you might be able to lay the groundwork for a new life by taking classes at night or trying out your new role part-time.
Testing your plans while you’re still employed can help anticipate the challenges of post-retirement. Doing a reality check before relying on a new endeavor for retirement income can help you see how much income you can realistically expect from it.
Some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age, while you continue to work part-time for the same employer.
Phased retirement programs are getting more attention as the baby boomer generation ages. In the past, pension law for private sector employers encouraged workers to retire early.
Traditional pension plans generally weren’t allowed to pay benefits until an employee either stopped working completely or reached the plan’s normal retirement age (typically age 65).
However, pension plans now are allowed to pay benefits when an employee reaches age 62, even if the employee is still working and hasn’t yet reached the plan’s normal retirement age.
Phased retirement can benefit both prospective retirees, who can enjoy a more flexible work schedule and a smoother transition into full retirement; and employers, who are able to retain an experienced worker. Employers aren’t required to offer a phased retirement program, but if yours does, it’s worth at least a review to see how it might affect your plans.
Check Your Assumptions
The sooner you start to plan the timing of your retirement, the more time you’ll have to make adjustments that can help ensure those years are everything you hope for.
If you’ve already made some tentative assumptions or choices, you may need to revisit them, especially if you’re considering taking retirement in stages.
And as you move into retirement, you’ll want to monitor your retirement income plan to ensure your initial assumptions are still valid, that new laws and regulations haven’t affected your situation and that your savings and investments are performing as you need them to.
For more information, visit raymondjames.com or contact Dan Jones at 866-760-3544.
When to Retire
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