When it comes to retirement, there are two questions we hear repeatedly:
When should I retire?
How much do I need to retire?
It turns out, the two questions are related. To answer the first, you have to have a sense of the second, from your expected expenses to your anticipated sources of income. Let’s go over a few key considerations around how to time your retirement.
The truth about early retirement
Traditionally, folks retired at 65 or later. Lately, however, there are two different schools of thought. The FIRE trend (financial independence, retire early) pushes folks to prioritize saving early in order to retire as soon as possible. On the other hand, a growing contingent is working well into their 70s and may even continue working part time in retirement.
Whether either of these approaches is right for you likely depends on your personal circumstances, from your starting salary and how much you’re able to save to your family obligations and expected expenses in retirement.
Before you decide to retire early, make sure you take time to research the process so you can avoid unexpected hiccups that could derail your finances in the long run.
The truth about delayed retirement
Postponing retirement, on the other hand, may create additional opportunities for you. The longer you wait to retire, the longer you have to grow your nest egg, for instance.
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. Delaying withdrawals could make your nest egg last longer, particularly if you anticipate any kind of market turmoil early on in your retirement.
If you retire at age 65 instead of age 55, for instance, and manage to save an additional $20,000 per year during that time, you’d add more than $300,000 to your retirement fund, assuming your investments returned 8% on average. Of course, that’s a hypothetical example and not intended to reflect actual performance, and all investments have the potential to lose money.
However, extending your timeline can give you a potential buffer.
What about the fine print?
There are other considerations as well. For example, if you expect to receive pension payments, early retirement may adversely affect them. Often, you accrue most of your benefits during the final years of your employment when your earning power is highest.
While Social Security relies on your highest-earning years overall regardless of when they happen, continuing to work after you start collecting Social Security may impact not only your benefits but the tax you may be required to pay on them.
Of course, there are other income streams in retirement beyond pensions and Social Security, but these can impact retirement timing as well. Remember: If you are using a traditional 401(k) or IRA, withdrawing funds before you reach 59½ will incur a 10% fine (though there are a few 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. Depending on your age, location, and the size of your family, these costs can be significant.
Key Ages
55—If you leave your job during the calendar year you turn 55, and have a 401(k) through that job, you can generally withdraw money from that account without paying a 10% penalty. Any withdrawals will be subject to federal income tax, and you need to leave the balance in the employer’s plan until you reach 59½.
59½—Can withdraw money from traditional 401(k)s and IRAs without incurring the 10% penalty; federal income taxes due on withdrawals.
62—Eligible for Social Security benefits. This counts as “early” retirement, and taking benefits at 62 will reduce your monthly payment.
65—Eligible for Medicare. You can select a plan three months before you turn 65; keep in mind there are a number of options to choose from and criteria may change from year to year. Check the government website for the most up-to-date information.
66-7—Full retirement age, as far as Social Security is concerned. (Whether you hit full retirement age at 66 or 67 depends on the year you were born.) Once you reach this age, your earned income no longer affects your potential benefits.
Social Security benefits can be one of the driving factors in determining when you retire. Just remember: Social Security is intended to replace a portion of your working income and should be considered alongside a more comprehensive retirement plan with additional sources of income.
Similarly, the rules around Social Security and Medicare, from the depth of coverage to the ages at which you qualify, are subject to change. This is particularly important for younger Americans, as there is some uncertainty around how these entitlements will be funded for future generations.
Picking a Target Date
Ultimately, it’s more important to have a plan than an exact date in mind. Working with a financial advisor can help you understand the myriad of factors that impact your retirement savings and potential sources of income, which can in turn influence the age at which you retire.
Plus, an advisor can help you consider some of the intangibles, for instance: Are you mentally ready to retire? Many new retirees enjoy the freedom from work for a few years before getting slightly bored. At this point, an advisor can help you determine whether working part time can help your finances or whether volunteering might be a better option.
If you have questions about your own retirement goals, regardless of where you are on your journey, reach out to a Bogart Wealth Advisor.