Figuring out when to retire is one of the most challenging things one will have to do in their lifetime. Most people are already too used to working Monday to Friday to even consider what life will look like when they have all the free time in the world.
Yet there is a huge reason one should start thinking about it as early as possible, at least five years before retirement begins. From having enough savings to live a comfortable life to claiming all of the Social Security benefits, deciding when to retire is a hot topic among U.S. citizens. Still, they may need a bit of help to make an informed choice.
Average Retirement Age and Benefits
When trying to figure out when to retire, many soon-to-be-pensioners are drawn to the idea of delving into all of the statistics and following in the footsteps of many other Americans. However, the data shows that even though the average retirement age is around 63 for women and 65 for men, most U.S. citizens are looking into waiting until their full retirement age.
U.S. citizens can start claiming retirement benefits from the age of 62, which is the earliest the retirement can start, up until age 70. Nevertheless, retiring before FRA (full retirement age) means they cannot claim the full benefits. They would have to settle with a reduced amount.
Even worse, those who retire early won’t be able to increase the value of their benefits. That’s only possible if they wait until they’re 70 years old.
To illustrate, someone who is now 62 years old can start claiming benefits, but they will be reduced. If they wait, however, until they’re 66 or 67 (FRA for most U.S. citizens), they can get the full amount. Even better, if they go over their FRA, they can increase the benefits by about 8% annually. Thus, once they reach 70, their benefits could be:
- 37% higher if their FRA is 66
- 24% higher if their FRA is 67
So why are some Americans retiring early? In some cases, they are used to living on as little money as possible. But more often, they’ve either inherited money or sold some sort of intellectual property, such as a profitable business. By doing so, they’ve increased their nest egg and can actually afford to relax earlier, even if they’re just 50.
However, those who are now thinking about retiring early should also consider Medicare benefits. If they retire before the age of 65, they will have to pay for private health insurance. Thus, waiting for their FRA or taking advantage of 8% bonuses until they’re 70 may be a better decision overall.
When to Retire: Telltale Signs It’s Time to Start Considering It
Deciding when to retire is, fortunately, made easy by a few telltale signs everyone is able to notice. In essence, if one experiences some of these, retirement might not be a bad option or unachievable at all. At the very least, they ought to start preparing for it before something unpredictable happens.
You Hate Your Job
If one is over 60 years old and isn’t looking to change their career now (even if they could) but aren’t satisfied with their job, retirement might be a solid option. Evidently, there are some clear benefits to waiting until they’re 70 years old. However, it might be better to forgo those bonuses and focus on oneself than to spend a few years more doing a job that doesn’t provide any mental stimulation or happiness at all.
Those who are quite happy with their jobs can keep going, of course. There are billionaires who don’t even have to work, but are still refusing to retire because they love their jobs. After all, becoming a retiree has a few cons as well. If one is simply not prepared for it and doesn’t know what they’ll do with their time, waiting it out for a few more years might be a better solution, especially if their job is still earning them a lot of money and feels more like a wonderful hobby.
You Always Have Money for Your Bills
The basis for retirement is to have enough money to last one until their death. If paying bills and mortgages is still a struggle, then going into retirement definitely isn’t an answer.
Of course, when one retires, some expenses will become drastically low, such as gas for the everyday commute. However, entertainment and traveling expenses will rise in retirement. On average, a retiree would need to have about 75% of their pre-retirement income to live comfortably.
Those who are struggling to pay their bills now probably won’t be able to get that 75% from the various benefits they could claim after retiring. Plus, most of them are actually taxable, such as Social Security benefits and any withdrawals made from IRAs and 401(k)s.
There’s the psychological part of it too. When one is still employed, it may be easier to account for all those fixed expenses. More often than not, their priority is set on making ends meet. Once they retire, though, splurging on stuff they couldn’t get while they were working could quickly get out of hand.
You’ve Already Settled Some Major Expenses
When deciding on when to retire, many people have to start planning early because of all the major expenses they won’t be able to afford later on. At first glance, it seems as if retiring after earning a huge paycheck and having a substantial nest egg might be enough. Nevertheless, expenses such as replacing the roof or getting a new car can quickly add up.
The money required for these expenses will come from taxable accounts. As such, one will have to pay a lot more than they have planned initially. It all depends on which tax bracket they fall into. Yet since the lowest bracket entails 10% and the highest 37%, it’s evident that even the upfront cost of some repairs or purchases could severely disrupt an otherwise comfortable retirement.
Thus, in order not to risk financial ruin, one has to think in advance. If their old car is at the end of its life, they should replace it a few years before retirement. What’s more, if there are some significant expenses closely tied to their home, people ought to settle those first. That way, they’ll somewhat ensure they have enough money to truly enjoy their retirement later on.
You Know How to Create and Stick to a Solid Financial Plan
In this day and age, even those who are years and years away from retirement ought to keep a budget. With a shaky economy and natural disasters happening every so often, it’s rather easy to go bankrupt if one doesn’t know how to handle their expenses.
Therefore, before starting to plan when to retire, one should try to track their expenses for a few years. It’s crucial to see how and where all the money is going. The spending history would let them scrutinize every single cost and compare it to the expenses they might expect in their retirement. As is already evident, once one retires, they won’t spend as much money on, say, debt repayment (as that should already be paid off) or the daily commute. On the other hand, they may have to spend on travel and leisure.
Once one knows how they’re spending money now, they’ll be able to figure out how they’ll allocate the benefits. Some may need to follow a specific order when withdrawing from their personal retirement accounts. If they have a traditional IRA, they’ll have to take into account the RMDs (retirement minimum distributions, which are obligatory after the age of 72). There’s also the issue of how much the Social Security benefits will be and when to start withdrawing them.
There’s No Debt Holding You Back
Having a financial plan to cover both regular expenses and emergencies is a must when it comes to retirement. However, if there’s debt holding one back from living worry-free, juggling all of the costs may be tricky.
Some people may decide to keep paying off their mortgage while retired out of sheer necessity. Nevertheless, any outstanding debt would put a lot of strain on a person; they would have to find enough money to cover both their current (changed) expenses and debt payments. The bulk of their savings may have to go on settling those. As such, there might not be enough funds to enjoy their retirement.
That said, paying off any outstanding debts before retirement would make some people work over their full retirement age. But that doesn’t have to be a bad thing at all. If they can manage it, they’ll be able to avoid those monthly payments and interest that accumulates rather quickly.
At the same time, though, it’s often difficult to determine whether debt payoff is worth it right now. Some people may find that putting more toward retirement is a better option if the interest is rather low (up to 3%, for example). With a 10% or greater interest, it’s definitely safer to pay off the debt before even deciding when to retire. The chances are that interest could prevent one from saving enough in the meantime.
You Know What You’ll Do When You Retire
Finally, although it’s not closely tied to one’s finances, knowing which activities one will engage in once they’re free from the daily commute and work is a worthy consideration. Retirement often worries people because they believe they’ll be bored. Thus, they delay and delay until they cannot object it anymore. Then, they start spending as if there’s no tomorrow.
In essence, when one is deciding when to retire, they have to assess their finances and their future lifestyle goals. If they aren’t sure what they’ll do once they retire but feel as if they should do it soon, looking into other ventures might be a good way to test-drive it all. Some people decide to volunteer for a while to see if that will be interesting enough. Others, however, take on a part-time job.
At the end of the day, retirement activities will influence how one allocates their budget and maintains it until they die. When someone is not sure what they want to do once they retire, that could put a lot of strain on the financial plan. It’s uncertainty retirees ought to keep away from, as it may make for a rather unhappy, and worse, uncomfortable retirement.
How to Prepare for Retirement
Knowing whether to retire early or a bit later in life will largely depend on one’s income, their current psychological state, and the benefits they’ll be able to collect later on. It takes a lot of planning, especially since retiring early might mean missing out on a bigger paycheck later on.
Thus, in order to decide when to retire, it would be wise to consider the following questions:
Do I Have Enough Money?
According to Fidelity, a good rule of thumb is to have ten times one’s current income all saved up until they’re 67 years old. However, the factors taken into account here are that:
- One starts saving 15% of the income from the age of 25
- They invest savings regularly (50% on average)
- They want to retire at 67 and are planning to lead a similar lifestyle afterward (no huge discrepancies in expenses)
From this, it’s evident that what’s enough money for one person won’t be the same amount someone else would be happy with. Thus, it might be a good idea to talk to a financial planner before deciding when to retire. They’d be able to provide further insight into where one stands in terms of retirement and give some advice as to what their next step could be.
Will I Have Insurance?
Most people don’t take healthcare into account while they’re still working. However, as it was mentioned, Medicare is available from the age of 65. In the meantime, one would have to pay for insurance out of pocket unless they have the option to access employer-sponsored pre-65 retiree medical coverage.
And even when someone becomes eligible for Medicare, that doesn’t mean it will cover everything. It has been estimated that about 15% of a retiree’s expenses in retirement will likely go on the premiums and out-of-pocket costs. Thus, it’s vital to consult with one’s employer or the HR staff to determine what the best course of action would be. Usually, one of the best approaches would be to boost contributions to tax-advantaged accounts, such as HSAs.
How Will My Family Survive Afterward?
As grim as it may sound right now, everyone should take into account that, if they die before their spouse, they ought to ensure their family will be able to survive. To that end, they have to decide whether they’d like to cash in on their pension plan or opt for either single- or joint-life payouts.
Getting a large sum of money right away that one can spend on whatever they want is rather tempting. Many people believe that they can use that money for income-producing investments, which may equal the annuity if managed well.
Nevertheless, cashing in on the pension plan is as risky as taking out all of the money from one’s account and going to Disney World. Having so much so suddenly might itch them to spend it all very fast. Thus, if possible, retirees should either opt for the single-life or joint-life payouts.
But there’s a lot to consider there too, which is why talking to one’s spouse and planning retirement together is crucial. Joint-life entails that there’s a beneficiary who will keep receiving the benefits after one’s death. However, the monthly payouts are lower, while the fees are higher. As for single-life, the payouts are usually larger on a monthly basis, but they abruptly stop when one dies.
Many future retirees think that most of the expenses go down once they die, so their spouse will be able to cover them easily. But things like utilities are unlikely to change, making joint-life a better option overall.
When to Retire
At the end of the day, knowing when to retire mostly comes down to how much one is earning, how healthy they are, and what their plans for the future entail. There isn’t a wrong answer here; if one has high enough savings to support an early retirement, they won’t think twice about those 8% bonuses. On the other hand, if they are in good shape and able to continue working (and they love their job!), they may be able to postpone retirement until they’re 70 and reap maximum benefits.
In general, though, waiting until one’s full retirement age or longer is safer in the long run. Once one decides to retire, they ought to remain retired for the rest of their life. And unfortunately, without proper planning, a significant nest egg, and a “settled score” — debts paid off and major expenses covered — there’s always a risk the money will run out.