Deciding When to Retire: The Importance of Good Timing
While you’re getting ready to travel, take up a new hobby, learn something new or simply spend more time with family, there are some other important things to think about when you’re getting ready for retirement. This includes your anticipated expenses, sources of retirement income and how long you’ll need your savings to last based on life expectancy. You’ll also need to consider when to start receiving Social Security, pension benefits, or any other financial reserves you might have. Each of these factors will have an effect on the other, as well as your overall retirement income plan. Luckily, there are many helpful tools and resources to help you successfully prepare for this exciting next stage in life.
Thinking About Retiring Early?
After a long week at work, retiring early sounds great. With careful planning, it maybe be possible; but you’ll need to save more money in fewer years for your dream retirement. Also, the earlier you retire, the more years your retirement savings will need to serve as income. According to a National Vital Statistics Report, people today can expect to live more than 30 years longer than they did a century ago. This means that there is more time to enjoy life experiences, but you’ll need more money to do it. You’re also likely to live through various stages of inflation, which will ultimately impact the value of your savings. If inflation is 3% a year--its historical average since 1914--it will reduce the purchasing power of a fixed annual income by half in roughly 23 years. As a matter of protection, you’ll want to plan to increase your retirement income each year.
Average Life Expectancy Estimates
As of 2018, the CIA and the Social Security Administration have predicted the following life expectancies for men and women.
|At age 65||84.3||86.7|
Planning on a Pension
A pension is considered a valuable career benefit. As your years of service increase, typically so does your earning power. If you decide to retire early, you’ll need to consider that you won’t be able to take advantage of your greatest accrual opportunities, which usually take place during your last few years of employment. A few more years might be worth the positive impact it will have on your future monthly benefits and Social Security.
Reminders about 401(k)s, IRAs & Medicare
If you retire before you turn 59½ and 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. There are some exceptions, which include disability payments and distributions from employer plans such as 401(k)s after you reach age 55 and terminate employment.
Also note that eligibility for Medicare starts at age 65. Unless you’re able to qualify 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 until you can receive Medicare coverage.
The Benefits of Delaying Retirement
Postponing retirement lets you continue to add to your retirement savings. That's especially advantageous if you're saving in a tax-deferred account, and even more so 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.*
Even if you're no longer adding to your retirement savings, delaying retirement pushes back the date that you'll need to start withdrawing from it. 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 you anticipate the requirements of your post-retirement role. It will also let you evaluate how much income you can realistically expect from it, and if you can comfortably rely on a new endeavor for retirement. Also, you'll learn whether it's something you really want to do before you spend what might be a significant portion of your retirement savings on it.
Phased Retirement: The Best of Both Worlds
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). This frequently encouraged employees who wanted a reduced workload but hadn't yet reached normal retirement age to take early retirement and go to work elsewhere (often for a competitor), allowing them to collect both a pension from the prior employer and a salary from the new employer.
However, pension plans are now 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 moreflexible 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.
Key Decision Points
|Eligible to tap tax-deferred savings without penalty for early withdrawal||59 ½**||Federal income taxes will be due on pretax contributions and earnings|
|Eligible for early Social Security benefits||62||Taking benefits before full retirement age reduces each monthly payment|
|Eligible for Medicare||65||Contact Medicare 3 months before your 65th birthday|
|Full retirement age for Social Security||65 to 67, depending on when you were born||After full retirement age, earned income no longer affects Social Security benefits|
**Age 55 for distributions from employer plans upon termination of employment
Check Your Assumptions
The sooner you start to plan the timing of your retirement, the longer 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 that your initial assumptions are still valid, that new laws and regulations haven't affected your finances, and that your savings and investments are performing as you need them to.
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*This is an example and is not intended to reflect the actual performance of any specific investment.