Deciding When to Retire: When Timing Becomes Critical
Now that you are out of the accumulation phase of retirement savings, it is time to consider at which age you should pull the trigger and retire. This can be a very difficult question to answer with many variables and calculations to consider. Some of these variables include: your anticipated monthly expenses, how long you will need the money to last, life expectancy, when the best age is to start drawing from social security or pensions, and many other. A Financial planner can help map all these questions out for your and take a lot of the guess work out of your retirement.
Thinking about early retirement?
Retiring early can seem like an attractive offer from an employer but can take some additional planning. Retiring early means fewer years of earning potential, and less accumulated savings. The earlier you retire, the more years you will need to draw money from your retirement. According to a National Vital Statistics Report, people can expect to live more than 30 years longer than they did a century ago.
Another factor to consider when identifying your anticipated monthly expenses is inflation. Because you are retiring earlier, inflation can have more time to eat away at your purchasing power. Assuming a 3% inflation rate – the historical average since 1914 – it will cut fixed incomes purchasing power in half in roughly 23 years. To factor inflation in to your retirement strategy you will need to increase the amount of income needed each year to maintain the same purchasing power.
If you are receiving pension payments at retirement, an early out option could also affect your payments negatively. Typically pensions accrue the most benefits in the final years of employment. Retiring early could reduce the monthly expected benefits from your pension and Social Security.
If you are considering retiring before the age of 59 ½, you should also identify your monthly income sources. If you choose to pull from a 401k or IRA, those distributions will be subject to a 10 percent early withdrawal penalty plus regular income tax.
Finally, you are not eligible to receive health benefits from Medicare until you turn 65. If you retire before that age you will need to plan on your health insurance premiums /healthcare costs as part of your anticipated monthly expenses. Some Employers offer retiree benefits that can compensate for this time period. Checking with your employer before pulling the trigger can help in correct planning.
Postponing retirement can have some drawbacks emotionally but could add substantial benefits to your retirement savings. If you are saving in a tax-deferred account and also receive employer contributions, these can help you save additional principal and more long-term growth. For example, if instead of retiring at age 55 let’s say you were to retire at age 65 and able to save an additional $20,000 per year. With an assumed return of 8% during those extra 10 years you would add an extra $312,909 to your retirement fund. (This example is hypothetical and not intended to be an actual reflection of performance or a specific investment).
Even if you are not able to add to your retirement during those extra years, delaying retirement can still add a longer time for compounding interest to work on your portfolio which could enhance your savings to last the rest of your life.
Phased Retirement: The best of both worlds
Many employers now offer what is referred to as phased retirement. A phased retirement allows the employee to still receive their full pension at retirement and lower their working hours to part-time. Phased retirement is becoming more and more common as the baby boomer generation gets older. In the past, private sector employees could not begin receiving pension benefits until the employee either reached the plans’ retirement age, or stopped working. Today many employees can now receive pension benefits at age 62 even if they are still employed. Employers are not required to offer a phased retirement, but if yours does it is worth looking in to.
While everyone’s situation and plans are a little different, regulations are always changing and it is important to stay current with your retirement objectives and continually check and update your retirement plan. Important dates to remember when considering early retirement are: age 59 ½ (eligibility to withdraw from tax-deferred savings), age 62 (eligible for early Social Security Benefits), Age 65 (eligible for Medicare), and age 65-67 (full retirement age depending on when you were born). A financial advisor can be a keystone to your success in staying current and investing appropriately for your individual situation. Before you make the decision to retire early, consider your options and consult with your planner.