Deciding when to retire is not always easy. Many people simply base the decision on their birthday, but there are a whole host of other factors that should weigh into your thinking as well. Here are seven key things to consider:
- Your bank account: When you retire, your portfolio takes over the job that the payroll department handled while you were working. If you have to cut yourself a paycheck each month, it makes sense to be sure that your bank account is up to the task. A common rule of thumb puts a sustainable withdrawal rate at about four percent. Another way to look at that would be to shoot for retirement savings that are 25 times larger than your expected annual withdrawal. If you are not quite there yet, it might make sense to work a little longer (or work part-time), save more, or make cuts to your anticipated retirement budget.
- Your bucket list: Before retiring, you should know the answer to three key questions: What do I want to do? Where do I want to do it? Who do I want to do it with? Knowing answers to those questions will help give you purpose and a plan for how to spend your time. If your key reason for retiring is to escape your job, don’t pull the trigger just yet. Wait until you have a plan in place for meaningful pursuits. Doing so will likely help you avoid a bad case of retirement “buyer’s remorse.”
- Your health: If you are in excellent health and have longevity in your family, working a little longer may not significantly cut into your plans. Not so if you or your spouse are in poor health. In that instance, delaying retirement could mean your chances to do certain things are gone for good. This is especially true if you are planning an active retirement. Take an honest look at your health and life expectancy and weigh that into your decision about when to retire.
- The markets: Investment returns during the first decade of retirement are extremely important. Retire on the cusp of a bull market and your portfolio will likely build enough padding to withstand future downturns and withdrawals. Retire and begin taking withdrawals at the beginning of a bear market, however, and those early losses will greatly increase your odds of running out of money. Experts refer to this as sequence risk, but it could just as easily be referred to as luck. No one has a crystal ball, but if the economy appears poised for a downturn, you might want to delay retirement (and withdrawals) until things rebound. The same is true if your portfolio has significant losses in the years leading up to retirement. In that case it might make sense to keep working until your investments have a chance to recover.
- Health care benefits: Recent studies by Fidelity and others estimate that a 65 year old couple retiring today will need between $200,000 and $400,000 to cover health care costs during retirement. That is in addition to what Medicare already covers. Having a plan to cover those costs — whether by savings, private insurance, or a Medicare supplement policy — is an important consideration when deciding when to retire.
- Social Security benefits: Retiring at 62 would mean a permanent reduction of almost 30 percent to your Social Security benefits compared to what they would be if you waited until your full retirement age. Just like retiring early reduces benefits, retiring later increases them. Those born after 1943 can expect an eight percent increase for each year they wait to claim benefits after full retirement age. This increase goes away at age 70, so working until then will result in maximum benefits.
- Your spouse: You would be surprised at the number of couples who are blindsided by differences over retirement dreams, plans and expectations. One wants to keep working, while the other is ready to be done. One wants to move to the beach and the other wants stay close to the kids. Are you on the same page with your spouse when it comes to retirement? Make sure you do your planning together so you can work through any differences early and enter retirement as a team.
As you can see, deciding when to retire is a complex decision with many moving parts. By giving it the time and attention it deserves, you can help ensure that your retirement gets off on the right foot.
FPA member Joseph R. Hearn is a Vice President at Teckmeyer Financial Services, LLC and author of If Something Happens to Me.