Culturally, we’re programed to think of 65 as the normal retirement age, but many people retire much earlier than that, and some much later. It isn’t strictly a financial decision. A variety of factors should be considered. I’ll cover the pros and cons of retiring early; the pros and cons of retiring later; and four important steps to help you answer the question for yourself.
Let’s start with the pros and cons of retiring early, which many people dream of doing. A 2019 survey by American Advisors Group found that 52 percent of Americans plan to retire before age 65. Of course, not everyone will be able to make that plan a reality. Health trouble, job loss and family issues can disrupt anyone’s retirement plans. However, even if you have full control over when you retire, it’s worth examining the pros and cons of retiring early. Let’s start with the pros. The two main ones are obvious. First is your health. The younger you are, the healthier you’re likely to be. Second is time. You’ll have more time to achieve your retirement goals.
Now let’s consider some possible cons. Guess what? The two main ones are the same as the pros. First, once again, is your health. Retirement may bring on new stresses that you didn’t anticipate. Or you may end up regretting your decision as you struggle to find a new sense of purpose in life. Second, just like before, is time. Yes, you have more of it to achieve your goals, but you also have more of it to finance. Even at a normal retirement age, with today’s longevity rates, most people need to plan for up to 30 years of reliable income. Retire early and you’ll stretch that timetable even further.
But what if you want to wait until, say, age 70 or later to retire? Well, if that’s by choice rather than necessity, there’s certainly nothing wrong with it. There are, in fact, some noteworthy pros to retiring later. To start, retiring later most likely increases your odds of being able to get your maximum Social Security benefit, which tops out at age 70. Next, you’ve had more time to save. Third, a bigger savings likely means you’ll be able to generate a higher annual income once you do retire, provided you have the right strategy. And lastly, if you like your job, continuing to work past the so-called ‘normal retirement age’ may be good for your health.
So, what about the potential cons of retiring later? Well, if you do eventually plan to retire, you’ll have less time to achieve your retirement goals. Depending on your job and your attitude toward it, working later may instead be bad for your health. Also, regardless of when you actually retire, you’ll still have to deal with all the financial issues unique to retirement, things like creating an estate plan and having the right strategies to take your Social Security benefits, along with satisfying your RMDs.
With all this in mind, how can you narrow down your own retirement timeline and answer the question of when you should retire? There are four steps to the process. To begin, determine your net worth. This means adding up the total value of all your assets, minus your debts. Obviously, you want a minimum amount of debt going into retirement, and you want your total assets to be enough to meet your income needs. How do you determine those? Well, that starts with step two: identify your retirement goals. Do you plan to downsize, travel, start your own business, or make a major purchase? If you haven’t thought about it, do so and write your goals down.
Step three is to estimate your Social Security income. No matter you level of assets, it’s important to maximize your benefits and coordinate them effectively with your other sources of income. That starts with knowing the right time to start taking your benefits. You can do some calculations on your own to determine roughly how much you can expect to receive under different scenarios by using the Retirement Estimator available on s-s-a-dot-gov.
Now, with all this information, you’re ready to take the final step: shift your financial strategy from portfolio growth to retirement income. In my experience, most people are best served by doing this during the transitional years before retirement, meaning any time after age 50. By doing so, you’ll accomplish several important things. You’ll be much better positioned to answer the most important questions about your retirement, including: How much savings do I need? How much income do I need my savings to generate? And, of course, when should I retire?
You’ll also have an asset allocation that reduces your risk of suffering a major loss due to market volatility, and of spending down your principal. You’ll have an allocation that starts preparing you for many of the challenges unique to retirement, like satisfying your RMDs, maximizing your Social Security, keeping up with general inflation, and keeping up with healthcare inflation, which is an even bigger challenge. Finally, you’ll have a financial strategy that’s flexible enough to adapt to whatever changes come your way in the years just before and during retirement. All that is possible with the help of a retirement Income Specialist, who is also the person most qualified to help you make that important shift from growth to income.
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