Deciding when to retire requires a taking holistic look at your finances. How much money you'll need and how long it will take to save that amount depends on your lifestyle, current assets and long-term goals. To develop a realistic savings target, you first need to estimate your expenses in retirement. Then you should consider the different sources of income you will have and the payments you can expect from each at different ages. Finally, you'll want to ensure you're prepared for the unexpected, whether that's a major expense or just a long life.
Calculating your needs
As you consider your expenses, think about how you hope to spend your retirement. Where do you plan to live? What activities are you hoping to do more often? Picture what your daily life will look like to get a better idea of what to include in your budget. Don't forget to account for necessities like utilities, transportation, health care and taxes. Given inflation, these costs will increase over time.
Estimating so many different expenses can be challenging, which is why we created this interactive budget planner. This free tool helps you calculate how much money you're likely to need throughout your retirement. It incorporates costs you may not have considered, like long-term care, so you can get a more accurate picture of your needs.
Getting the timing right
The total savings you'll need will vary based on the length of your retirement. While none of us can predict how long we will live, we can still make informed decisions about when to retire. Planning for retirement does come with some uncertainty, but our advanced modeling tools can run thousands of scenarios to create income projections that enable you to evaluate your readiness. Our free retirement income calculator will help you understand the income you can expect from your current assets and decide whether you have enough.
In addition to retirement accounts, you should factor in any pensions you or your spouse may have and Social Security. The Social Security Administration mails annual statements to all workers age 60 and older, or you can view your benefit amount anytime on their website. Choosing when to retire can be challenging, but if you are nearing retirement, our income planning solution will soon be able to help you make a more confident decision. As you consider your plans, keep in mind that there are advantages and disadvantages to retiring at different ages.
Before age 65
With the promise of being able to spend your days however you see fit, leaving your job before your 65th birthday may sound very appealing. An earlier retirement means more years to travel or pursue a lifelong passion. Unfortunately, younger retirees encounter more challenges accessing health care and meeting their financial needs.
Beginning the year you turn 55, you may qualify for an exception to withdraw savings from your 401(K) without penalty if you leave or lose your job. However, early retirees typically pay a 10 percent penalty, in addition to any tax owed, to access funds from other retirement plans like an IRA until age 59½. Individuals who retire in their 50s or earlier often rely on income from investments in non-retirement accounts to fund the early years of their retirement.
Widows and widowers can choose to begin receiving Social Security survivors' benefits at age 60. Anyone can claim Social Security at age 62, but the monthly payment will be 25 to 30 percent less than the benefit you would receive at your full retirement age. Reduced benefits compensate for the fact that you will be receiving payments over a longer period of time.
Rising health care costs may also dampen your plans for an early retirement. With the exception of people with disabilities, Medicare eligibility doesn't begin until you turn 65. According to a report issued by eHealth, a private health insurance exchange, an individual between the ages of 55 and 64 paid an average of $701 in premiums (before subsidies) each month to purchase health insurance in the individual marketplace in 2017. If you currently have employer-sponsored coverage, retiring before age 65 could mean a significant increase in your health care expenses.
In your later 60s
Today, one's later 60s are considered traditional retirement age. People who choose to retire at this age typically have many years to enjoy their favorite activities and qualify for age-based benefits. Working until your later 60s makes it much easier to afford health care and stretch your savings.
In addition to becoming eligible for Medicare at 65, the Social Security Administration currently defines full retirement age as between 66 and 67 depending on when you were born. You will benefit from larger payments if you wait until this age to claim benefits. Working longer also gives your investments more time to grow. "Catch up contributions" provide an opportunity for investors age 50 and older to add an extra $6,000 to their 401(K) and an extra $1,000 to their IRA each year.
In your 70s or later
Maybe you just love what you do or perhaps you need extra time to boost your savings. Many Americans are working longer whether by choice or by necessity. A 2016 report from the Economic Policy Institute found that families with an earner between the ages of 56 and 61 had a median of $17,000 saved in retirement accounts. That number includes many families with no retirement savings at all.
Fortunately, delaying claiming Social Security until age 70 allows payments to grow to 132 percent of your full benefit amount. You'll also have more years to grow your investments and make catch-up contributions. Keep in mind that individuals are usually required to begin taking minimum distributions from all tax-deferred plans at age 70½ regardless of their work status.Knowing when you're ready
Before you turn in your notice or begin planning a party, make sure you're prepared for retirement. You may not be ready to retire if you:
- Still enjoy working. There's no need to leave your job just because you've reached a certain age.
- Are living paycheck-to-paycheck. Someone who barely covers expenses while working will struggle in retirement.
- Have a lot of debt. Juggling repayment obligations without straining your savings can be difficult.
- Anticipate a major expense soon. Retirees often cover large purchases by withdrawing the funds from tax-deferred accounts, which can push them into a higher tax bracket.
- Haven't adjusted your portfolio. As you get older, you should move toward less risky investments and diversify your holdings. Otherwise, your savings may not be there when you need it.
- Aren't prepared for the future. Retirees need a long-term financial plan based on a safe withdrawal rate to ensure their savings will last.
To retire with confidence you'll need a strategy that makes the most of your savings. If you are near or already in retirement, our income planning service, that will launch soon, will help you evaluate all of your assets and customize a drawdown approach to minimize your tax liability. We can help you figure out what you can afford to spend and how to best allocate your investments. Our service will enable you to model your spending power over time, so you can make informed choices about how to manage your funds. Being proactive with your finances today can empower you to enjoy a more secure retirement. T