Determine your retirement age
- Deciding when to retire should be based on more than reaching a date or age.
- There are advantages and disadvantages to early retirement.
- Phasing into retirement is an option worth exploring.
While many people have an idea of their ideal retirement age, not everyone may understand the impact this choice can have on their income or their retirement lifestyle. Considering a range of factors can help you answer the crucial question: what age should I retire?
Evaluate your retirement date
The foundation of your retirement age should be based on:
- How much you've saved. You can help influence this by working longer and maximizing your savings.
- How much you plan to spend. Consider your needs and expenses as well as your goals and vision for retirement. You can adjust your expenses up or down based on your desired lifestyle.
- Your life expectancy. A life expectancy table might give you a starting point, but remember, it's safer to assume you'll live longer than the average.
Once you've determined when it's possible for you to retire, or if you already have a specific date in mind, you can consider the other implications your chosen retirement age might have.
Early retirement generally means retiring before the Social Security full retirement age of 65-67 (depending on your birth year). While retiring before this age may sound attractive, it also carries some significant costs. You have fewer working years to build up your savings, and more retirement years to spend it, which increases the risk of running out of money.
Challenges when retiring early:
- You can begin taking Social Security benefits as early as age 62, but these benefits are significantly lower than the benefits available if you wait until the full age.
- Over a long retirement, even 3% inflation can cut your purchasing power almost in half over 20 years.
- If you have a pension, early retirement may result in lower monthly payments due to fewer years accruing benefits.
- With fewer and fewer employers offering health benefits for retirees, you may have to pay for health care until becoming eligible for Medicare at age 65.
Penalty-free distributions in early retirement:
- If you turn 55 or older in the year you leave your job, you may be able to take penalty-free distributions from your employer's qualified retirement plan.
- If you leave your job prior to the year you turn 55, you can take penalty-free distributions from your employer's qualified plan at age 59 1/2.
- When you turn 59 1/2, you can take distributions penalty-free from your IRA.
- If you don't otherwise qualify for penalty-free distributions, you still may be able to avoid the penalty by taking an IRS-approved payment stream from your retirement plan.
Financial advantages to delaying retirement:
- Full Social Security benefits at 65 - 67 (depending on your date of birth) are considerably more than those available at age 62.
- You can keep contributing to a Roth IRA and/or employer retirement plan. Contributing to an employer retirement plan is a particularly good opportunity if your employer offers matching contributions.
- Your assets have more time to grow and your savings will not need to last as long.
- Inflation will have fewer years to erode your savings.
Some employers offer a phased retirement program, which can give you a way to ease into retirement over several years. Phased retirement can allow you to receive retirement benefits before the typical retirement age of 65 while you continue to work for your employer. Depending on the plan, you may be able to work part-time, or on a more flexible schedule than you had before.
You may want to ask your Human Resources department whether this option is available.
Expect to live longer
Knowing how long you need your money to last drives how much you need to save and when you can retire. While there's no way to pinpoint exactly how long you'll live, a life-expectancy table can give you a starting point. In general, these tables only consider your current age and gender because women tend to live longer than men.
A more detailed estimate might also include your current health, medical and family history, race, occupation and other factors. Even so, what you have in the end is only a reasonable estimate. The safest approach is to assume that you will live longer than you expect and your retirement savings will need to support you the whole time.
- Cover your essentials now and in retirement
- Ensure your lifestyle. Your hobbies, travel and dining-out throughout your life.
- Prepare yourself and the people you love against the unexpected things that come up every now and then
- Leave a legacy to the people and causes you care about
Confident Retirement® approach