Greetings! I trust that this will find you well and enjoying life.
When it comes to transitioning into retirement, timing really is everything. The age at which you retire can have an enormous impact on your overall retirement income situation, so you’ll want to make sure you’ve considered your decision from every angle. In fact, you may find that deciding when to retire is actually the product of a series of smaller decisions and calculations.
The good news is that, statistically, you’re going to live for a long time. That’s also the bad news, though, because that means your retirement income plan is going to have to be sufficient to provide for your needs over (potentially) a long period of time.
How long? The average 65-year-old American can expect to live for over 19.4 additional years. (Source: NCHS Data Brief, Number 267, December 2016.) Keep in mind as well that life expectancy has increased at a steady pace over the years, and is expected to continue increasing.
The bottom line is that it’s not unreasonable to plan for a retirement period that lasts for 30 years or more.
Retiring early can be wonderful if you’re ready both emotionally and financially. Consider the financial aspect of an early retirement with great care, though. An early retirement can dramatically change your retirement finances because it affects your income plan in two major ways.
First, you’re giving up what could be prime earning years, a period of time during which you could be adding to your retirement savings. More importantly, though, you’re increasing the number of years that your retirement savings will need to provide for your expenses. And a few years can make a tremendous difference.
There are other factors to consider as well:
- A longer retirement period means a greater potential for inflation to eat away at your purchasing power.
- You can begin receiving Social Security retirement benefits as early as age 62. However, your benefit may be as much as 25% to 30% less than if you waited until full retirement age (66 to 67, depending on the year you were born).
- If you’re covered by an employer pension plan, check to make sure it won’t be negatively affected by your early retirement. Because the greatest accrual of benefits generally occurs during your final years of employment, it’s possible that early retirement could effectively reduce the benefits you receive.
- If you plan to start using your 401(k) or traditional IRA savings before you turn 59½, you may have to pay a 10% early distribution penalty tax in addition to any regular income tax due (with some exceptions, including payments made from a 401(k) plan due to your separation from service in or after the year you turn 55, and distributions due to disability).
- You’re not eligible for Medicare until you turn 65. Unless you’ll be eligible for retiree health benefits through your employer (or have coverage through your spouse’s plan), or you take another job that offers health insurance, you’ll need to calculate the cost of paying for insurance or health care out-of-pocket, at least until you can receive Medicare coverage.
Postponing retirement lets you continue to add to your retirement savings. That’s especially advantageous if you’re saving in tax-deferred accounts, and if you’re receiving employer contributions. For example, if you retire at age 65 instead of age 55, and manage to save an additional $20,000 per year in your 401(k) at an 8% rate of return during that time, you can add an extra $312,909 to your retirement fund. Even if you’re no longer adding to your retirement savings, delaying retirement postpones the date that you’ll need to start withdrawing from your savings. That could significantly enhance your savings’ potential to last throughout your lifetime.
And, of course, there are other factors that you should consider:
- Postponing full retirement gives you additional transition time if you need it. If you’re considering a new career or volunteer opportunities in retirement, you could lay the groundwork by taking classes or trying out your new role part-time.
- Postponing retirement may allow you to delay taking Social Security retirement benefits, potentially increasing your benefit.
- If you postpone retirement beyond age 70½, you’ll need to begin taking required minimum distributions from any traditional IRAs and employer- sponsored retirement plans (other than your current employer’s retirement plan), even if you do not need the funds.
|Key Decision Points|
|Eligible to tap tax-deferred savings without early withdrawal penalty||59½*||Federal income taxes will be due on pretax contributions and earnings|
|Eligible for early Social Security benefits||62||Taking benefits before full retirement age reduces each monthly payment|
|Eligible for Medicare||65||Contact Medicare 3 months before your 65th birthday|
|Full retirement age for Social Security||66 to 67, depending on when you were born||After full retirement age, earned income no longer affects Social Security benefits|
* Age 55 for distributions from employer plans upon termination of employment (age 50 for qualified public safety employees); other exceptions apply
If we can help in any way with this or anything else related to retirement don’t hesitate to contact us.
Jeff Christian CFP, CRPC