In 2011 the U.S. Census Bureau cited an average retirement age of 62, but no one’s personal situation is exactly average. Deciding when to retire involves a number of underlying decisions, all of which fit together like puzzle pieces to create the bigger picture. Let’s examine those decisions and how you might approach them.
Do I have much debt?
One of the best ways to boost retirement income is to pay off debt before you let go of a steady paycheck. A mortgage with a low interest rate might be an exception, but in general the less debt the better. If you’re carrying high credit card balances, both the debt itself and your spending habits should be scrutinized. Take a close look at your assets and liabilities as a first step to determining a retirement date.
How will I pay for health care?
Health insurance premiums and prescription drug costs are critical factors in the budgets of most retirees. If you want to retire before Medicare eligibility at age 65, you should determine the source and cost of your health care coverage until then. Even after age 65 you may want supplemental insurance for costs not covered by Medicare, so learn about supplemental policies before planning your retirement date. Also ask yourself about long-term care (LTC) expenses, including whether to purchase LTC insurance, the possibility of living with your children, and other scenarios.
What income will I have?
Estimating your cash flow is essential to making sure your money lasts throughout retirement. Your sources of retirement income might include pensions, paychecks from a second career, rental income, or revenue from your investment portfolio. Important factors for investment income are your portfolio’s likely performance, the inflation rate, and the rate at which you’ll withdraw assets from your accounts.
For most Americans, Social Security is a critical source of retirement income. You can draw partial benefits starting at age 62, but the benefit amount increases for each year you delay claiming until age 70. As the average American lifespan continues to increase, many experts advise waiting as long as possible because the lifetime benefit amount is often higher.
How much do I need to fund the lifestyle I want?
Many cookie-cutter estimates declare how much money “everyone” should have on hand at retirement. But the amount you need depends on the lifestyle you’re aiming for. Continuing to work part-time while pursuing low-cost hobbies, for example, will require far less than leisurely travelling the world. So consider where you see yourself living in retirement, whether you plan to work in any capacity, and how you would like to spend your time.
Next, list the expenses you expect for your ideal lifestyle, being realistic about health care costs as you get older. Now you have a vision for retirement and a target cash flow to support that vision. If your assets and expected income aren’t enough to generate that cash flow, you may need to delay retirement, cut your current spending, change your living arrangements or adjust your lifestyle requirements.
What will my tax situation be?
One often-overlooked factor in timing your retirement is tax management. Where you hold the various types of assets, and the order in which you withdraw them, can impact the taxes you pay and therefore how well your retirement is funded. It’s usually a good idea to withdraw money from taxable accounts initially, leaving other assets to continue growing tax-deferred. Your Social Security benefits may be taxable, but it depends on your other sources of income. Also, it’s important to look ahead and plan for required minimum distributions (RMDs) from IRAs. RMDs can raise your taxable income and cause your Social Security benefits to be subject to tax.
If you’re confused by these various puzzle pieces, contact a financial professional to help you create a bigger picture of when it’s best for you to retire.