The right time to retire is different for everyone. It depends on several factors, including your health, your ability to work, the amount you’ve saved, your age and understanding what you want to do with your time after you stop working. Retiring early may seem like an attractive choice, but you need to make sure that you’re financially prepared for this next stage of your life’s journey.
What to know about retirement age
Retirement can mean different things to different people. It can mean simply leaving the workforce at a specific age, reducing the amount of time you spend at work, applying for Social Security benefits, or a combination of those milestones. The decisions you make about when and how you retire will determine your comfort level during your retirement years.
It’s important to understand when you can start applying for Social Security benefits. According to the Social Security Administration (SSA), you can start receiving benefits as early as age 62. However, if you choose to receive benefits early, you will get a reduced percentage. On the other hand, if you wait to receive benefits until you reach age 70, you will qualify for an increased benefit.
Officially, your full retirement age depends on when you were born. While 65 was previously the retirement age for all Americans, amendments passed by Congress in 1983 have gradually raised the age limit for people born in 1938 and later. For people born in 1960 or later, the full retirement age is 67. The SSA offers a free calculator to determine when you’re eligible for benefits.
But what if you want to retire before age 62? Early retirement means you won’t qualify for Social Security benefits; you’ll need to pay your own way until you qualify. For example, retiring in your 50s means you’ll have to increase your income and savings as much as possible during your working years. Also note: Withdrawals from a retirement account, such as an IRA or 401(k), incur a 10% penalty prior to age 59 1/2. That means you’ll need a substantial amount saved in non-qualified assets like certificates of deposit and cash savings to bridge your income gap until you can withdraw from your retirement accounts without penalty. A non-qualified asset is any investment or saving vehicle that uses after-tax dollars.
And it’s possible you could outlive your retirement savings. If you retire too early, you might not have enough retirement income to fully enjoy your post-work life if you live a long time. However, with the right retirement plan, you can find a balance that suits your needs and supports your ideal retirement lifestyle.
Retirement planning: Income and savings
Social Security benefits are intended to replace a percentage of your pre-retirement income. Your benefits are based on your highest 35 years of income. According to AARP, the average monthly benefit in 2020 is $1,503, and the maximum allowed benefit is $3,011 per month.
To determine if your Social Security benefit will be enough for you, it’s essential that you estimate your post-retirement expenses. That figure should include everything from daily expenditures to travel and healthcare expenses. It also includes items such as insurance premiums and money set aside for estate taxes. In general, it’s best to overestimate your retirement expenses when making calculations as you don’t want to end up overspending after retirement. A qualified financial planner can help you to come up with a reasonable estimate.
Many people also save for retirement through an employer-sponsored 401(k) or a self-funded IRA. These types of pre-tax investments provide additional income after retirement. Another option is to establish some form of passive income to contribute to your income post-retirement. That could include income from rental properties or taxable brokerage accounts. Finding ways to increase your income prior to retirement can allow you to exit the workforce entirely or reduce your schedule to part-time, allowing you to benefit from greater freedom and flexibility.
Other financial considerations to make for retirement planning
Planning for retirement is one of the most important things you can do in life — but you don’t have to make these major decisions on your own. Meeting with an Adirondack retirement planner can help you better understand your current financial situation and what you can do to maximize your ability to enjoy retirement with peace of mind.
Here are some topics you should consider discussing with a retirement expert:
- Your financial goals. To develop a realistic retirement plan, you need to prioritize your financial goals. When you speak with your financial planner, be frank about what you will want for your future. That might include setting aside money for your children, living debt-free, or the kind of living standard you expect to have.
- Your ideal retirement timeline. Even if you want to retire as soon as possible, you’ll need to discuss your time horizon for reaching your financial goals. A planner can help you analyze your current savings and investments to develop a realistic timeline.
- Your ideal retirement lifestyle. What do you want your retirement to look like? Whether you plan on downsizing your home, retiring abroad or staying close to family, you should take the time to consider how your lifestyle will affect your post-retirement budget. Your planner can help you better understand the rate at which you can safely withdraw funds from your savings to minimize the risk of needing to return to work.
- Your current financial situation. To provide you with the best possible advice, your planner will need to get an accurate picture of your current financial situation. Before meeting, gather all of your relevant information. That might include account statements for investment and retirement accounts, tax records, estate planning documents, pension plan information, monthly expenses and recent pay stubs.
It’s never too late or too early to start thinking about your retirement plans. At Adirondack Trust Company, our expert retirement planning advisors are experienced in guiding customers through every stage of the retirement planning process. Schedule an appointment to learn more.