Ask someone, "When should I retire?" and you're very likely to hear, "As soon as you can!" But the best answer for many people can be very different and for more reasons than you might expect.
Deciding when to retire is more than just a financial decision. It's also social and emotional; after all, this is the biggest uprooting of a person's life since they left school and joined the workforce full-time. There are four key things to consider before deciding when you should retire: Wealth, health, housing, and purpose.
Your retirement wealth matters
For many Americans, early retirement isn't an affordable alternative. According to a Federal Reserve study, the median value of financial assets (such as stocks, bonds, mutual funds, and others) for a head of household aged 65-74 was $72,000 in 2013 (most recent data). Based on the 4% distribution rule, that would only generate about $2,900 per year in sustainable income. Pensions are another source of retirement income for many. However, only a small percentage of Americans will receive any pension benefits.
Furthermore, Social Security -- a cornerstone retirement income source for most Americans -- only pays about $1,500 per month on average to current retirees, meaning there's a pretty wide gap between the median retirement-aged American's retirement savings, what Social Security pays, and how much income they'll actually need.
This alone is a key reason why many Americans shouldn't retire early. By taking Social Security early, the monthly benefit is significantly lower, meaning faster depletion of other retirement assets. For many early retirees, this means going without later in life, or relying on family and charity to make ends meet.
Paying for healthcare
Healthcare expenses alone keep many people on the job until they are eligible for Medicare at 65, even with substantial retirement savings. This is particularly true for those who receive health insurance from an employer's group plan.
There is some good news in this regard: Federal law requires most employers to allow former employees remain on their group insurance (100% paid by the employee) for a period. In most cases, you would be able to continue coverage (COBRA) for 18 months. If qualify for Medicare within 18 months before you qualify for COBRA, your dependents covered by your group insurance would be able to retain COBRA for up to 36 months from the date you qualified for Medicare.
There are private marketplaces and state exchanges through which you can purchase health insurance, but prices and coverages can vary based on geography and other factors, including pre-existing conditions. There's also significant uncertainty around congressional efforts to repeal and replace the Affordable Care Act (also known as Obamacare), and how this could affect insurance rates for millions of Americans. Anyone considering retiring before they are eligible for Medicare, or some other health insurance for retirees (such as union benefits) would probably best served to plan for higher healthcare costs in coming years.
There are also the costs of care that insurance and Medicare won't cover. According to the department of Health and Human Services, 70% of people who live to age 65 will require long-term care at some point, and insurance or Medicare won't cover many of those costs.
For instance, if you suffer a fall, you may need help bathing, preparing meals, or with other household activities that aren't medically necessary. It could cost thousands of dollars for only a few weeks of support, and you'd be out of pocket for this expense.
Will housing be a burden or a boost for your retirement?
Just as with retirement savings, the data isn't necessarily great when it comes to housing for many older Americans. According to a study by Harvard University, the percentage of people aged 60-69 owning a home has fallen over the past 20 years:
This is important for two reasons. First, home equity is an important source of income for many retirees, particularly later in life when other assets may be depleted.
Second is the burden of housing costs. Many homeowners enter retirement without a mortgage or pay it off early in retirement. This can mean significantly lower housing costs versus renters, who will typically see housing costs increase every year at a higher rate than homeowners.
Having purpose in retirement is important
Retirement should be a chance to take your leisure and pursue activities you didn't have the time for during your working years. But many retirees leave a decades-long career and lose the sense of purpose and fulfillment work often provides. There's also social interaction many retirees lose. These things can lead to isolation and in some cases depression for retirees.
Getting involved in your community or even maintaining some work activities can help fill the need to have purpose and make a difference. Whether it's volunteering for a favorite charity, picking up a part-time job, or even starting a small home-based business, there are multiple ways you can be sure you're still giving back and plugged into your community while still enjoying the freedom of retirement. Not only will this fill the hours many retirees find themselves idle, but it will help you live a more meaningful life.
When you can answer these four things, you'll know when you should retire
Wealth, health, housing, and purpose. Once you've weighed each of these things, factored the financial and emotional impacts they will have, and taken steps to make sure you're as prepared for them as you can be, you'll be able to answer, "When should I retire?" for yourself.
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