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3 Rules for Deciding When to Retire

By Christy Bieber – Sep 16, 2020 at 9:15AM

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Making the right choices on when to leave work will cover your financial needs throughout retirement.

Timing your retirement right is crucial because your decision about when to leave the workforce is going to affect the amount of money available for the rest of your life.

To ensure you make the right choice, here are three key rules you'll want to follow. 

1. Know how your Social Security benefits will be affected

You don't have to claim Social Security benefits when you retire, but most people do because they provide a much-needed source of income. If you're going to start your benefits upon leaving the workforce, make sure you understand how your age at the time will determine the amount you'll receive. 

Senior couple sitting on park bench.

Image source: Getty Images.

All retirees have a full retirement age (FRA), which is determined by their birth year and is between 66 and 67. If you retire before your FRA, early-filing penalties apply each month that reduce your standard benefit by as much as 6.7% annually during the first three years ahead of FRA and 5% for each prior year. If you retire after it, delayed retirement credits raise the amount monthly, adding up to an 8% annual increase until age 70. 

Once you file for your benefits, you're generally committed unless you rescind your claim within a year and pay back all that you've received, so the choice isn't one to take lightly. Since Social Security will be an important source of income, calculate the amount you'd get at different ages and decide what age is ideal for you to start your checks.

2. Understand what your savings will do for you

Social Security alone isn't enough to live on, so you need supplementary money from savings. That means you need to know how much your retirement investments will produce. You can't just take as much money as you need from them, since this could result in your account running out of cash quickly. 

Instead, decide on a strategy for choosing a safe withdrawal rate, such as following the 4% rule. See how much income your savings will provide using your chosen strategy and make sure it's enough to support the lifestyle you hope to live. 

3. Plan for the worst

Everyone wants a retirement filled with travel and fun, but not everyone gets it. Health problems can start sooner than you think, and both medical care and long-term care can be far more expensive than you may imagine.

It's important you make sure your savings can cover your healthcare needs as a retiree, and that you have the right insurance coverage to keep those costs down. To do that, shop for Medicare plans, compare Medicare Advantage versus Medigap with traditional Medicare, and calculate the amount of savings you have earmarked for medical expenses. Exploring the purchase of long-term-care insurance can also be a good idea, as Medicare provides no coverage for a nursing home or home care under most circumstances. 

Expensive medical costs aren't the only potential calamity you need to be prepared for, either. There's a growing possibility that Social Security benefit cuts could occur within the next 10 to 15 years. Consider how you'd fare under different scenarios, including if there's a 24% reduction in benefits.

If you find you're unlikely to be able to afford your medical expenses or that you couldn't withstand even a small reduction in Social Security, you may want to work a little longer to bulk up your savings, delay your Social Security benefits claim, and reduce the amount of time your savings must support you. 

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