Are you considering retiring early? Deciding that you will leave work before your full retirement age (FRA) is something that you may be emotionally ready for. But are you financially ready?
Making sure that you can live out your retirement years in comfort instead of strain is crucial before making this huge choice. And you should be sure to factor in these three things.
1. How much will your Social Security be lowered?
If you retire at your FRA, you should be eligible for your standard benefit. You get a benefit increase if you delay taking it, but your monthly check is decreased if you take it early. How much depends on your age.
For example, if your FRA is 66, you will receive 75% of your standard benefit. If you take Social Security at age 62 and you will get 70% of your benefit at age 62 if your FRA is age 67.
This means that if your FRA is age 66 and your standard benefit is $2,500, you should get $1,875 at age 62. If your FRA is 67, it will be reduced to $1,750 at age 62. It this amount exceeds or equals your expenses, then you can potentially take your benefit early. But if you end up with a deficit, you should rethink your plans for early retirement.
2. What is your life expectancy?
How long you expect to live matters when considering retirement. You could be living off of your assets longer if you live to the age of 90 than if you live to the age of 80 -- which would mean that you need more money saved. If your FRA at age 66 gets you a standard benefit of $2,500, a reduced benefit of $1,875, and a delayed benefit of $3,300, how long you live could factor into how much money you get from the system over time.
If you are someone with a shorter life expectancy, taking this benefit early could yield you the most in lifetime income. If you live to be around the average age of 80, taking it at your FRA could pay you the most. But if you think you could live a long life in retirement, delaying taking Social Security if you don't absolutely need it may be in your best interest -- even if you retire early.
The chart below demonstrates how drawing the most Social Security benefit over one's lifetime is dependent on claiming age and life expectancy. Someone with a long life expectancy may benefit more from delaying benefits, while someone with a shorter life expectancy may be better off claiming early.
|Live to age 75||Live to age 80||Live to age 85|
|Take benefit at 62||$292,500||$405,000||$517,500|
|Take benefit at 66||$270,000||$420,000||$570,000|
|Take benefit at 70||$198,000||$396,000||$594,000|
3. How much more should you save?
For the average American, Social Security should replace around 40% of your working income. But that percentage could be higher or lower depending on what you made when you were working. How much this guaranteed income stream replaces your working wages will determine how much extra you should save.
Depending on how much you made while you were working, you may need anywhere from 55% to 80% of your pre-retirement income when you stop working. You could have another guaranteed income source, but for most Americans, it will come from retirement savings.
For example, if you have a salary of $60,000, your income and expense needs in retirement may be calculated this way:
- Start with a salary when working that equals $60,000
- Calculate 80% of your salary for your retirement expenses which will equal about $48,000
- Factor in Social Security which could cover 40% of this or around $24,000
- A $24,000 deficit remains which is money that would need to come from retirement savings in this example
Studies have shown that maintaining a withdrawal rate of 4% or less with an investment portfolio that consists of 60% stocks and 40% bonds could help you avoid running out of money in retirement. Generating the $24,000 in this way would require a beginning savings balance of $600,000.
You can track whether or not you can feasibly meet your savings goals by looking at what you currently have saved, how much time you have before you retire, how much you're adding each year, and the average rate of return that you receive. For example, if you have $100,000 saved, 15 years until you retire, an average rate of return of 8%, and annual additions of $10,000, you could reach the goal of saving $600,000 . But if you have less saved currently, fewer years until you plan on retiring, a lower rate of return on average, or lower annual contributions, meeting this goal may require some tweaking.
Early retirement may be something that you hope for, but making it a reality will require a plan. Looking at your future goals, where you are now, and whether or not your current actions are enough will be what's needed to make this dream a success.