When should you retire?
The short answer is when you're financially and mentally prepared to do so, but there is much more to it than that. To retire comfortably, you'll need to know how much retirement income your savings, pensions, and Social Security can sustainably create, as well as how your basic needs will be met, such as healthcare. Here's a quick guide that can help you determine what your idea retirement age will be.
Will you have enough income in retirement?
This is the big financial question. Being able to retire comfortably isn't necessarily about the amount of money you have in savings -- it's about how much income you'll generate.
Generally, experts suggest that you'll need about 80% of what you earned before retirement to maintain the same standard of living. Here's how you can figure out whether you'll have enough or not.
First, add up all of your retirement income sources. Social Security is a big source of income for most retirees, and you can get a good idea of what to expect by creating an account at www.ssa.gov and viewing your latest Social Security statement. Then, add any pension or other sources of income you expect.
Next, estimate the amount of income you can expect from your savings. While it's far from perfect, the "4% rule" says you should be able to withdraw 4% of your retirement savings, and increase the amount over time to compensate for inflation, without fear of running out of money. So, if you have $500,000 in savings, plan to withdraw $20,000 of that in your first year of retirement. Divide this by 12 to determine your monthly expected income from savings.
Now combine this amount with the money you expect to receive from Social Security and other sources to determine your total expected retirement income. If it's not more than 80% of what you're making now, then you may want to wait a few more years to retire -- or be willing to accept a lower standard of living after you do.
6 Important ages to know
In addition to your retirement "number," you should know some milestone ages on the road to retirement that may influence your decision of when to retire.
- 55 -- This is the age where you can first withdraw from an employer's retirement accounts such as a 401(k) penalty-free, provided you're no longer working for the employer. This is known as the "separation from service" exemption, and it doesn't apply to IRAs.
- 59-1/2 -- The standard age when you can begin to tap into all of your retirement accounts.
- 62 -- The initial eligibility age for Social Security. Keep in mind that if you claim Social Security at 62, your monthly checks can be permanently reduced by up to 30%.
- 65 -- Many people think of 65 as standard retirement age, and this is the age of Medicare eligibility.
- 66-67 -- Full retirement age for Social Security is 66 to 67 years old, depending on when you were born. Here's a guide to help you determine your full retirement age and how it affects you.
- 70 -- A couple of significant things happen when you're 70. It's the latest you can wait to claim Social Security (and claiming at this age will result in a monthly payment up to 32% higher than at full retirement age). And at age 70-1/2, you'll have to start taking required minimum distributions (RMDs) from your pre-tax retirement accounts, such as traditional IRAs and most 401(k)s.
Other factors to keep in mind
There are a few other factors to think about before determining your ideal retirement age. Healthcare is a big one. Unless you can keep your employer's health insurance plan or get insurance through your spouse's plan, you'll need to figure out how to remain covered if you retire before reaching the age of Medicare eligibility. For an older couple, this can be a big expense, and it's rather uncertain at this point, given the Republican efforts to repeal and replace the Affordable Care Act, so this additional expense needs to be planned for.
The sort of lifestyle you want is just as important a consideration as your finances. Maybe the numbers all add up, but you're simply not ready to stop working yet. Maybe you like your job, or it gives you a much-needed sense of purpose, or your social life revolves around your job and you don't want to give it up just yet. On the flip side, maybe you're not quite ready to retire, but health or family issues make it impractical for you to continue working.
The point is that there's no single good answer to the question "When should I retire?" As we've discussed, there are lots of variables in that equation -- money, age, and personal circumstances. However, this discussion should at least help you figure out whether you are (or will be) in good financial condition to retire at a certain age.