Countless working Americans look forward to retirement and the idea of escaping the daily grind. But the decision to retire isn't one to be taken lightly. Pull the trigger on retirement too soon, and you could wind up in a situation where you're strapped for cash, bored, or just plain unhappy.
There are several factors to consider when attempting to nail down the ideal age to retire. Here are three to focus on, in particular.
1. Know what your savings will buy you
Without a crystal ball, it's hard, if not downright impossible, to predict how much income you'll actually need during your senior years. That's because you don't know how long you'll live, what expenses you'll incur, and how well your investments will perform over time.
That said, you can still do an honest evaluation of your retirement savings to see how well they're likely to stack up. As a general rule of thumb, most people need 80% or more of their previous income to pay the bills during retirement. Social Security will replace about 40% of your former earnings, which means your savings will need to make up the rest.
Let's say your pre-retirement salary is $100,000. (Even if you're years away from leaving the workforce, you can do your best to estimate what your ending salary will be.) Let's also assume you'll get $2,000 a month out of Social Security for a total of $24,000 a year. If you're looking to replace 80% of your income, you'll need $80,000 a year -- $24,000 will come from your Social Security benefits and $56,000 will need to come from your retirement account.
If we apply the 4% rule, which has long been the standard for establishing a retirement savings withdrawal strategy, we'll see that to arrive at the aforementioned level of retirement income over a 30-year period, you'll need a total of $1.4 million in savings -- assuming you don't plan to work or have another income source.
If you're, say, 67, and $50,000 short, you might consider working an extra two years, maxing out your 401(k) during that time, and retiring at 69. (Incidentally, doing so will also boost your Social Security payments, since you get credit for delaying benefits.) On the other hand, if you're 63 and already have a $2.5 million nest egg, you might consider retiring sooner and enjoying some of that money while you're younger.
2. Evaluate your health
Your health should play a role in determining your ideal retirement age for a number of reasons. First, you should know that the average healthy 65-year-old today will pay an estimated $200,000 or more for medical care during retirement. If your health is below average, you should expect to spend even more, so when you think about how well your savings will fare in retirement, consider the impact your health will have on your bills.
Another reason to focus on your health boils down to how much time you think you have left. Sure, there are always life expectancy tables to consult, but if you're already suffering from a chronic illness in your mid-60s, there's a chance you may not make it to your mid-80s, the age that the average 65-year-old is expected to live to. If that's the case, and you have a decent chunk of savings, you may want to retire right away and enjoy that lifestyle for as many years as you can.
Finally, consider the fact that your health might force you into early retirement, whether you like it or not. According to Voya Financial, 60% of Americans wind up retiring earlier than planned, with health issues being a major contributing factor. If your health is poor, you're still free to come up with a retirement age, but just be prepared to exit the workforce a few years in advance.
3. Figure out what you want to do with your time
Many workers picture retirement as a joyful, relaxing period in their lives. But the reality is that retirement can be a difficult adjustment for those who are used to being productive with their days and having a schedule. In fact, retirement increases the likelihood of suffering from clinical depression by 40%, according to the Institute of Economic Affairs.
When you think about the right age for retirement, figure out how you want to spend your days, and what impact an early, average, or late retirement might have on your ability to do so. For example, if you think you'll need to travel constantly to keep yourself engaged, but you don't have the savings to support that lifestyle for 20 years or more, you might consider retiring at age 70 rather than, say, 65. On the other hand, if you're tired of your job, and you're convinced you'll be happy spending your senior years tending to your garden and visiting your grandchildren, you might feel ready to retire sooner.
While all of the above factors can help you narrow down the right retirement age, you may be better off shifting gears and arriving at an age range, as opposed to one specific number. Saying you'll retire between the ages of 66 and 69 gives you a lot more flexibility than settling on 67. If you find that you'd rather have some leeway in your retirement planning, by all means, go for it.