When you picture retirement, perhaps you have a clear idea of how you want to spend your time. Maybe you want to visit with family, travel, learn a new hobby, volunteer, or sit back and relax -- or enjoy a combination of all these.
But when you think about what age you want to retire, is your vision as clear? If you're like one third of baby boomers, the age aspect of retirement is still hazy. Around 23% of boomers say they're not sure when they are going to retire, according to a Harris Poll survey, and another 11% say they haven't given it any thought at all.
That may not seem like a big deal, but not having a retirement age in mind makes it much more difficult to plan. When you know what age you want to retire, you can get a better ballpark idea of how much you'll need saved before leaving your job forever. If you decide to wing it by retiring whenever you feel like it, there's a good chance your savings won't be aligned with your timeline.
Fortunately, choosing a retirement age and coming up with a plan to ensure you're prepared isn't as difficult as it may seem.
The first step toward retirement: knowing when to retire
You may have a general idea of when you want to retire, but nailing down a specific age helps ensure your retirement plan is as accurate and pragmatic as possible.
For example, you may plan to retire between age 65 and 70. That may sound pretty specific, but if you expect to need $50,000 per year to cover all of your basic expenses in retirement, retiring at 65 rather than 70 means an extra five years' worth of expenses that you'll need to be able to cover -- or $250,000.
The sooner you pin down a specific retirement age, the more time you'll have to figure out how much you'll need to have saved and to create a realistic savings plan. The earlier you retire, the more money you'll need to have saved -- within a shorter timeframe. But if you know you'll be holding off on retirement for a few years, you can adjust your plan accordingly.
It's a good idea to plan on retiring earlier rather than later, in case the unexpected happens and you become unable to work. If you're planning on waiting until your 70s to retire, but you lose your job at age 60, you may be forced into an early retirement -- whether you're financially ready or not. Or you could get sick or become injured, which could prevent you from earning wages.
So how do you choose when to retire? Much of it comes down to what you already have saved and how much you'll be able to save before retirement. For instance, if you're 40 years old with $50,000 saved for retirement and you contribute $200 per month, which earns a 7% annual return. At that rate, you'd have around $423,000 by the time you turn 65. But what if you decided to retire a few years earlier at, say, age 60? All other factors remaining the same, you'd have just $292,000 saved. If that's not enough to make it through retirement, you'll need to either hold off on retiring or supercharge your savings to boost your retirement fund by age 60.
Keep in mind that Social Security also plays a big part in choosing your retirement age. You don't necessarily have to claim benefits right when you retire, but retirement and Social Security usually go hand in hand; many people start claiming benefits when they leave their job. And how much you'll receive in benefits depends on the age at which you start claiming them.
How Social Security affects retirement income
The earlier you claim Social Security benefits, the smaller your monthly checks will be. While you can claim as early as age 62, you won't receive 100% of the benefits you're entitled to unless you claim at your full retirement age (FRA), which is between 66 and 67 depending on the year you were born, determined by the Social Security Administration (SSA). If you wait to claim until after your FRA (up until age 70), you'll receive a bonus each month on top of your full amount.
Again, while you don't have to claim benefits and retire at the same time, you can maximize your retirement income by being strategic about the age at which you retire and start claiming Social Security benefits.
For example, say you're 50 years old, you have $50,000 saved, and you're contributing $200 per month in a fund that earns a 7% annual return. For this example, your FRA is 67, and you're entitled to $1,300 per month in Social Security benefits if you claim at that age. If you were to retire at 62, you'd have around $156,000 saved on your own. If you also claim Social Security at that age, your benefits would be cut by 30%, leaving you with $910 per month -- or $10,920 per year.
If instead, you were to retire at 70 and you continued saving at that rate, you'd have about $292,000 saved by that age. By waiting to claim Social Security until age 70, you'd receive a 24% boost on top of your full amount, giving you $1,612 per month -- or $19,344 per year.
There are many factors involved in planning for retirement, but the first step is deciding when you want to retire. The sooner you choose your ideal retirement age, the easier it will be to plan ahead and figure out how much you'll need to save now to reach your retirement goals.