One of the most important yet overlooked areas of retirement planning is the age at which you expect to retire. You might not give much thought to this factor, thinking you'll retire at 65 -- or perhaps at 62 when you become eligible for Social Security benefits, or simply whenever you feel ready to leave your job.
Thinking about when is the right time to retire -- as well as what to do in case you're forced to retire earlier than you'd planned -- can have a significant effect on your retirement savings. If you retire before you're financially ready, you could face a long road of money problems.
What actually is the right age to retire, though? There's no perfect answer to that question, but we do have some indication of the age at which most people choose to start their retirement journey.
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The average retirement age is earlier than you may think
The average person who is currently retired left their job at age 61, a 2018 Gallup poll found. That might sound promising, as 61 is a relatively early age to retire. However, according to the same poll, the average worker aged 50 to 64 said they didn't expect to retire until age 67. So either a lot of workers are hitting the jackpot and can suddenly afford to retire early, or they're retiring early because they were forced to do so.
Among current retirees, 43% said they had to retire earlier than they'd hoped, typically due to either health issues or losing their job, according to a report from the Employee Benefit Research Institute. Early retirement might sound like bliss, but if your savings aren't strong enough to last for decades, it could spell trouble.
Sometimes retiring even a few years earlier than you'd anticipated can be costly. The average person age 65 and older spends roughly $46,000 per year, according to the U.S. Bureau of Labor Statistics. If you're spending at that rate and you retire six years earlier than you'd anticipated, that's around $276,000 worth of additional savings you might or might not have. Also, the earliest you can start claiming Social Security benefits is age 62, so if you retire before that, all your income will have to come from your savings.
Another expense that could potentially make early retirement incredibly costly is healthcare. You're not eligible for Medicare until age 65, and if you lose your insurance when you retire, you'll need to either find coverage elsewhere or go without -- and both options could be expensive.
Nobody plans to lose their job or experience health issues that will force them into an early retirement, but that doesn't mean you can't plan for the unexpected. As you're preparing for retirement, there are a few things you can do to prepare for any situation that comes your way.
Preparing for the possibility of an early retirement
One of the best things you can do to prepare for any unexpected financial situation is to establish a healthy emergency fund. Then, if you lose your job or if health problems occur, you don't have to immediately start pulling cash from your retirement fund.
If you're nearing retirement age, it's a good idea to have an emergency fund that's more robust than average. Most experts recommend saving enough to cover three to six months' worth of expenses, but you might want to save more than that. If you lose your job in your 50s or 60s, it could be more challenging to find another one before you retire. Having a solid emergency fund can help in the event that you're unemployed for a significant period of time or if you're forced into an early retirement.
Another way to prepare for the potential costs of early retirement is to start funding a health savings account (HSA). You're only eligible for an HSA if you're currently enrolled in a high-deductible healthcare plan (meaning you have a deductible of at least $1,350 for individuals or $2,700 for families). But if you are eligible, you can contribute up to $3,500 per year (or $7,000 per year for families), and your initial contributions are tax-deductible. Your savings then grow tax-free, and you can also avoid paying taxes on your withdrawals as long as the money goes toward eligible medical expenses. If you retire before age 65, when you can enroll in Medicare, an HSA can make it a little easier to afford healthcare and insurance.
Even if you're expecting to continue working into your late 60s or beyond, it's important to consider the idea that you could be forced to retire earlier than you'd planned. You might even choose to supercharge your savings and plan to retire in your early 60s. Then if you're able to work a few more years, that's icing on the cake. No matter your strategy, make sure you have some type of backup plan in place if you do need to retire early -- it could potentially save your retirement.
