Introduction
In a previous article, we examined how you can determine the amount you need to be saving now in preparation for retirement. One of the factors that will affect that decision (as you saw) is the age of retirement.
Choosing a retirement age is one of the retirement decisions that people considering or planning for retirement will have to make. This decision often involves consideration of many financial and non-financial factors. Whatever decision you make, there will always be a trade-off. Choosing a retirement age is one area where individual needs and differences come to play.
How Retirement Age Impacts Retirement Income
The age you retire will affect the income that will be available to you at retirement via Social Security benefits. You are not eligible for social security benefits until 62. Consequently, if you retire before the age of 62, you will have to remove social security as one of your income sources until you are 62.
Also, if you begin to claim your retirement savings before the age of 66, you will not have access to the full amount. You will probably get only 75% of the full amount. Your spouse will also get only 35% of the benefits instead of 50% if you wait until you are 66. The reason for this reduction is that you will be claiming the benefits for a longer time. The person who begins to claim at 66 will have lesser time to make claims, which increases what he or she gets per claim. On the other hand, the person who begins to make claims by 62 will have more time to make claims, which reduces what he or she gets per claim.
Furthermore, if you wait until you are seventy, you will get the highest possible social security payment.
The bottom line? The longer you wait to retire, the more retirement income you will have due to higher social security benefits.
Retirement Age and Retirement Savings
However, social security benefits are not the only source of income at retirement.
If you remember from the last article, the retirement income you need from savings is 80% (can be more or less) of your annual pre-tax income minus income from social security benefit. Therefore, if the money from social security benefit reduces, income from retirement savings have to increase to match the retirement income you need. If you choose to retire early, you will need to increase income from retirement savings. (we assume there will not be other income sources for the sake of simplicity).
Therefore, the earlier you retire, the more money you will need in your retirement accounts during retirement. Alternatively, you can choose to augment the shortfall by income from part-time work if that will not defeat the reason you want to retire in the first instance.
Retirement Age and Financial Independence
Another factor when it comes to deciding on retirement is financial independence. Many people want to achieve financial independence as early as possible. Because of that, they prefer to retire as soon as possible. It bears repeating here that people who seek financial independence seek it for different reasons. It does not necessarily mean the person wants to spend all day sleeping or binge-watching Netflix. Instead, some people want to devote themselves to some causes in the world they are passionate about without having to consider if it pays income – or how much it pays.
Therefore, the pursuit of financial independence can make some people retire earlier than others.
Retirement Age and Medical Insurance
Medicaid does not set in until the age of 65. Therefore, for those who want to retire earlier than this, one consideration is their capacity to set up personal medical insurance before Medicaid sets in. In this case, the retirement savings will even need to be higher.
Other Factors
Other factors determine when people choose to retire.
Boredom
Many people decide to retire late because of the fear of boredom. These are business owners and working professionals who cannot imagine life outside the corporate world or the business management sphere. People in this category will choose the latter end of the retirement line (70). Some of them may even decide to forego retirement. For these people, it is not a financial decision but a matter of what they love to do.
Others have other things they would love to do at retirement, and boredom is the last thing with which they concern themselves. Those in this category will most likely choose an earlier retirement age.
Standard of Living
Some people are afraid their standard of living will drop if they retire early. This is especially true for people with low retirement savings. They feel they can’t meet up with the income they need at retirement. Therefore, they prefer to wait out retirement or forego it entirely. They would instead take up a less demanding part-time job as their age advances.
Saving Habit
Some decide to retire late because they can’t get themselves to develop the saving habit they need to require earlier. They are different from those who find themselves with low retirement savings at a specified period. It might not be too late for these people, but they can’t just get to saving.
Motivation
There are different motivations for retirement. As such, people have different preferences when it comes to the age of retirement. Some who love their job may hasten retirement. Those who love their job may delay (or forego) it. Those who have things they want to pursue at retirement different from their current job will retire earlier than those who do not.
Making a Choice
What works for A will not necessarily work for B. Every individual need to pull these factors together and make a decision.
If you want to retire before 62
Some of the questions include:
- Do you have enough retirement savings to cope without social security?
- Do you have a pursuit that will occupy your time during retirement?
- Can you fund personal healthcare insurance? (Medicaid does not set in till 65)
- If retirement savings is not significant enough, are you willing to lower the standard of living or do part-time work?
- Can your savings habits produce the retirement savings you need during retirement?
If you want to retire before 65 but after 62
Some of the questions include:
- Do you have enough retirement savings to cope with reduced social security payment?
- Do you have a pursuit that will occupy your time during retirement?
- Can you fund personal healthcare insurance? (Medicaid does not set in till 65)
- If retirement savings is not significant enough, are you willing to lower the standard of living or do part-time work?
- Can your savings habits produce the retirement savings you need during retirement?
If you want to retire by 66
Some of the questions include:
- Do you have the health to keep working until 66?
- Do you still enjoy doing the work you are doing?
If you want to retire by 70
Some of the questions include:
- Do you have the health to keep working until 66?
- Do you still enjoy doing the work you are doing?
Conclusion
Choosing a retirement age is both a science and an art. It involves many personal factors, and only you can decide the age that is right for you. You must consider all the financial and non-financial factors before making a decision.
0 Comments