Deciding when to retire is a question most people will face at some point in their lives. Though it might seem like a simple question, deciding at what age to retire is an increasingly complex decision that needs to take into account many factors.
While there is not necessarily an easy answer to the question, fully understanding the opportunities and challenges faced in retirement is a critical first step in helping to decide to retire at 55, 65, or beyond.
Here are five initial considerations to keep in mind.
Income analysis. The first and probably the most critical step in determining when to retire is to estimate how much income you will need, and how much income you will have in retirement. Take a look at potential retirement income sources including Social Security benefits. For many, Social Security benefits are the main source of retirement income so knowing when those benefits will become available and what they will be is important.
[See: 8 Things That Matter More Than Money for a Happy Retirement.]
Eligibility to begin receiving benefits starts at age 62. However, keep in mind that by receiving benefits starting at 62, there is a reduction in the amount of benefits received as compared to waiting until full retirement age (which is determined by your year of birth). Also, if you plan to continue working and take your Social Security benefits prior to full retirement age, you might actually have your Social Security benefits reduced if your income level is too high. Additionally, if you wait to begin receiving Social Security benefits until after your full retirement age, you could receive an increased benefit of 8 percent more per year until age 70, when the maximum Social Security benefit becomes available. (It is recommended to refer to the Social Security Administration to discuss your specific situation.)
To fully understand the complete financial picture of retirement, after reviewing sources of income, review potential expenses. Food, housing, health care and money for travel or hobbies should all be taken into consideration. In addition, it is best to have set aside an additional sum of money for unexpected expenses. Also consider how much money you would like to be able to leave for your surviving family members or heirs, or to charity after your death.
Health care costs. Taking a closer look at health care costs, determine what, if any, employer-provided benefits will be available in retirement, such as health, dental and vision insurance. Coverage in these areas will go a long way in protecting retirement funds, but it is also important to budget for any premiums or out of pocket expenses to continue coverage.
If retiring before age 65, the federal Consolidated Omnibus Budget Reconciliation Act (COBRA) does require some employers to offer medical coverage for those retiring before 65, but usually only for 18 months. Premiums may also be higher than what they were when employed.
It’s also important to consider that Medicare kicks in at age 65, if you qualify, which can translate to cost savings. However, Medicare does not cover all health care costs and does not cover most nursing home costs. It also requires a monthly premium for Part B and D coverages and a deductible for hospitalization.
[See: The Best ETFs Retirees Can Buy.]
Employee-sponsored benefits. Regardless of what age one retires, leaving the workforce might also mean walking away from employer-sponsored benefits such as life insurance and disability insurance, as well as the aforementioned health, vision and dental plans. Find out if any of these benefits can continue into retirement and, if not, budget accordingly for those expenses.
Also, look at any individual retirement accounts or 401(k)s and check into specific rules regarding withdrawals and age limitations as well as the potential tax implications once withdrawal begins.
For example, taking money from the employer’s 401(k) prior to age 59.5 while still employed will likely result in significant tax penalties. Withdrawing money from your 401(k) is generally reportable income from a tax perspective, which can inadvertently cause movement to a higher tax bracket dependent upon the amount withdrawn. Consult with a tax advisor for additional information.
Phased retirement. While working one day and being retired the next might be ideal for some, phased retirement is fast becoming the preferred option for many. Reducing hours with a current employer or working part-time elsewhere — perhaps even doing something completely different — might be appealing choices. Regardless of which path is chosen, taking the time to develop a renewed budget given a new income level is important as it will help determine how much retirement savings need to be accessed now versus at a later date.
Phased retirement or working part-time might also bring the added bonus of being able to maintain employer benefits such as health insurance and employer matches to 401(k)s, and, in certain cases, might mean a higher Social Security benefit, which ultimately helps your bottom line as well.
Personal readiness to retire. With all the calculations and estimations regarding financial readiness to retire, many people overlook one very basic, but important, question: Are you ready?
Retirement is certainly very appealing with extra time for family and friends, travel, and pursuit of hobbies. However, it can be too much time for some. The lifestyle change that comes with retirement can be jarring, particularly after years of hard work and focus on the job. Taking the time before retirement to think about what to do next for personal fulfillment will play a significant role in helping to maintain a happy and healthy lifestyle in retirement.
[See: 10 Ways to Avoid the IRA Early Withdrawal Penalty.]
There is no magic formula in deciding when to retire as it is a very personal choice with many factors to consider, many of which can be identified with the help of a financial professional and tax advisor. However, taking the first steps to help paint a realistic picture of the possibilities of retirement is the most important part of ensuring a fulfilling next chapter in life.
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5 Things to Consider When Deciding to Retire originally appeared on usnews.com
