When can I retire?
If you are questioning when you can retire, the answer to that question will depend on a number of factors. Information from the U.S. Census Bureau shows that the average retirement age in the U.S. is 63. However, when you can retire will depend on your savings and your personality. You can retire when you have enough money to live comfortably and are ready
The full retirement age from the Social Security Administration depends on the year in which you were born. If you were born in 1960 or later, your retirement age is 67. This is the age at which you can draw full Social Security benefits.
Social Security should be viewed as a supplement to your retirement savings. If you regularly save every month beginning in your 20s, you could potentially amass more than $1 million in your savings, which should be enough for you to enjoy a comfortable life after retiring. However, your personality also factors in.
Retiring means different things to different people. Some people view it as completely leaving the workforce while others think of it as changing their current job to something else. Others may have personalities that make them want to continue working as long as they can and therefore, continue adding to their retirement savings.
Statistics on retiring
When you were young, you likely thought that “I will retire when I am 65.” While most of our parents retired at that time, statistics show that this has changed. In a recent Gallup poll, 76 percent of the respondents reported that they planned to continue working past age 65. Around 35 percent of those people will continue to work out of necessity.
If you make saving a habit beginning when you are young, retiring when you want will be easier. If you simply decide to continue working because you want to work, having enough retirement savings can make the decision one that you can make freely rather than being forced to remain in the workforce.
Will my finances determine when I can retire?
A good starting point is to ask yourself “How will my finances determine when I can retire?” Take a critical look at your age, your savings rate, and the age at which you envision retiring. Use a calculator to get an idea. Think about the lifestyle that you would like to live after you retire.
After you have assessed where you are currently at, you can be in a better position to determine the steps that you need to take to make certain that your own personal choices and not your finances will determine when you can retire. Even if you decide to continue working, you will feel much freer if the decision is your own instead of a decision that is mandated by your financial circumstances.
Retirement factors and assessment
What factors should I look at to determine when can I retire? There are multiple non-financial and financial factors that may play a role in figuring out when you can retire.
There are several non-financial factors that may play into when you can retire, including the following:
- Health care
- Long-term living arrangement
- Estate plan
- Personal reasons, including lifestyle changes and longevity trends
Your health care is an important factor to think about. While you are working, you may have the benefit of participating in an employer-sponsored health care plan. Your company might pay some or all of your health insurance costs. When you retire, your insurance will end. You will need to think about whether you can afford to purchase private health insurance in addition to Medicare for your health care needs.
Your health is also a factor. If you generally enjoy good health and are likely to continue being healthy, you may have more freedom when it comes to determining when can you retire. If your health is poor, you may be forced to retire much earlier than you want because of your medical conditions.
Long-term care is another important consideration. Stays in nursing facilities and assisted living centers can be prohibitively expensive, costing thousands of dollars per month. Data from the U.S. Department of Health and Human Services shows that the average 65-year-old today has a 70 percent chance of needing some form of long-term care in the future.
You can hedge against this possibility by purchasing long-term care insurance or whole life policy with a long-term care rider. If you are a veteran, you may also be eligible for long-term care assistance through the VA.
Your estate plan may also factor in when you can retire. If you want to amass substantial assets and savings to leave to your loved ones, retiring later might help you to do that. Choosing to retire later may provide you with more time to build your assets so that you might be able to leave a sizeable estate to your family members.
The Social Security Administration reports that a man who is currently 65 can expect to live to age 84.3. A woman who is currently 65 can expect to live to an average age of 86.7. However, these are averages, and 25 percent of 65-year-old adults will live past age 90. Ten percent will live beyond age 95.
Longevity trends show that people are living longer. This may impact when you can retire since your savings might need to last over a longer period of time. Lifestyle changes after you retire may be another important factor. If it is a choice, you may want to wait to retire until you are able to maintain the lifestyle that you want.
Financial factors for retirement
The financial factors that may play a role in determining when you can retire are equally important. It is crucial for you to take a careful look at your expenses, budget, and your income sources after you retire.
Start by calculating your expenses. It is a good idea for you to carefully track your expenses for a month, including your cash transactions. At the end of the month, categorize your spending so that you can see where your money is going. You should also calculate your ongoing expenses such as your mortgage, insurance, utilities, grocery bill, gas bill, and others.
Once you have a clear picture of your expenses and your spending habits, you should identify areas where you can cut your costs and save money. Create a realistic budget and make certain that you adhere to it closely. Devote any extra money to building an emergency fund and to building your savings so that you can retire.
You should also calculate your expenses and your budget for after you retire. To do this, you will need to be able to project your monthly income. Review all of your potential income sources in retirement. You can estimate your Social Security benefits by using a U.S. government SSA retiring estimator here.
Next, inventory your plan assets to determine how much money you will need to have so that you can live comfortably. If you have a pension, figure it in. Finally, if you have other income sources such as rental properties, dividends, or annuities, include them in your projected monthly income.
To make it likelier that you can retire when you want, you will need to engage in the planning process. Here are some steps to take to help you to complete the process.
1. Do an inventory of assets and track your net worth
Inventory your assets. To do this, you need to figure out what you own and what the fair market value of all of your assets is. You should then figure out your net worth by analyzing your income sources and subtracting your liabilities. Continue tracking your net worth and take steps to increase it so that you can retire comfortably.
You also need to make certain that you understand the tax implications of your retirement income. Some types of accounts are taxed at the time that you make withdrawals such as traditional IRAs, 401(k) accounts, 403(b) accounts, and 457 accounts.
Withdrawals from Roth IRAs are not taxed after you retire. You will also want to calculate any taxes that you might have to pay on your Social Security retirement benefits. Finally, you need to become an expert on funds withdrawal so that you can keep more of your income.
2. Eliminate debt and spend less than you earn
If you have debt, you need to eliminate it so that you can retire. Create a plan to pay off the debts that you owe. Avoid incurring new debt if at all possible. You can employ a number of methods to eliminate debt such as the snowball method, which is paying the debt with the lowest balance first or starting with the debt that charges the highest rate of interest.
Whichever method that you choose, stick with it. You should also make certain that you are spending less than you earn by following a budget as discussed earlier and cutting out unnecessary expenses.
3. Set aside ample funding for emergencies
Having ample savings for emergencies is important. Most people experience unexpected emergencies such as accidents, illnesses, or periods of unemployment. You need to make certain that you have enough money in savings to get you through harder times.
Work towards building a minimum of three to six months’ worth of your living expenses in an emergency savings fund. To help this balance to grow faster, you can choose to put it in a liquid account such as a high-interest savings account or a money market fund.
4. Take care of health insurance
Another important step in planning so that you can retire is to take care of your health insurance needs. Learn what you need to know about Medicare and any supplemental plans that you might need. Most people become eligible for Medicare when they turn age 65. However, there are two situations in which you might be able to get Medicare at age 62 or younger.
If you are disabled and receive Social Security Disability benefits for at least two years, you will be Medicare eligible even if you are younger. If you have end-stage renal disease, you can qualify for Medicare no matter your age.
5. Assess all income sources as described in the above FINANCIAL section
The next step in the planning process is to assess all of the income sources that you will have after you retire. Follow the steps that we previously described in the FINANCIAL FACTORS section.
6. Create/change your Investment strategy based on your goals
Another part of the planning process so that you can retire is to create your investment strategy based on your goals, your age, and your time horizon. You can use a retirement age calculator and determine your ability to tolerate risk to help you to create your investment strategy. If you are younger, you can afford to be more aggressive in your accounts and strategies.
As you near the age at which you would like to retire, you will want to change your investment strategy to a more conservative approach. This is because your goal may also change from building wealth to maintaining capital so that you can weather financial downturns.
You should regularly contribute to a 401(k), IRA, or Roth IRA. If you are able to do so, try to contribute the maximum allowed amounts. You are able to contribute up to $19,000 per year to your 401(k) plan if you are younger than 50. If you are 50 or older, you can make additional contributions of $6,000 per year.
You are able to contribute a maximum of $6,000 per year to a traditional IRA or a Roth IRA if you are younger than age 50. If you are 50 or older, you can contribute an additional $1,000 per year. Automate your investments by setting up automatic transfers from your paycheck or your bank account so that you can invest and save without thinking about it.
Knowing your level of risk tolerance is important. Your ability to tolerate risk will change as you grow older. When you are young, you can afford to take more risks because of the longer period of time that you will have to save. You should evaluate the risk in your accounts with each decade and make adjustments to your portfolio so that it becomes more conservative over time.
Consider how long will my retirement savings last? To figure out the average retirement savings that you might need, think about how long you are likely to live. Total the current market value of all of your savings and investments. Then, determine a realistic annualized real rate of return on your investments. You can conservatively assume that inflation will be 4 percent annually. A realistic rate of return would be between 6 percent and 10 percent. To be on the safe side, you should estimate on the low end of the range.
Make certain that you consider the taxes that you will have to pay on your distribution for each of the types of accounts that you own. For IRAs, 401(k)s, and other accounts in which your contributions go in on a pre-tax basis, you will pay taxes at your ordinary income tax rate when you begin taking withdrawals. Since your Roth IRA contributions go in on an after-tax basis, you will not be taxed on the withdrawals that you take from your Roth IRA account, assuming you follow distribution guidelines.
Make certain that you diversify your investments and choose brokerages that have lower fees. It is possible for you to find a brokerage that does not charge fees or commissions on your investments. This can potentially help your investments grow more over time.
You should make sure to optimize your portfolio. As you grow older, you should also change your risk profile so that it becomes more conservative. As you near the age at which you plan to retire, your goal should be focused more on preserving your capital while beating inflation.
A word on early retirements
When can I get Social Security? The minimum retirement age at which you can begin to draw Social Security benefits is age 62. The minimum age at which you can withdraw full benefits is age 65 to 67, depending on when you were born. While you can take your benefits before you reach your full retirement age, there are several reasons why it might be a better idea to wait instead of retiring at 62.
There are a few pros and cons of early retirement. Retiring early might help you to recharge and allow you to focus on traveling or a favorite hobby. However, if you are not financially ready to retire, you may find that you will not have enough money to support the lifestyle that you envision.
If you retire before the full retirement age, you will receive substantially less in your benefits. People who retire at the minimum retirement age 62, will only receive 75 percent of your full benefit amount. If your spouse plans to draw benefits based on your work record, he or she will only be able to take 35 percent of your full amount instead of 50 percent.
There are several benefits of working longer. If you do, your investments will have a longer time to accrue interest. This may allow you to enjoy a greater savings percentage.
When you put off retiring, there will also be a shorter asset distribution period when you do. Your Social Security benefits payments will likewise be higher. You will also be able to rely on your employer-provided health benefits for a longer period of time. Finally, remaining in the workforce can provide you with mental and physical benefits. It might make sense for you to focus on transitioning to retirement instead of choosing a specific date for retiring.
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