Consider two people: Alberta and Kent. Both are active, fun-loving people with a wide circle of family and friends. Both have been very successful in their respective fields. Alberta is 54, and Kent is 68. One of them is retired: Alberta.
“Wait a minute,” you may be thinking, “she’s only 54. She still has her peak earning years ahead of her. And why is Kent still working? He’s past full retirement age; he could be collecting his full Social Security benefit and taking distributions from his retirement accounts.”
All the above statements are true, but they’re missing two very important data points: while Alberta has been planning for years to retire early in order to spend more time in creative pursuits and volunteer work, Kent still feels highly productive and motivated in his career. “I plan to spend at least the same amount of my life retired and free to allocate my time the way I want as I did working,” Alberta says. Kent, on the other hand, says, “I’m performing better now and making a more significant contribution to my company and my industry than I ever have. Why would I want to retire?”
The fact is, “retirement age” doesn’t mean the same thing it did a couple of decades ago. There was a time when most people took retirement as soon as they could, and almost always by full retirement age—which used to be 65. But now, people are making different choices. One influence is the “financially independent, retire early” (FIRE) movement, whose adherents build a strategy to gather the necessary assets as early in their career as possible so that they can walk away from the day-to-day demands of a career in their 50s or even earlier. Another major factor is the fact that people are living longer and longer, thanks to advances in medicine, nutrition, and personal wellness. In the near future, it will not be unusual for people to live as long after they retire as they did before retirement. Consider that when the Social Security Act was passed in 1935, the average life expectancy for an American male was 61. Now, it’s over 77 (and for women, it’s longer).
So, what does “retirement age” mean to you? Here are some important things to consider as you think about the “right” age for your retirement.
Whether your goal is to retire at 45 so you can sail around the world, or work until you’re 70 to maximize your Social Security benefit, your financial preparation and strategy is the most important and foundational factor in deciding the right time to retire. That means that you’ve projected your expenses and stacked them up against your sources of income to ensure that you can live the way you want on the resources you’ll have available. It also means that you’ve considered how you’ll fund healthcare costs, since you probably won’t be able to depend on an employer’s health insurance plan. If you intend to retire early, you’ll need to be prepared to live entirely on investments and savings until you qualify for Social Security, pensions, or other benefits that likely won’t kick in until your mid-60s or later. Even if you’ve been diligent about funding your qualified accounts (401(k)s, IRAs, etc.), you can’t pull funds from them until you’re at least 59 ½. If you plan to retire at full retirement age or later, have you built a projection for your Social Security benefits and any pension income to which you may be entitled? Once you stop getting a regular paycheck, your ability to sustain your lifestyle will depend on having sufficient income to cover your anticipated—and probably a number of unanticipated—expenses.
Your debt is handled.
Typically, the number-one constraint on retirement income—other than healthcare and housing expenses—is debt. Have you eliminated as much debt as possible? You may decide that getting rid of your mortgage payment isn’t strictly necessary, since the value appreciation of the home may be offsetting the amount of debt remaining. But remember: you can’t eat the equity in your home. More and more Americans are entering retirement with debt, which means that it’s more important than ever to make sure that the wrong kind of debt won’t prevent you from having the retirement lifestyle you’ve been longing for. Being debt-free—or as close to it as practical—is highly advisable for those going into retirement.
You know your “why.”
We’ve written previously about the importance of having a clear idea of what you’re retiring to, not just what you’re retiring from. Too many people go into retirement with the sole idea of “escaping” the workplace and its demands, but they forget the vital importance of having something positive to look forward to. It’s not enough to have a goal to “quit working”; what new goals and achievements are you planning to pursue, once you’re able to spend your time as you choose? If you don’t know the answer, then it may not be the right time for you to retire.
At The Planning Center, we help our clients form solid financial plans for retirement, but we don’t stop there. Because our fiduciary responsibility requires us to keep clients’ best interests foremost, we also want to help them create holistic visions for secure, low-stress, fulfilling lives, post-retirement. To learn more about how we work with clients to help them envision better financial futures, visit our website to read our article, “Want to Sleep Better at Night? Maybe You Need a Financial Plan.”