Deciding when to retire is not always easy. Many people simply base the decision on their birthday, but there are a whole host of other factors that should weigh into your thinking as well. Here are seven signs it’s time to retire:
1. Your bank account
When you retire, your portfolio takes over the job that the payroll department handled while you were working. If you have to cut yourself a paycheck each month, it makes sense to be sure that your bank account is up to the task. A common rule of thumb puts a sustainable withdrawal rate at about 4 percent. Another way to look at that would be to shoot for retirement savings that are twenty-five times larger than your expected annual withdrawal. If you are not quite there yet, it might make sense to work a little longer (or work part-time), save more, or make cuts to your anticipated spending during retirement.
2. Your bucket list
Before retiring, you should know the answer to three key questions: What do I want to do? Where do I want to do it? Who do I want to do it with? Knowing answers to those questions will help give you purpose and a plan for how to spend your time. If your key reason for retiring is to escape your job, don’t pull the trigger just yet. Wait until you have a plan in place for meaningful pursuits. Doing so will likely help you avoid a bad case of retirement “buyer’s remorse.”
3. Your health
If you are in excellent health and have longevity in your family, working a little longer may not significantly cut into your plans. Not so if you or your spouse are in poor health. In that instance, delaying retirement could mean your chances to do certain things are gone for good. This is especially true if you are planning an active retirement. Take an honest look at your health and life expectancy and weigh that into your decision about when to retire.
4. The markets
Investment returns during the first decade of retirement are extremely important. Retire on the cusp of a bull market and your portfolio will likely build enough padding to withstand future downturns and withdrawals. Retire and begin taking withdrawals at the beginning of a bear market, however, and those early losses will greatly increase your odds of running out of money. Experts refer to this as sequence risk, but it could just as easily be referred to as luck. No one has a crystal ball, but if the economy appears poised for a downturn, you might want to delay retirement (and withdrawals) until things rebound. The same is true if your portfolio has significant losses in the years leading up to retirement. In that case it might make sense to keep working until your investments have a chance to recover.
5. Health care benefits
Recent studies by Fidelity and others estimate that a sixty-five year old couple retiring today will need between $200,000 and $400,000 to cover health care costs during retirement. That is in addition to what Medicare already covers. Having a plan to cover those costs—whether by savings, private insurance, or a Medicare supplement policy—is an important consideration when deciding when to retire.
6. Social Security benefits
Retiring at sixty-two would mean a permanent reduction of almost 30 percent to your Social Security benefits compared to what they would be if you waited until your full retirement age. Just like retiring early reduces benefits, retiring later increases them. Those born after 1943 can expect an 8 percent increase for each year they wait to claim benefits after full retirement age. This increase goes away at age seventy, so working until then will result in maximum benefits.
7. Your spouse
You would be surprised at the number of couples who are blindsided by differences over retirement dreams, plans, and expectations. One wants to keep working while the other is ready to be done. One wants to move to the beach and the other wants stay close to the kids. Are you on the same page with your spouse when it comes to retirement? Make sure you do your planning together so you can work through any differences early and enter retirement as a team.
As you can see, deciding when to retire is a complex decision with many moving parts. By giving it the time and attention it deserves, you can help ensure that your retirement gets off on the right foot.
At the risk of sounding obvious, you have a much greater chance of accomplishing a goal if you know exactly what it is you want to do. Someone committed to going to Harvard has a much greater chance of ending up there than does someone who just wants to go to college. Someone committed to climbing Mount Everest is much more likely to reach the summit than someone who just wants to climb mountains.
How about you? When it comes to retirement, how specific are your plans? do you want to “save” or do you have a specific dollar amount in mind? Do you want to “retire as soon as possible” or do you have a specific date in mind. Do you want to “travel” or do you have a goal to visit five countries a year? A decided person is a productive person. Being specific allows you to aim at a target. Not surprisingly, aiming at the target improves your chances of hitting it.
For many, the phrase “retirement planning” has become limited to the planning done in the years leading up to retirement. When you consider that your retirement could last for 20 to 30 years, however, it’s easy to see that your planning won’t end once you transition out of the workforce.
Chances are good that the things you want to do, are able to do, and can afford to do will change over the years. As a result you will likely have several transitions to plan for.
As a chess fan, I was struck by how similar the phases of retirement are to the three phases of a chess game. In chess, you have the opening, the middle game, and the end game. Let’s take a quick look at each and see what parallels we can draw with retirement.
Phase 1: The Opening
The opening of a chess game is all about maneuvering your pieces into position in anticipation of your overarching strategy. How well you develop your pieces in the opening often determines whether you spend the game on the attack or on your heels.
Similarly, Phase 1 of retirement is all about outlining your strategy and getting your pieces into play. That means deciding what you want to do and determining how much it will cost. For example, do you want to travel or stay close to home? Do you plan on moving? Is there a particular hobby or activity you want to focus on? Spend time thinking and talking to your spouse about what your typical day in retirement will look like.
Once you have your plan it’s time to create your retirement budget. List out your sources of income, such as Social Security, pension, personal savings or income from your job if you plan on working part time. Next begin putting numbers to the planning you did earlier. How much will things like your housing, food, travel, insurance, hobbies, and entertainment cost?
Is your estimated retirement income enough to cover your expenses? If not, now is the time to make up for any shortfall. You’re likely in your peak earning years and retirement plans like IRAs allow people over 50 to make excess “catch-up” contributions. Save as much as possible and work to eliminate debt so you can enter retirement with your finances in order.
As you can see Phase 1 has many moving parts. It is not unusual for someone to spend several years planning for and executing this transition. Once you have the where, when, and what questions answered and are confident that your nest egg is up to the task, you are ready to move from the opening to the middle game.
Phase 2: The Middle Game
In chess, the middle game is where most of the action is. The pieces are in play and each player can get creative. In fact, a good imagination and the ability to execute are two of the most important elements of the middle game.
If Phase 1 of retirement was heavy on strategy, Phase 2 is heavy on tactics. It’s time to transition out of your job and turn on your income streams by claiming Social Security and starting withdrawals from your personal accounts. It’s usually best to take money from your taxable accounts first (save tax-deferred accounts until later) and to keep your withdrawals to around 4 percent of your account value per year.
Once your income is set you can begin doing all the things you planned for this phase. This can sometimes be complicated by the fact that your circumstances will constantly be changing. Your health may change. Your finances may change. A great opportunity might present itself that you hadn’t considered before. All of these things will require you to modify your tactics.
World chess champion Gary Kasparov once described chess as trying to find your way to a destination using a map that is constantly changing. The same is true in retirement. Your strategy will likely remain the same, but the maneuvers you make to support your strategy will be fluid. The challenge is to wake up each day engaged and ready to act. As is usually the case with chess, you have limited time to make your moves.
Phase 3: The End Game
When the end game arrives during a chess game, you likely will be down to a few pieces. Earlier in the game, you either sacrificed them as part of your strategy or had them taken from you unwillingly. Depending on how things played out in the middle game, a change in strategy or tactics may be in order. The available choices and the time you have to make them are limited.
Obviously, the parallels in this phase are a little more unpleasant to consider, but since there is no Phase 4, there are some key issues you will want to take care of. For example, you will want to review your will and powers of attorney to make sure they are up to date and reflect your current wishes. Likewise with beneficiary designations on things like your life insurance policies and retirement accounts.
Also, as your health changes, the desire to live next to the beach may give way to the desire to live closer to family or a good medical facility. Moving is always a major undertaking, so talk with family and do as much planning as possible while you’re healthy.
As you can see, retirement is more than just a date on the calendar. By planning for each major phase, you can have peace of mind and focus on living a rich, rewarding life no matter how many pieces you have left on the board.
Portions of this article were excerpted from the book The Bell Lap. In addition, Joe originally published this article at www.fpanet.org.
Chances are you’ve been asked that question before. Maybe by your spouse or a co-worker. Maybe by your kids. When someone asks you that question, is the answer you give a date or a dollar amount? For most people it’s a date. Something like “March of next year.” or “When I’m sixty-five. Two years to go!”
When you think about it, though, your age has very little to do with it. Sure, you can start taking Social Security at 62, but the average Social Security payment couldn’t lift you above the poverty line. If you’re like most, your nest egg will be doing the really heavy lifting during retirement. It will take over the job that the payroll department handled while you were working. So instead of basing retirement on your birthday, consider basing it on your bank account instead. Figure out the amount of money you need in order to generate the annaul income you require to fund the retirement you want. Get that amount saved and you’re retired, regardless of how old you are or whether or not you are still working.
At almost every stage in life, you need to answer three crucial questions. How you answer them will influence the arc of your life for decades to come. What are they?
1) Where do I want to live?
2) What do I want to do?
3) Who do I want to do it with?
Think back to the previous times in life when you answered those questions. Maybe it was when you were heading off to college or entering the workforce. Maybe it was when you got married and started a family or maybe it was when you had a career change. Knowing what you know now about how each decision shaped and influenced your life, can you see how important your answers were?
As you plan for and enter retirement, it’s time once again to ask and answer “The Big 3.” Block off some time on your calendar to think – and I mean really think – about those questions. How you answer them will largely define how you spend the final third of your life. And if you feel like sharing what you come up with, post a comment below. It might just serve as insight or inspiration for the rest of us.