The question of when to retire can be difficult to answer since it is tied to several other factors, from job satisfaction to the amount of money you have saved. The date for retirement isn’t the same for everyone, but you will need to make some sort of projection if you wish to make a strategic plan for savings.
You can retire at any age provided that you are confident you have enough money saved to last you for the rest of your life. However, there are both drawbacks and benefits to retiring at different points in life. The decision of when to retire also largely depends on many of the government policies set in place, such as when people can start claiming Social Security or enroll in Medicare. Some of the important points to consider when determining your target retirement age include the following:
1. 401(k) Withdrawals
There are certain restrictions about when you can start drawing on your retirement accounts. For most people, the most important question to answer is when they can start making withdrawals from their 401(k).
In general, you can start taking money from these accounts as early as 55, but different rules apply at different ages. Between 55 and 59 1/2, you can make withdrawals provided that you have retired and did so before you turned 55. Retiring before 55 means taking 401(k) loans or hardship withdrawals, which can entail heavy penalties.
Between 59 1/2 and 70 1/2, you can withdraw from your 401(k) accounts provided that you are no longer working. If you do still work, you will be restricted from drawing from any account with your current employer. At 70 1/2, required minimum distributions start.
2. Social Security
One factor that often drives retirement age decisions is Social Security. People can technically start receiving Social Security benefits as early as age 62, but they will take a hit on the amount they receive. If you continue to work and receive Social Security benefits before reaching full retirement age in the eyes of Social Security, which depends on birth year, you may see your benefits reduced even further.
When you wait longer than full retirement age, which is usually 66 or 67, you continue to earn a higher monthly benefit up until age 70, at which point the benefit becomes capped.
Many people choose to work until 70 so that they can maximize their Social Security income, which is a guaranteed check that gets regular inflation adjustments as a percentage of the total, so it will grow more each year with a higher starting rate.
Medicare kicks in for people who qualify at age 65. Obtaining health insurance outside of an employer before this time can prove both difficult and expensive, so many people choose to stay employed largely for healthcare benefits until they turn 65 and get Medicare coverage.
Importantly, you will still pay premiums for Medicare, but the rates are much more reasonable than you would find in the private market, plus pre-existing health conditions do not factor into coverage decisions. Of course, the things that Medicare does cover are fairly limited, so you may also want to work longer to afford supplemental insurance as well as long-term care insurance, to reduce the potential financial burden of health care when you are not working.
4. Average Retirement Age
Another factor that plays into some people’s decisions is the average retirement age in the United States. According to the US Census Bureau, the average retirement age is 62, with the average length of retirement 18 years. This is perhaps surprising considering that Social Security defines 62 as early retirement; however, people who stop working at that age may still choose to hold off on Social security benefits to have greater support down the line.
While the average retirement age is something to consider, it should not have too much bearing on those who want to wait or those who feel like they can save enough to retire much earlier. Also, it is worth noting that the average retirement age will likely change significantly in the coming decades as people choose to work longer and retire later.
5. Health and Finances
While looking at the specific age requirements of various retirement programs is important, it does not tell the whole story about when you should retire.
First, think realistically about the size of the nest egg you will be able to develop before you hope to retire as well as your health and the health of your parents. This may feel morbid, but it can also give you insight into how long you can expect your retirement to last. People are living longer than ever, and many feel the pressure to work additional years so that they can avoid running out of money should they live well into their 90s.
Considering both health and finances holistically can give you a better sense of how long you might need your nest egg to last, as well as how much it can be stretched before a new strategy needs to be adopted.