Deciding when to retire is a critical decision. Take the time to get it right.
When you are in your late 50s or 60s, deciding when and how to retire is one of the most important decisions you will make at this point in your life. Your decisions not only affect your financial security, but also your quality of life for the rest of your life.
There are a number of financial and lifestyle considerations that you probably need to consider. This post describes a handful of perspectives to help you think these issues through.
Financial requirements and barriers
There are a few go / no-go financial factors that you should consider.
The first thing you should do is determine whether your retirement income from all sources can meet your basic and voluntary living expenses. Sources of retirement income can be social security, systematic withdrawals from old-age provision and, if applicable, pensions. Estimate the total retirement income you could earn at some possible retirement ages so you can see how your retirement income could increase if you just postpone retirement by a few years.
If your estimated retirement income doesn’t cover all of your estimated cost of living by the age you want to retire, you may need to consider working longer hours, cutting your cost of living, using your home equity, or a combination of these three strategies.
Another potential challenge is to find affordable health insurance. Many early retirees hope to work until they are eligible for Medicare by the age of 65, when health care becomes more affordable for most retirees. If you plan to retire before the age of 65, consider how and where to get health insurance and what it will cost.
Reasons to retire
It is important to take a serious look at the factors that can have an impact if you are about to retire. Some factors could “push” you into retirement. For example, you might be in poor health, work in a stressful environment, or just be tired of working in your current job and looking for a change.
On the other hand, there may be factors that “pull” you into retirement. You may want more freedom to do activities that you enjoy more than work. Perhaps you have certain goals or activities that you can only pursue in retirement, such as travel or hobbies, or you might want to be actively involved in charitable causes.
There are sometimes a variety of factors that will influence your decision to retire. If so, it is worth considering which of these factors is of greater concern to you.
Reasons for continuing to work
Some people want or may need to continue working beyond the desired retirement age. If so, it may be helpful to investigate why.
For example, some factors might “urge” you to keep working. You may need earned income to support yourself, dependent children, or aging parents, or you may need affordable health insurance.
On the other hand, some factors can “pull” you to keep working. Perhaps you find that your job is fulfilling, you have work goals that indicate you are not done yet, or you enjoy the social engagement that work brings you.
Again, more than one of these factors could play a role, so consider which of these factors is most relevant to you.
Watch out for triggers
You may have put a lot of thought into it, if you are about to retire, a trigger happens that makes you rethink your plans. Common triggers include reaching milestone ages, such as being eligible for Social Security at age 62, being eligible for Medicare at age 65, reaching your “full retirement age” for Social Security, or reaching a reference age on your employer’s pension plan.
The retirement of your spouse, domestic partner, or close friends and family can also make you rethink your retirement plans. Or, you may have a frustrating “I’m out of here” experience at work that makes you want to leave sooner rather than later. The birth of a grandchild or some other life changing event can also help accelerate your retirement.
In all of these cases, try to avoid making a hasty decision that you will later regret. Reconsider your plans, think things through, and discuss them with people who are important to you, such as your spouse, partner, or close family members and friends.
Be ready to pan for overrider events
No matter how much you plan ahead, life can override your carefully made plans. Examples of “high-level” events are dismissal or job loss, major work interruption such as restructuring, a health shock or a family break. In each of these cases, the pension plan that has already been developed makes it easier to switch to a “Plan B”.
Deciding when and how to retire can be a lot of work, but it’s well worth your time and attention. Often times you don’t have a do-over, so do your best to cover all the basics at the beginning.