Timing Is Everything

After years of hard work, you're certainly entitled to a happy retirement. You may have already started daydreaming about it, at least a little. Will you travel the world, volunteer for your favorite charity, go fishing, or spend more time with the grandkids? The possibilities are endless.

Even so, many workers are a little afraid of retirement. They’ve heard too many horror stories about people who retire too soon and find their incomes severely restricted. According to a 2018 survey from the Transamerica Center for Retirement Studies (TCRS), 48% of American workers say they fear they will outlive their retirement savings.

Key Takeways

  • Before you retire, make sure your income will support the lifestyle you want.
  • Consider postponing retirement if you have family financial obligations or substantial outstanding debts.
  • If you have a spouse or other partner, the two of you should coordinate your retirement plans.

So how do you know when the timing is right? Here are six indicators that you’re ready to retire if you want to.

1. You've Reached Full Retirement Age

If you were born between 1943 and 1954, your full retirement age for Social Security purposes is 66. If you're born after 1959, you’ll have to wait until you’re 67.

Although you can start claiming Social Security benefits as early as 62, your benefits will be much higher if you wait until full retirement age. If you start your retirement benefits at 62, your monthly payment is reduced by a whopping 25%.

On the other hand, if you wait even longer to claim Social Security—the maximum age of delay is 70—you’ll receive as much as 132% of the monthly benefit you would have collected at your full retirement age.

2. You're Debt-Free

If you’ve paid off all your debts, you are well-positioned for retirement. If you have credit card debt or still owe a lot of money on a home or car, you may want to postpone giving yourself over fully to the golden years.

When you’re on a fixed income, a hefty mortgage or car payment can put a major strain on your finances. It also makes it more difficult to deal with unexpected expenses.

Before you hand in your retirement notice, try to whittle down most if not all of your outstanding debts.

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How Much Should I Save for Retirement?

3. You're No Longer Supporting Your Kids or Parents

Are your kids all grown up, out of the house, and earning their own income? That makes it a lot easier for you to retire.

However, if you're still supporting your kids or helping them out regularly, you may want to put your retirement plans on hold for a while. You might also hold on if you have elderly parents who need your financial support, or may need it down the line.

According to a 2017 Wells Fargo/Gallup poll of U.S. investors, about 46% of parents with adult children were providing financial support to one or more of them. And 14% of those with a living parent were helping them financially. If this sounds like you, retirement probably isn’t realistic until your situation changes.

"Supporting aging parents or kids at home is becoming more expensive as college and housing costs continue to rise. There is no way a couple can downsize and start minimizing their expenses if they have a household to take care of," says Carlos Dias Jr., wealth manager at Excel Tax & Wealth Group of Lake Mary, Fla.

When you list your expected retirement expenses, divide them into "must-haves" and "want-to-haves."

4. You've Created a Retirement Budget

This may seem like a no-brainer, but many soon-to-be retirees don't crunch the numbers. Before you ditch your career, it’s important to figure out whether you can live comfortably on your post-retirement income.

Start by adding up your must-have monthly costs, including mortgage or rent, groceries, electricity, and other utilities. Then add in your "wants," such as travel, entertainment, shopping, and dining out.

Once you’ve calculated your estimated monthly expenses, it’s time to figure out whether you’ll have enough income to cover them. Add up your estimated Social Security benefits, pension payments, retirement account distributions, and any other sources of income you will have.

Here's one rule of thumb on your retirement account distributions: "Your retirement budget, if you retire in your mid-60s, should not exceed 4% of your investments plus Social Security and pension payments," says Kristi Sullivan, CFP®, of Sullivan Financial Planning LLC in Denver, Colorado.

Do you have enough to cover your monthly expenses, including at least some of those "wants?" If so, you might be ready to retire.

5. Your Portfolio Is Updated

How long has it been since you took a hard look at your investment portfolio?

"There are three parameters that influence one’s ability to live off one’s savings at the onset of retirement: First, the size of the savings or investment portfolio upon retiring; second, the expected growth rate of the portfolio going forward (the average annual return), and third, the amount of annual withdrawal/consumption the retiree is going to require to maintain this/her lifestyle (or not)," says Jeff de Valdivia, CFA, CFP®, of Fleurus Investment Advisory LLC in Fairfield, Conn.

If you haven’t done a portfolio checkup in a while, now is the time to do one. If your portfolio has taken a major hit in recent years, your nest egg may not be as large as you thought.

It may be useful to sit down with a financial advisor as you carefully reassess your portfolio and figure out whether you need to make adjustments.

As you near retirement, you may also want to shift to a more conservative investing strategy to protect your retirement wealth.

6. Your Spouse Agrees

Unless you live alone, retirement doesn’t affect just you. Retirement is a decision for you and your partner to make together.

One factor to discuss is how the reduction in your income will affect your partner. If you and your spouse are both financially and emotionally ready for it, you’ll be more likely to enjoy a fulfilling retirement together. If your spouse intends to continue working for many years, your retirement may be much lonelier than you expected.

"Communication is always important, especially when it comes to your household finances. Being on the same page in terms of your retirement plan will help bring you peace of mind about transitioning into your next phase in life," says Mark Hebner, founder and president of Index Fund Advisors Inc., in Irvine, California.

The Bottom Line

Retiring too early can be a mistake that leads to you not enjoying retirement to its fullest. Especially if you're forced to re-enter the workforce by financial necessity instead of your own choice. Take the time to plan carefully so that you make the right decision on when to retire.