At one time, the common age for retirement was 65, but times have changed. Even the Social Security Administration (SSA) has increased the age at which full retirement benefits are available. Also, there has been a shift from defined-benefit plans to defined-contribution plans in many company-sponsored plans. Adding to these changes is the fact that many savings programs are not producing projected returns, and you will see why many individuals may need to postpone retirement.
Even for those who are financially secure, reaching age 65 does not always mean it's time to retire. Many 65-year-olds love their jobs and want to continue working. Many factors will play into a decision to retire and at what age a person retires.
(For more information, see Will Your Retirement Income Be Enough?)
Determine Your Readiness
If your employer's policy is to offer retirement at age 65, consider whether you are really ready to quit from a psychological and financial perspective. If not, consider whether you want to ask your employer to allow you to work a few more years, or if you favor being hired as a consultant. You want to do this at least a year before you reach 65, as some employers start the retirement process early. Many employers are now focusing on hiring and retaining employees who are experienced and "know the business" to strengthen their intellectual banks.
Staying on as a salaried employee not only means you continue receiving a steady income, but you will also continue to receive health coverage and other benefits your employer may offer. On the other hand, going the consultant route offers you more flexibility and could allow you to have more of a working-retirement, thereby enjoying both options at the same time.
Create a Budget
Retirees who have saved up for many years can feel that reaching retirement age means it's time to enjoy the fruits of their labor. Fair enough, but the risk is that people can go overboard and spend it all in a few years. To avoid falling into this trap, budget your expenses. Be sure to include new costs you plan to incur, such as extra travel. This will help you make a realistic determination of how easily you can afford some of those future plans.
An easy way to do a budget is to take out your most recent pay stub(s). Look at the net pay amount—after all deductions have been made. Convert that to a monthly number. Add or subtract amounts that will be different in retirement; usually, this number doesn't change much. If anything, it goes up to account for more travel. If you have to budget down to every expenditure, don’t retire. You can’t be ‘cutting it close’ with a 30- or 40-year period of spending ahead of you.
Best Time to Take Social Security
Social Security is usually included in an individual's financial projections for retirement. One key decision when factoring Social Security into your equation is to determine whether you will receive full or reduced benefits. If you were born before 1938, you are eligible to receive full retirement benefits from the SSA at age 65. If you were born in 1938 or afterward, your full retirement is determined by how long after 1937 you were born. See the following table for details.
|Age to Receive Full Social Security Benefits|
|Year of Birth||Full Retirement Age|
|1937 or earlier||65|
|1938||65 and 2 months|
|1939||65 and 4 months|
|1940||65 and 6 months|
|1941||65 and 8 months|
|1942||65 and 10 months|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 and later||67|
If you take Social Security benefits before you reach your full retirement age, your annual benefits will be lower than if you waited until you reached full retirement age. If you do not need the payments when you reach full retirement age, consider waiting until age 70 to garner the maximum possible benefit. Waiting any longer will not raise what you'll receive.
“Factors that drive when it is best to take Social Security include the historical income of you and your spouse, your ages, and life expectancy," says Mark Hebner, founder and president, Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”
"Most adults who are healthy would benefit from suspending their Social Security until they reach age 70," Hebner adds. “There are online resources for investors to help them maximize their potential Social Security payout.”
Sign Up for Medicare
Medicare can be used to cover certain medical-related expenses instead of using your savings to cover those amounts. Medicare provides hospital insurance—for in-patient care and certain follow-up care—and medical insurance coverage for physician services that are not covered under the hospital insurance.
Medicare is available to individuals who are age 65 and older. (The age can be younger for individuals who are disabled or have permanent kidney failure.) The medical portion of the insurance is available at a premium and is optional. Therefore, if you are covered by a health plan at work, you may not need the medical portion; or you can compare the cost and features of both and choose the one that is most suitable for you. The hospital insurance is available at no additional cost to you, as you have already paid for it as part of your Social Security taxes while you were working.
Even if you will not retire at age 65, you may still want to consider signing up for Medicare, as it may cost you more if you sign up later.
Use Your Home for Income
If you live in a large place, it may be time to consider whether you should move to a smaller home that is less costly to maintain and/or to an area where the cost of living is lower. Changing residences could provide some additional funds to add to your retirement nest egg.
If you are not willing to move or sell your home but need additional income, consider whether the risks involved in a reverse mortgage are suitable for you. Under a reverse mortgage program, the lender will use the equity in your home to provide you with tax-free income. Before applying for a reverse mortgage, be sure to ask as many questions as possible, including how much in fees will be incurred, the terms of the mortgage, and your receipt-of-payment options.
Managing Your Income
If you need to take income from your savings to finance your retirement, take steps to ensure that you minimize taxes and maximize what you get to keep. Your unique financial profile will determine the most opportune time to use certain types of income, but from a general perspective, withdrawals from tax-deferred accounts such as traditional IRAs and employer-sponsored plans should occur during the years when your income tax rate is lower. This will help to minimize the amount of income tax you owe on those amounts.
(Taxes on Retirement Assets: How to Pay Less has the details.)
The Bottom Line
You will likely read lots of advice about timing your retirement and ways to manage your income. One thing to remember is that there is no one-size-fits-all solution. Working with a financial planner and/or retirement counselor can help you design a solution tailored to your needs and income. Ideally, start planning for retirement as early as possible and don't forget to rebalance your investment portfolio as often as necessary.