When should you retire? Use these three rules as a guide to select your optimal retirement age.
1. Know what you'll do after you retire
Probably the most important step in determining when you should retire is figuring out what you want to do after you retire. The bottom line is that you could become bored if you don't have plans for what you'll do during your retirement years. It could be that playing golf or traveling will be enough to keep you happy and active. However, many retirees go back to work in some capacity -- not because they have to, but because they want to.
Merrill Lynch surveyed working retirees in 2014. Four-fifths of them chose to work even though they didn't have to do so. The top reason they cited for continuing to work was "to stay mentally active." The second-highest response was "to stay physically active."
Volunteering with non-profit groups is another great option for many retirees. The important thing is to remain physically and mentally active, which has been proven time and again to be essential to retirees' happiness.
2. Make sure you know you can afford to retire
You need to ensure your financial resources will be able to support you during retirement, regardless of when you decide to retire. For some, money will decide their retirement age for them.
There are a couple of general rules of thumb to keep in mind.
- First, you'll probably need about 80% of your current income to maintain the same standard of living in retirement.
- Second, you should only withdraw about 4-8% of your retirement nest egg each year to avoid running out of money. If you have read my whitepaper Retire in Luxury, you know that you can withdraw more if you invest wisely in the market. However, if you foolishly only invest in "safe" vehicles then you will have to withdraw on the lower end of the range.
Social Security will be a major source of retirement income for most Americans. If you wait until your Social Security-mandated full retirement age (between 66 and 67, depending on when you were born), you'll receive full benefits. However, you can receive reduced benefits as early as age 62 -- or you can wait as late as age 70 to enjoy increased benefits.
Also include all other potential sources of retirement income in your financial calculations, such as pensions, individual retirement accounts (IRAs), and 401(k) plans. Keep in mind that these sources have their own rules governing when you can make withdrawals without penalties. For example, IRA withdrawals prior to age 59-1/2 are usually subject to a 10% penalty.
3. Factor your health into the decision
There are at least a couple of important reasons to factor your health into the decision about when you'll retire. First is the financial impact. Fidelity estimates that a 65-year-old couple retiring now will spend $245,000 on healthcare during a 20-year retirement. And that doesn't include long-term care expenses, which can be enormous.
If you retire before age 65, your healthcare expenses will be even higher. That's because you'll probably have to pay for health insurance totally on your own unless your employer provides coverage for retirees. At age 65, you can enroll in Medicare -- for now, though there's a possibility that the Medicare age could be gradually raised over time to help keep the program solvent.
Second, you may be forced to retire earlier than you'd like because of health issues. An Employee Benefit Research Institute (EBRI) survey found that 46% of retirees in 2016 retired earlier than expected. Over half of those individuals retired early due to health problems or disability. Even if you don't currently have health problems, delaying retirement for too long could be problematic if your job takes a toll on your body.