A couple Saturdays ago, Jill and I hosted a family party. Our home was full to the brim of grandparents, parents, cousins, nieces, nephews, aunts and uncles. I spent the day moving from group to group, chatting about our plans for the summer, laughing about old times and dissecting James Holzhauer’s historic success on Jeopardy. He’s up to $1.6 million in winnings!
Anyway, when I stopped by to chat with a group of my younger relations, I caught them building their retirement castles in the air. The majority of them are still at the start of their careers, but they were fantasizing about how they’d spend their time in retirement. Throughout the discussion, it became clear to me the one thing they didn’t discuss; WHEN they hoped to retire.
Hmmm . . . and that got me thinking.
You see, we all have ideas for how we’d like to spend time in retirement. Some of us want to travel. Or take up new hobbies. Spend more time with friends and family. Others hope to start new careers or even go back to school. Many simply want to sit on the porch, whittle, pet the dog and watch the sun rise and set.
But, I find when to retire is a question that many haven’t answered, including many of us who are fast approaching or even in our retirement years.
In fact, a recent Harris poll asked Boomers – those between ages 54 and 72 – to describe their plan for retirement. It found that 23% of those responding said, “I honestly don’t know,” while another 11% said, “I haven’t thought about it.” That’s 44% – close to half of the respondents – with no clear idea or plan in mind for their retirement age.
Folks, this just doesn’t work. Without a destination in mind, how can we map out how we’ll get there?
It is important to point out here that your retirement strategy must allow some flexibility within your retirement age goal. It just may not be practical, or even possible, for you to retire when you want. Ultimately, your investments, savings, and income must align with a plan and framework to help you get the most out of your retirement. And not establishing a clear idea of when you will retire makes planning for retirement that much more difficult.
Over the years, I have found that the best idea is to give yourself as much leeway as possible to plan for your retirement. Get started as early as you can, while you can still adjust your investment strategy if necessary. And remember, the strategy that you have become accustomed to in your accumulation years may not work in your distribution years. So, the earlier you set a date in mind, the more time you will have to structure a savings and investment plan to meet your goal.
More planning time before your retirement helps to shore-up more recovery time for the inevitable financial setbacks and unexpected expenses. These surprises force you to readjust your timetable and can even derail your plans entirely. Establishing contingencies to handle issues that may arise pay dividends later. Whether it’s to cover expenses, adjust your lifestyle, or direct specific investment strategies, contingency plans help you realize your goal.
One benchmark you may wish to consider, as you try to nail down an age to retire, is when do you think your spending needs will change significantly? Most of us experience a significant reduction in income once we make the transition from the financial accumulation to the financial distribution stages of our lives. It can be advantageous to time your retirement once your cost of living has been reduced. For some of us, that may be when you downsize or, as I like to call it, “right-size” a family home. For others, it may be when adult children graduate or leave home. Each investor’s timing for this may be different, but once you’ve accounted for those issues, the age at which you can retire comes into much sharper focus.
It’s important to consider your retirement age as a factor for your Social Security benefits. Those benefits are likely a critical figure in your post-retirement income strategy. After all, nearly 9 in 10 individuals age 65 and older receive Social Security benefits, and those benefits represent about 33% of the income of the elderly, according to the Social Security Administration.
Although you can claim Social Security benefits as early as age 62, you won’t receive 100% of the benefits to which you are entitled unless you have reached your Full Retirement Age (FRA). For most, your FRA is between 66 and 67, depending on when you were born. And for every month that you delay claiming benefits past your FRA, the Social Security Administration will pay a bonus on the benefits up to age 70.
Social Security benefits are calculated based on your highest 35 years of income (adjusted for inflation). So, if you continue to earn significant income as you approach retirement, it may behoove you to work longer to receive a higher benefit.
Let’s consider some other essential age benchmarks as you consider planning your goal retirement age, and how those issues may factor into your planning and strategy. For example, age 59 ½ is the earliest you may make withdrawals from your Traditional IRA and other retirement accounts without incurring a penalty tax.
Age 65 marks the beginning of Medicare eligibility. Retiring before then may require you to factor in the cost of healthcare coverage until you are eligible. Age 70 ½ is another important milestone for many investors. Because that’s when you’re required to take Required Minimum Distributions (RMD’s) from your qualified retirement accounts.
Folks, regardless of your personal retirement age goal, consider that the average age of retirement is 62, as determined by the U.S. Census Bureau. Many folks retire earlier than they expect, and it’s not always their choice. Sometimes it’s because they can’t find work. Sometimes it’s because of disability or illness. It is crucial that your retirement strategy be flexible enough to accommodate these changes as necessary. Don’t wade into retirement without a plan that can adjust as your needs and circumstances change.
The poll I mentioned at the outset was marked by the uncertainty expressed by folks who are approaching their retirement years. They’re not sure when, or in some cases even if, they’ll be able to retire. While broad economic indicators remain positive and there’s still potentially lots of upward momentum and growth, people are uncertain about what the future holds and uncertain what to do. Don’t let this uncertainty cripple you; not to Cutter Family Finance faithful. Take charge by clearly visualizing your retirement goals and making concrete plans, starting with a timetable.
Now more than ever is the time to be vigilant and stay alert, because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.
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