Retirement is something that many hard working Americans dream of, but often don’t know how or when they can make it happen.
For most people, the responsibility of retirement planning is not a conversation that comes up until it needs to. Either you’ve worked hard enough that your savings have your back or you’ll just be working far into your 70s (or older). What else is there to think about?
It’s not just about waiting to hit a certain age number and then activating this mysterious thing called retirement.
Depending on your current age, proper planning and timing your retirement can mean the difference between proudly checking off your bucket list activities and living happily ever after, or living frugally and making it difficult to make ends meet.
This article should hopefully open your eyes to what options you still have and how to decide when to retire.
How Much Does Social Security Pay in 2020?
Social Security is how Americans who retire can continue to receive monthly income to cover the cost of living.
The system is not intended to fully replace the income you used to earn. Roughly speaking, the benefits will cover about 75% of your old income, sometimes less.
At age 62, you can file for early retirement, but beware that early retirement pays around 25% less than if you wait for full retirement.
For example, if you were entitled to receive $2,000 a month at full retirement, retiring early means you only get $1,500 (25% less). That’s $500 a month that you’ll never get to use to spend on essential things like medication deductibles, groceries, gifts for family holidays, or simply splurge and pamper yourself on the niceties of life, just for choosing to retire early!
For full retirement age (FRA), you must wait until you are between 66-67, depending on your birth year. If your spouse passed away and you are receiving their retirement benefits, you don’t have to wait until full retirement age to collect yours – you can begin at age 62.
Once you retire, your Social Security account will act like a bank account that pays out monthly to you. However, you don’t decide how much you get to withdraw each time.
The Social Security Administration (SSA) uses a calculation that takes into account your current age, lifetime earnings, and several adjustments to come up with your monthly payout.
Once you file for retirement and begin collecting Social Security benefits, you have locked that amount at a fixed number.
Use this quick calculator to get an idea of how much your monthly benefits could be.
Play with the retirement year, so that you can see what you might get at age 62 versus age 66-67.
Also, the effects of inflation mean a dollar today is not worth a dollar in the future – it’s worth a fraction of that dollar. And that means it will take up more of your money to purchase the same things.
The above calculator can also simulate what you would receive as a benefit if the value of the dollar changes at the same rate it’s changing today.
You’ll notice the number can seem to triple when inflation is taken into consideration. While you might receive more that far into the future, the cost of living will also increase accordingly.
Of course, retiring too early also means you are at risk of depleting your benefits faster. Meaning, retiring at 62 instead of 67 will leave you with five years less of money to pull from.
Timing your retirement will dictate, in large part, the quality of life you can have from that point forward. It seems better to retire at FRA, and only opt for early retirement when circumstances push you, like when a job mandates it.
On the other hand, if your job policy doesn’t mandate retirement, you have the option to either continue working out of pure enjoyment or switch to part-time. This way, you don’t suddenly stop contributing to social security, and your lifestyle remains roughly the same.
Let’s talk about other sources of income aside from Social Security.
Is Your Investment Portfolio Ready to Support You?
The effects of inflation are very real. It’s the “wearing down” of the purchasing power of the dollar. Usually, a 3% inflation rate should be accounted for in your calculations.
While you might have been steadily contributing to your investment portfolio, its annual growth rate must be expected to outpace inflation. If your portfolio grows at the same rate as inflation, the two cancel each other out, and what you have is money that is losing value.
Check frequently with your portfolio manager and discuss adjusting your asset allocation. There are other things to consider besides mitigating inflation, like your tolerance for risk, but this is a critical conversation to have if Social Security benefits alone aren’t enough for your standard of living.
If you are considering living off the dividends of your investments, then what you pay yourself must not disturb your portfolio’s growth. As part of the math, consider what you will receive from Social Security, and combine this with your portfolio income source. This monthly cash flow should sustain the cost of living expenses.
Similarly, traditional IRAs have minimum distribution requirements, and you owe income tax and get hit with a 10% penalty when you take the withdrawals before age 59½ – something to consider.
The average 401(k) account at the beginning of 2019 had $103,700. If you get to live 20 years longer, that’s just about $400 a month, if it stops growing, of course. In other words, taking early IRA withdrawals costs you money. Money that you need.
Types of Retirement Income Portfolios
By no means is this an exhaustive list. The following are just a handful of portfolio types that generate income for you at various risk and payout levels.
Bond ladder portfolios. As the name implies, you purchase bonds one at a time, making sure they mature at different times.
For example, if you bought several bonds that mature each year for the next 20 years, this provides you with annual income for that many years. Similarly, purchasing treasury inflation-protected securities provides you with fixed income, less stress, and very little maintenance.
Another type of portfolio is the total return portfolio. These portfolios follow the historical performance of both stocks and bonds. These are more long-term, and so you will witness volatility (up/down changes in value) monthly, quarterly, and annually.
With total return portfolios, your returns are not guaranteed. Still, you can spend some of your principal, and these portfolios usually work for disciplined investors who can stomach the changing trends of the markets over many years.
If you were dreaming of living off only the interest of your investments, this is difficult to achieve if the interest earned is meager, like it is with CDs, government bonds, corporate and municipal bonds. Countering this by opting for high-interest securities instead gives you a much higher income, but you accept the risk of losing that income very quickly. That’s because high-yield investments inherently carry more risk like it is with high yield bonds, REITs, and closed-end funds (CEFs).
Putting all these together, you can perhaps mix and match the different risk levels and time frames so that your income from these trickles out to you just when you need it.
For example, low-risk investments can be used immediately as soon as you retire. The medium-risk investments can fill in for the next handful of years. And the very high-risk investments you would expect to not touch at all for about a decade.
A certified financial advisor or investment professional should be solicited to answer all your questions.
What About Your Spouse?
Experiencing life in retirement years can bring joy if done together with your life-long spouse.
But if you retire separately, this can leave you bored at home or alone with friends and neighbors.
Sadly, retirement also increases the chance of clinical depression by 40%, and it affects men more than women. Retiring by yourself makes this number much higher if you’ve got no other plans.
It’s not hard to see that we humans like to be either doing something slightly challenging and productive or something enjoyable. But never “nothing.” That’s the path to depression.
You should prepare to engage in volunteer work, take classes to learn new skills, take up a hobby, or start an online business from home – anything to keep you productive and happy.
Things You Can Do When You Retire
The most ironic thing (but understandable) thing you can do after you retire is getting a job. Not necessarily because you need one, although you might, indeed, want some extra income.
But rather because you can now explore a job you’ve been curious about.
You could also volunteer, which is very rewarding. Help out at the local hospital, help a small business with a temporary project, help out at the library, or be a mentor for children.
Learning to play an outdoor sport and aiming to master it can be invigorating. Check out tennis, golfing, boating, fishing, or become an author of your own book!
If it’s not so obvious, the most relaxing thing you can do while in retirement is live a life doing your most favorite hobby.Try your hands at different types of photography, quilting, woodworking, gardening rare plants, play guitar or piano, or just piece together the most complicated puzzles in a challenge with a local club.
Buy and spice up a classic car. Start a club of car enthusiasts and meet weekly to talk about fixer-upper projects. Get into car photography, too!
For those active types who like to feel productive, starting a business is the ultimate high. From more straightforward tasks, like pet sitting, house sitting or picking up others’ groceries, to crafting things with your hands and selling them online.
And what better way to experience the world than through travel. Combine this with your newfound photography or videography hobby, and you’ll have so much to explore, if not to collect and share your travels with others online.
For others, travel can mean driving an RV down classic roads all over the country. Make new friends of all age groups and take them along your adventures!
On a more serious note, retiring before your spouse means losing a salary. This will impact what the both of you can afford to indulge in, so make sure you’ll be happy with this new salary level.
If you enjoyed taking a vacation together every six months, doing it on one salary now will undoubtedly put a lot of financial pressure on the working spouse.
Also, it might sound exciting to retire early, but if your spouse is still stuck at work, you won’t spend any of your time doing things with them.
If you do choose to do early retirement at 62, for example, being the lower-income partner is probably best. This allows your spouse’s benefits to continue growing. Remember that retiring early comes with lower benefits. When your spouse delays retirement to a later age, their increased benefits can help fill the gaps caused by your lower benefits.
Dependents: Children & Elderly Parents
Early retirement as an option goes out the window if you’ve got children or elderly parents to look after. Their expenses are your expenses.
Are you perhaps still funding someone’s college tuition? Or are you supplementing your elderly parents’ income from not receiving enough social security themselves?
If this is the case, it might be bad timing for you to retire early at only 62. You should seek professional advice on how to save as much as you can. You’ve got too many lives counting on you.
College Kids
For dependent college students, you can invest in an online course to teach them to generate side income on their own. Look online for 5-10 courses that you think might interest them, and offer to buy it for them. All they need is to choose one that sounds right for them.
So many young adults these days have blogs and websites offering professional services, like Facebook advertising agencies and personal coaching. If you’ve got money to spare prior to retirement, start an index mutual fund or other financial market account and leave the proceeds to your kids. This way, when they are of college age, they don’t look to you for financial help.
Look into UGMA accounts or 529 plans. Your children will appreciate it!
Briefly, a UGMA account allows someone to transfer their assets to an underage beneficiary. Usually, this is a parent giving to their child.
You don’t need the help of an attorney to establish a trust fund, which can take a lot of time and costs a lot. The asset is placed on behalf of the minor.
In other words, it’s as if the child wanted the account and simply asked you, the parent, to manage it in the meantime, while they grow up.
The adult who established the account is referred to as the adult custodian, and that adult will manage the account until the child reaches adulthood. At that point, the account is all theirs to manage.
The UGMA account is not sheltered from taxes, but the tax rate is much lower and applies up to a certain amount. Also, if you want to include tangible assets, a UTMA account is very similar to UGMA but lets you hold real estate, intellectual property, and works of art. Otherwise, UGMA accounts are limited to intangible financial assets, like stocks, bonds, cash, and insurance policies and annuities.
Elderly Parents Moving In
Another quite common occurrence is your elderly parents wanting to move in with you just as you are dreaming about retirement.
Some people believe their retirement dreams should not be held hostage by anyone – even their own elderly parents. If you planned for this and can afford it, putting your elderly parents in a senior’s assisted living can be just what you need.
You’ve worked hard your entire life. Why should you let other people’s circumstances rip away that freedom you earned?
Assisted living for seniors cost around $3,600 a month in 2015. That’s $43,200 a year to have a community of caregivers care for your elderly.
Today this cost is likely above $4,051 a month, or $48,612 a year.
If you think this is very high, consider this covers an entire set of services that you won’t have to worry about, like:
- Apartment with emergency call option
- Housekeeping, maintenance, and laundry services
- Healthy meals prepared by a chef and served in a restaurant-style dining room
- utilities and basic cable television
- A calendar full of life enrichment programs
- Transportation service for errands, appointments and community outings
- Senior-friendly fitness activities and wellness programs
If you have retired, have all your expenses covered, and can afford this level of service for your elderly parents, it might be the perfect solution for both of you.
All Debts Paid and Cost of Living Low?
Debt repayment should be your priority. Once you retire, the chances of paying off your debt diminish.
For many reaching age 65, they still have a lot of student loan debt to pay off. And if you own a home, you probably still have a mortgage to pay, too.
If you are already living as frugally as possible and still can’t push away the “living on the edge” feeling, you might be among the many Americans filing for bankruptcy.
And don’t even think about putting items on a credit card. If you get hit with a surprise medical condition or lose your job, you’ll fall into the trap of taking late fees and increased interest on that credit.
Therefore, you should aim to pay off all high-interest credit cards first. The mortgage is second.
For the mortgage payments, consider how much income you’ll receive altogether once you are retired, and postpone lavish activities and expensive luxury trips until the mortgage is paid off.
If you have medical bills as well, you might have to look into selling your home and moving into a smaller one.
Credit card debt delinquency shows up almost immediately, while medical debt takes about six months to appear in your credit report. Plus, medical debt has very low interest, so you shouldn’t be as concerned about paying it off as, say, the high-interest credit card debt.
For those whose head is spinning and feel like they’ve lost control, talking to a credit counselor might be just what you need. They will look at your entire financial situation and make recommendations for how to strategically eliminate your debt and possibly find additional benefits.
Find a nonprofit credit counseling agency. When debt collectors start bothering you, a credit counselor can set up a debt management plan that can reduce the debt significantly or pay it off entirely in about 2 to 5 years.
Even if you filed for retirement, you could find side gigs or part-time work to keep the money flowing. Not only does this help keep boredom at bay, but you should aim to pay more than the minimum due each month. Aim to pay off your highest debts or those with high interest as fast as possible.
Sell all your junk or valuables that you don’t care for anymore. Rent out a room in your large home, sell the boat you no longer use regularly or put your electronic gadgets or pricey artwork up for auction.
On that note, if you are entering retirement, then you probably need to cancel plans to buy a new car, take on a new mortgage or replace an entire roof.
How’s Your Health?
Not everyone is lucky to call this stage in life their Golden Years. You might be struggling with serious health problems, and postponing retirement just doesn’t make sense.
Your job might feel unbearable or overly stressful. The thought of hanging in there just a few more years can make you cringe. It might be time to move on.
In some cases, early retirement will improve your health situation because you can focus on resting and attending physical therapy sessions (if needed). And in extreme health scenarios, retiring immediately as soon as you qualify allows you to enjoy whatever health you do have remaining.
On the flip side, if you are moderately healthy with manageable health issues, know that on average, it costs $200k-$400k in health costs for someone over 65.
If you are disabled, the government offers several programs: Social Security Disability Insurance and Supplemental Security Income (SSI).
Social Security Disability Insurance is available to you and certain members of your family if you pay sufficient Social Security taxes and meet the requirements.
SSI, on the other hand, is also a government program, but the benefits don’t come out of Social Security taxes. It’s designed to provide extra income for the blind, aged, disabled, or those with little income.
This includes visits, monthly pill refills, and x-rays, among others. If you can continue working to build up your savings and contributions, it could give you peace of mind knowing you have just that much more saved up.
Got a Bucket List?
Visit the pyramids, buy a red convertible, or skydive in Bali. Whatever adventures you’ve still got waiting on your bucket list – they cost money!
Maybe the fancy new car is a gift from you to you, but that romantic get-away in Italy has to account for another person and the hotel accommodations there. Where are you going, who will be there with you and to what part of the world will you travel?
And in case you’ve always wanted a bucket list but never made one, here are some ideas:
- Backpack through Europe
- Enter the Forbidden City in Beijing, China
- Go on an African safari
- Go snorkeling
- Try whitewater rafting
- See Coliseum in Rome
- Photograph the Tower of London
- Visit Stonehenge
Hold off on retiring until you’ve had a chance to accomplish these.
All in all, these are the majority of things to think about when contemplating how to decide when to retire. As you see, it’s more prudent to start planning ahead of time and not be caught with surprises that spiral you into a myriad of challenges.
Planning, talking with your spouse, and consulting with financial professionals regularly is your best course of action. Retirement is a new phase in your life, and you’ll go through an adjustment period. Keep making progress in all these aspects, and very soon, you’ll know the best time to retire.