Consider This Before Retiring
Countless questions arise as you’re planning for retirement. How much do you need to save? Could you be saving more? When do you plan to retire? Can you actually retire at that age and live comfortably?
With so much to think about, retirement planning can get exhausting and overwhelming. However, that can often lead to people simply avoiding these questions and hoping all their retirement concerns will simply work themselves out (in fact, only 38% of Americans say they have a long-term financial plan, according to a Gallup survey).
While there are dozens of questions you should be asking yourself before you retire, there are three in particular that can determine whether you’re actually ready to bite the bullet and leave your job. If you don’t have an answer just yet, it means you still have some preparation to do before you think about retiring.
1. When should you start claiming Social Security?
When you think about the age at which you want to retire, you might already have a goal in mind. Perhaps you want to wait until you’re 65, or maybe you’ve always dreamed of retiring early, before your 60th birthday. But have you considered when is the best time to claim Social Security benefits?
Many people believe that retirement and claiming benefits happen simultaneously, but they don’t necessarily have to. You could choose to retire at age 60, for instance, but then delay claiming benefits a few years and claim at 65. Deciding when to claim is a big decision that shouldn’t be taken lightly, because the amount you receive in benefits is directly tied to the age at which you start claiming them.
Age 62 is the earliest you can claim, but if you do so, your benefits will be reduced by up to 30%. For every month you wait, you’ll receive slightly more with each check up until age 70. Your full retirement age (FRA) is the age at which you’ll receive 100% of the benefits you’re theoretically entitled to, and it’s between age 66 and 67, depending on the year you were born. If you claim before you reach your FRA, your benefits will be reduced (by exactly how much will depend on how early you claim), and if you delay benefits until after your FRA (up to age 70), you’ll receive additional benefits to make up for the months you weren’t receiving anything.
It can be tempting to claim as early as possible just to see some extra money coming in, but sometimes waiting has its advantages.
For example, say your full retirement age is 67, and the amount you’re entitled to if you claim at that age is $1,400 per month. If you claim at 62, you’ll receive 30% less, leaving you with just $980 per month. By waiting until age 70, though, you’ll receive a 24% bonus on top of your full amount, bringing your total to $1,736 per month.
There’s no single right answer for when you should start claiming; it depends on your personal situation. If your retirement fund isn’t quite as robust as you’d hoped it would be, it might make sense to delay benefits by a few years to receive that bonus each month (plus if you also wait a few years to retire, it gives you more time to continue saving). Or if your savings are right on track and you don’t necessarily need a few hundred extra dollars per month, you might get more enjoyment out of retirement if you claim early.
2. How long will your retirement savings last?
You might already be thinking about how much you need to have saved by the time you retire, but the more important question is how long those savings will last during retirement.
To figure out how far your money will go, first determine roughly how much you’ll need each year to get by during retirement. Many people find that they spend less during retirement than while they were still working, and by creating a retirement budget, you can get a good idea of where your money will be going. Be honest with yourself here — if you know you’re going to be traveling a lot or picking up expensive new hobbies, be sure to include those in your budget.
Once you have a number in mind for about how much you expect to spend each year, you’ll be able to better tell how long your current savings will last. You might find out that you need a lot more than you anticipated, especially if you’re going to be spending several decades in retirement. So if you expect to have, say, $250,000 by the time you retire, and you estimate you’ll need $50,000 per year to cover all your expenses, that quarter of a million dollars will only last you around five years. Of course, you’ll also have Social Security benefits to help bridge the gap between what you have and what you need, but depending on how much you’re receiving, that might not be enough (especially if you claim early and receive a reduction in benefits).
To figure out how much you should have saved, take the amount you estimate you’ll need each year during retirement and multiply it by 25. The 4% rule is a common guideline to figure out how much you can withdraw from your savings each year, and it states, in a nutshell, that you can withdraw 4% of your savings the first year of retirement, then adjust that number each following year for inflation. So to work backward and figure out how much you need to have saved total in order to withdraw 4% the first year and live comfortably, you’ll multiply your end result (how much you want to withdraw) by 25.
So, for example, say you think you’ll need $30,000 each year during retirement. Multiply that by 25, and you’ll end up with $750,000, which is how much you should have saved by the time you retire. With that much saved, you can withdraw 4% ($30,000) the first year of retirement and adjust it each year after, and you should have enough to last through retirement.
3. How will you pay for healthcare costs?
Healthcare costs are one of the biggest (and potentially unexpected) expenses you’ll face during retirement. While you can’t know exactly how much you’ll spend on healthcare, you can arm yourself with as much information as possible to prepare for these costs.
The average retiree spends roughly $4,300 per year on out-of-pocket healthcare expenses, according to a report from the Center for Retirement Research at Boston College, and about two-thirds of that amount is spent on premiums.
To prepare for these costs, first know what you’ll be expected to pay for. Although Medicare does help cover many healthcare expenses you’ll face, it doesn’t cover everything. While emergency care and hospital visits are typically covered, routine care — such as teeth cleanings and eye exams for prescription glasses — usually isn’t. You’re also still responsible for all premiums, deductibles, and co-insurance payments, which can add up quickly.
You might choose to take advantage of a health savings account (HSA) to cover some of these expenses. Essentially a retirement fund just for healthcare costs, an HSA allows you to contribute pre-tax dollars, let your investments grow, and then withdraw that money tax free as long as it’s put toward eligible medical expenses. You have to be enrolled in a high-deductible insurance plan to be eligible to open an HSA, but it’s a great way to save money specifically for healthcare expenses.
It’s tough to know when it’s the right time to retire. You might never be 100% certain that the time is right, but that’s OK — the important thing is that you’ve thought it through and can answer some of the most important questions you’ll face during your retirement journey.