May 13, 2022
Retirement is an exciting time. Whether you’re planning to hit the open road or spend more time with the grandkids, there’s a reason these are called the golden years.
However, planning for retirement isn’t quite as fun as being retired. For many people it’s a time full of questioning: How will I spend my time? How much do I need to save to retire? And most importantly, how do I know when to retire?
Decide What Retirement Means to You
- Whether you plan to stay in your home, move closer to children, or move into a retirement community
- Your health and whether you or your partner may need more assistance in the immediate future
- Whether you want to spend all your assets or leave a certain amount for family members or charitable contributions
- Whether you’ll invest time in travel, hobbies, charity work, or something similar
Figuring out how you want to live during retirement will help you determine what your lifestyle will cost. From there, you can use PenFed’s retirement calculator to create realistic savings goals that ensure you live comfortably and on your terms.
Calculate Your Living Expenses, Liabilities, and Assets
Another important step in deciding when to retire is determining how much you’ll need each month to live comfortably. While it can be hard to calculate an exact budget, by looking at the cost of your current lifestyle and comparing it to your retirement goals, you can create an informed estimate of how much you need to retire the way you want to.
Start by looking at your current annual expenses. Use your personal budget and statements from your checking account and credit cards to ensure you don’t overlook important expenditures. If you don’t currently monitor your expenses, you might find it helpful to create a budget and track your spending for a few months so you have realistic numbers to work with. Your expenses should include items like:
- Groceries, utilities, and gas or transportation costs
- Rent or mortgage payments
- Incidentals like doctor appointments and car repairs
- Entertainment, holiday or birthday gifts, and annual trips
Next, consider any sources of income you’ll have outside of work. This might include:
- Money from retirement accounts or pensions
- Interest from saving accounts, bonds, or saving certificates
- Dividends or capital gains from stocks
- Income from rental properties
- Money from a business you own or sell
- Money from the sale of businesses or properties
- Social Security payments
Once you’ve calculated your income and expenses, use an online calculator (like this one from NerdWallet or this one from CNN Business) to figure out how long your retirement savings might last. You may find you’re on track with your savings. If not, you may want to create a new savings strategy or compare different savings options to supplement what you already have.
Reducing Debt Before Retirement
Listing out your expenses is a good time to consider whether you’re comfortable managing debt once you’re no longer working. If so, consider how much and what type of debt you’re willing to manage. Depending on your situation, part of your retirement strategy may include creating a plan to get out of debt or to pay off credit cards.
Compare Retirement Products
You’ve got options when it comes to retirement plans. Many people are familiar with pensions, although fewer employers offer them today than in the past. You may also be familiar with 401(k) accounts. But there are many retirement options beyond the 401(k) that could fit your needs.
Comparing your retirement options takes time and research. For that reason, some people prefer to work with a financial advisor rather than choose a retirement plan themselves.
Is It Worth Paying for a Financial Advisor?
A financial advisor isn’t the right choice for everyone. Some people feel confident researching and making investment decisions themselves. But a financial advisor may be worth it if you’re:
- Too busy to research your investment options
- Worried you’re not saving enough
- Concerned you may be investing in the wrong things
- Struggling to organize your finances
- Not meeting important financial goals
What Does a Financial Advisor Do?
A financial advisor works with their client to create personalized goals and plans for achieving those goals. These goals might include savings goals but could also cover other areas of your life like building a better budget or choosing the best accounts for you.
The real benefit of a financial advisor is that you’re working with someone whose full-time job is understanding and staying updated on the financial products available to you.
What Qualifications Should I Look For in a Financial Advisor?
Start by considering your objective in hiring a financial advisor. Do you need to pay off debt? Are you exclusively interested in building retirement? Once you know, make sure you’re choosing a financial advisor with the right experience who is invested in your success. If you’re not sure you’re working with the right type of advisor, their certifications will tell you the kind of training they have and what they specialize in.
How Does Social Security Affect My Retirement Date?
Social Security plays a huge role in determining when you should retire. Here are a few things you should know about Social Security eligibility and how it can shape your choices in retirement.
What Is Full Retirement Age?
One of the most important factors for choosing a retirement date is your full retirement age, or the age when you will become eligible for full Social Security benefits. This age is determined by the year you were born. Although most people become eligible for partial benefits at age 66 or 67, you can draw more money per month if you wait until age 70 to claim your benefits.
Most Americans don’t wait until they’re 70 years old to retire. In fact, a 2021 Gallup survey showed that the average age of retirement in the U.S. is 62. If you plan to retire before 70, you’ll need to decide whether you want to draw partial Social Security payments or support yourself with retirement savings until your full benefits kick in.
How Does Semi-Retirement Affect My Social Security Benefits?
Some people prefer to retire gradually by working part time or changing careers before fully leaving the workforce. Semi-retirement offers many benefits, including staying engaged and active, and it can be a way of stashing more savings for later or delaying taking Social Security.
However, working in retirement can affect your retirement benefits in two major ways:
- Your combined salary and retirement benefits may put you in a higher tax bracket. If you don’t want to pay higher taxes, you may need to adjust your work hours or how much you draw from retirement accounts.
- If you draw your Social Security benefits before full retirement age and earn above Social Security’s exemption limit, your Social Security benefits may be reduced. The Social Security Administration provides examples online of how income from semi-retirement can affect your benefits.
Will Early Retirement Affect My Social Security?
Early retirement may look tempting, but the younger you are when you retire, the longer your savings must last. The average life expectancy for the U.S. population is 77.8 years (75.1 for men and 80.5 for women). That means a person who retires at 50 must make their retirement funds last almost 28 years.
What’s more, retiring early means you have less time to save for retirement. This may not be a problem for high earners who start saving early, but many Americans would struggle to save enough to retire early without compromising their dreams.
Finally, Social Security requires that you work a minimum of 35 years to draw full benefits. For most Americans, the money they receive from Social Security replaces around 40% of their pre-retirement income. Retiring early could mean missing out on that support and relying more heavily on your own retirement savings.
Big changes can be scary, but retiring doesn’t have to be. With a little research and planning, you can make your golden years bright for a long time. So, what are you planning to do first when you drop the 9 to 5?