AT WHAT AGE CAN I RETIRE?
I once worked with a client in San Diego who retired from his county municipality job after working there for 30 years. He was in his early 50’s, owned a few rental properties and had elected to start drawing on his pension plan to fund his early retirement. Right before we began our financial planning engagement, he’d taken a position in the private sector where he was working roughly 10-12 hours per day. Although he already had a steady income in early retirement allowing him to pursue other hobbies and interests, he never really gave much thought to what retirement in his early 50’s would be like. So, he did what many of us do – he decided to continue on with his new job.
When Can I Retire?
In the last meeting of our financial planning engagement, he said, “Danny, I have some news that may impact the financial plan. I quit my job.” He explained that the extra 2-4 hours he spent working and the fact that he was paying roughly 40% of his employment income to taxes was not a worthy tradeoff for the decrease in his quality of life. So what are some questions that he should have asked prior to retiring early?
- If I decide to retire early, what would I want to do with all my spare time?
- How will this decision affect my spouse and family?
- How much monthly income do I need to retire early and what is the proper life expectancy I should use when determining my income needs?
- Have I included the replacement cost of employee benefits such as health and life insurance benefits?
- If I start collecting my pension plan and continue working, how much will my income tax increase?
Why Do You Want To Retire?
Has your work life suffered from a management/reorganization change? Or is it the desire to relocate for a fresh change of scenery or lower cost of living (a consideration for many of my clients in California)? Maybe be closer to kids and grandchildren? Whatever your reasons are, it’s necessary to sit down and write them down so you are clear on your goals. Figuring out why you want to retire is more important than figuring out how or when. When I ask folks when they want to retire, the most common answer is age 65. When I ask why, the common answer is it sounds like a good age. I realized that most people were associating the “appropriate” retirement age with the Full Retirement Age for Social Security. Ironically, for most baby boomers, that age is now 67, but most people still tell me 65. This further illustrates that most prospective retirees aren’t doing enough to define and visualize what retirement will really be like. Once retired, it’s difficult for many to re-enter the workforce at the same level of compensation/status so it’s extremely important to understand the reasons for retirement before you commit:
- Is either spouse planning to go back to work full or part time?
- Will we be volunteering for any charitable/philanthropic organizations?
- What are some hobbies or productive tasks that you enjoy?
- What are areas of learning or growing that you are truly passionate about?
- Are there any current health issues that could progress and inhibit our ability to enjoy retirement in our later years (how does this affect our current plans)?
Visualize Your Ideal Retirement
Once you’ve determined the why, the next question is what – as in, what do you plan to do with all your spare time? If every day was Saturday, what would your life look like and how would you fill your time? It’s important to consider things such as your relationship with your spouse and what kind of interests/activities you both have in common with one another.
Try this out: Close your eyes and picture yourself retired after one month. I say after one month, because it will take a little time to tie up loose ends and really start getting settled in your everyday routine. Picture yourself waking up on a Monday and envision what your ideal morning looks like now that you’re in retirement. Think about times of the day when you’re by yourself and times when your spouse or family may be around. How often do you leave the house and what will you be doing to occupy your time? How often will you be dining out? Once you have an idea of what your typical day will look like, now it’s time to start thinking about your other lifestyle goals in retirement.
Traveling in general is a common goal for many retirees and should be included in a retirement budget. I’ve had clients without children who planned to live abroad full time in retirement. I’ve had other clients who wanted to purchase a second property as a vacation home and others who were interested in a rental property that could be used as a vacation home for part of the year. In regards to travel, it’s important to define the frequency, distance and cost of trips as you continue to determine your quality of life and spending in retirement.
Geographic proximity to children and grandchildren typically has a heavy influence on these decisions. Some desire to relocate to be closer to children and grandchildren and gain a “fresh start” on life. Being in a new environment and community as you embark upon retirement can be very enticing! On the other hand, some folks are perfectly happy with their current living situation and instead plan on making regular trips to visit family in other cities. If traveling is a goal in retirement, then here are some of the questions you will want to ask yourself:
- Do we plan to relocate?
- How often will we be traveling to see family?
- How often and where would we like to travel for vacations?
- How much do we typically spend on vacations?
Preparing For the Cost of Retirement
Okay, here’s where the rubber meets the road – you’ve carefully thought out what your retirement will look like and most likely contemplated more than one scenario. This can make you feel more indecisive than you were in the first place! It’s okay, you’re still headed in the right direction. Now you need to do some research and estimate the cost for some of these scenarios. You’re essentially creating a budget – you are going to include all your housing costs and all of your fixed and variable living expenses.
Next, you have to account for how much of your income is going to taxes, and this is where things can get a little tricky. If you move to a different state, then your state and property taxes can change substantially. Also, income needs typically fluctuate in retirement as a result of the age difference between spouses. For example, one spouse may draw social security benefits earlier than their partner. Having a good understanding of what your cash flow needs will be year-to-year will give you an idea of how much your income will fluctuate and how much tax you are going to pay. The good news is that this exercise also allows you to uncover tax planning opportunities so you can pay less tax and have more income to spend in retirement!
The Next Steps
As you can see, preparing for retirement isn’t just a quantitative process – it’s actually quite the opposite. Clarifying your motivation to retire is the first step, which should be followed by visualizing your ideal life in retirement. Again, be meticulous when considering your different options and explore all the variables that impact what your lifestyle will cost. Then do some research so you have an idea of tax liabilities and other factors that may increase your outflows so you can make a better estimate of how much you need to spend.
If you have taken the time to go through this process, you should give yourself a pat on the back for taking the first step towards planning your ideal retirement. Now that you know how much you will need to spend, it’s time to start taking inventory of your financial resources and fixed income sources to determine if your ideal retirement scenario is feasible. I will address how to do this properly in my next post, but in the meantime, you can read more about every step of the retirement planning process by getting your Free Retirement Checklist here.
Danny G. Michael is the founder and CEO of Satori Wealth Mangement, Inc. He has 20 years of experience in retirement planning working with individuals, families, and business owners.