- February 14, 2019
- Posted by: Danny Michael
- Category: Retirement
At What Age Can I Retire?
I once worked with a client in San Diego who had recently retired from his county municipality job after working there for 30 years. He was in his early 50’s and owned a few rental properties and had elected to start drawing his pension plan since he decided to retire early. It turns out that he had recently taken a position in the private sector where he was working roughly 10-12 hours per day. In our last meeting of our financial planning engagement, he came in and said Danny, “I have some news that may impact the financial plan. I quit my job.” It turns out that the extra 2-4 hours of his day he spent working in addition to the fact that he was keeping less than 40% of his employment income was enough for him to decide that the increase in income was not a worthy tradeoff for the decrease in his quality of life. So what are some questions that could/should have been ask about retiring early?
- If I decide to retire early, what would I want to do with all my spare time?
- How will this decision effect my spouse and family?
- How much monthly income do I need to retire early?
- 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?
- How will my monthly income needs change over time as my life continues to change?
- If I start collecting my pension plan and continue working, how much will my income tax increase?
- When analyzing the different survivor benefit options offered by my pension, which benefit fits my goals/needs the best?
- Is it smarter to delay my pension plan or social security and live off savings and any current income or should I start to collect my benefit early?
- Am I including future fixed income sources such as social security, pensions or rental income as part of my analysis?
- Is my withdrawal rate from my employer sponsored retirement plans and my own personal retirement accounts such as IRA’s too high?
- Which accounts will I draw from knowing that IRA’s and employer sponsored plans like 401k’s have age requirements for withdrawals?
Why Do You Want To Retire?
Are you tired of working for your current boss or maybe your work life has suffered from a management/reorganization change? Are you concerned about job security? Or is it the desire to relocate for a fresh change scenery or lower cost city (A consideration for many of my clients in San Diego and Los Angeles)? Maybe be closer to kids and grandchildren? How about to finally do something you’ve always been passionate about? Whatever the reasons are, before making a decision of such importance, it’s necessary to sit down and write down all of the reasons so you are clear on your goals. Once you’ve determined 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. Figuring out why you want to retire is more important than figuring out how or when – earlier in my career when I would ask folks when they want to retire, the most common answer was age 65. When I would ask why, the common answer was that it sounded like a good age. I quickly realized that most people were associating the “appropriate” retirement age with the Full Retirement Age for Social Security. What is funny is that for most baby boomers today, that age is now 67, but most people still tell me 65. This further illustrates the notion 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 work force at the same level of compensation/status so it’s extremely important to understand the reason for retirement.
Visualize Your Ideal Retirement
Try this out: Close your eyes and picture yourself retired after 1 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 every day 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. When having this discussion with my clients, geographic proximity to children and grandchildren typically has a heavy influence on these decisions. For some, relocation to be closer to children and grandchildren and gaining a “fresh start” on life in retirement is a desirable scenario. Being in a new environment and community as you embark upon retirement can be very enticing since again, every day is Saturday and you have full control over how you spend your time! On the other hand, some folks are perfectly happy where their current living situation and instead plan on making regular trips to visit family in other cities. I’ve had discussions with some clients without children who planned to live abroad in retirement. I’ve had other discussions with clients who wanted to purchase a second home as a vacation home and others who were interested in a rental property that they could use as a vacation home for part of the year. Traveling abroad is also a common goal for many retirees and should be included in your retirement budget. As you can see, travel is typically a primary goal in retirement and it’s important to define the frequency, distances and costs of trips as you continue to determine your quality of life and spending in retirement. Here is a list of some common questions that retirees should consider:
- Do we plan to relocate?
- How often will we be traveling to see family?
- Is either spouse planning to go back to work full or part time?
- Are there any charitable/philanthropic organizations where we want to volunteer?
- How often and where would we like to travel for vacations?
- What are some hobbies or productive tasks that you enjoy?
- Are there gifts or talents you’re afraid to try, but think you might be good at?
- 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)?
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 if you will – you are going to include all your housing costs and all of your fixed and variable living expenses. You have to account for how much of your income is going to taxes, so 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 age differences in spouses. As an example, one spouse may draw social security benefits earlier than their spouse. Having a good understanding of what your cash flow needs will be year-to-year will start giving 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 to determining what age you can retire
As you can see, preparing for retirement isn’t just a quantitative process – it’s actually quite the opposite. Having good awareness as to what is creating the motivation to retire is the first step, which should be followed by visualizing your ideal quality of life. Again, be meticulous when considering your different options in retirement and consider all the variables that impact what it will cost you to live that lifestyle. 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. Once 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 in retirement to determine if your ideal retirement scenario is feasible.