Hopefully your retirement is a lifelong goal you (and potentially your spouse) are working towards. Or maybe it’s a scary transition you have no idea if you are ready for. Regardless, it can be difficult to figure out the perfect time to actually quit work for good. If you are nearing the end of your career, here are several factors you will want to consider when deciding which year will be the start of your golden year.
Your Age Matters (Obviously)
Unless you planned (and saved) for an early retirement, age will play an important factor in your ability to retire. You won’t be able to access your 401(k) from your current employer unless you retire after you turn 55. Other retirement accounts are often even more restrictive. You likely can’t touch those before you turn 59 and a half. Furthermore, you won’t be eligible for Social Security benefits until at least 62. So unless you have a huge stash of other savings lying around, it will be hard to quit working before that.
That being said, it makes much more sense to work beyond those ages. It will help make sure your retirement income takes good care of you for the rest of your life, in most cases. Every year you delay Social Security increases your monthly benefit by eight percent. Furthermore, keeping your retirement accounts untouched just means they have more time to grow.
Your Post-Retirement Plans Need to be Ready
It’s a big mistake to enter into retirement without a specific plan for how you will spend your new-found time. Suddenly ending the career that defined you can be a major shock. Sadly, depression sets in for more recent retirees than society would like to admit. Even if you’re planning on doing some part-time work after you finish your career, it pays to remember that you are not necessarily guaranteed part-time employment.
A better way to prepare for retirement is to find a way to wind down your career while you start exploring your post-retirement options. If you’re able to work part-time or shift your schedule for your last few years of work, it can help you make a smooth transition. Hopefully you’ve already filled some of free time with new hobbies, helping you adapt to your “new normal” much easier.
Your Nest Egg
Before you start talking about retirement, make sure to speak with your financial advisor about the transition. It’s a huge mistake to retire with less than you’ll need and then just hope for the best from the market. Make sure you know exactly how big that nest egg will have to be. Then work to find a way to get there. Assuming that you can simply pick the right stocks and make up the difference with savvy investments is a good way to ruin your finances. Unfortunately, people fall into this trap all the time. Don’t join the club!
You’ll also need to come up with a strategy to withdraw money from your nest egg. After all, a retiree with simple index stock and bond funds will make withdrawals that are vastly different than the person someone who’s invested in individual growth stocks that throws off no dividends.
Remember that if you want to switch strategies, selling at a gain can mean that you need years of planning in order to reduce tax liabilities.
Sometimes There’s a Perfect Time to Retire
Some people hit a mini-lottery when they are very close to retirement age and get offered a severance package because their employer wants to downsize. Others retire when the major work project they are a part of is finally delivered. Can you see a window of opportunity to gracefully exit your position while keeping everybody happy? You may not really care much since you are thinking of quitting for good. However, exiting on good terms leaves the door open for you — just in case you want (or need) to work with them in some capacity in the future.
Don’t just look for convenient opportunities in the workplace either. Many people choose to work until their kids are through school. Paying for your kids’ college expenses can be quite draining on your finances. Plenty of parents decide to remain in the workforce at least until the tuition bills stop coming.
You should also consider if you have major expenses coming up? If so, you may want to keep working a bit longer. That way your retirement funds aren’t getting depleted by a major one-time expense like replacing your old, beat-up vehicle.
It’s not that you can’t plan for any major expenses post career. In fact, you’ll specifically have to. Major expenses are bound to still happen in the decades of your retirement, after all. But taking a big chunk out of your nest egg once you’ve stopped working can be stressful, especially if it’s happening while you are still adjusting to your transition.
Your Healthcare Costs
It used to be that you could retire at 65 with a solid pension and the company health insurance. These days, most retirees are on the hook for potential health care costs — which you may not have budgeted for. Fidelity, one of the largest custodians of 401k assets in the country, estimates that a 65-year-old couple will need $240,000 to cover medical expenses in retirement. That includes insurance and out-of-pocket costs.
If you’re considering retirement in the next few years, make sure you know how much of your retirement income might have to go towards health insurance premiums and other costs. If you haven’t prepared for that, it probably makes sense to delay retirement for a few more years.
The Bottom Line
Deciding when to retire is no easy task. It’s mighty important to approach your retirement with a clear understanding of your financial and psychological needs. It’s not always easy to get back into the workforce if you call it quits too early, and later regret your decision.
Unfortunately, there’s no guarantee that the choice you make will be the perfect one — no matter how much you prepare. That shouldn’t stop you from thinking about these factors before you quit for good, though. It will help you increase the odds that you can make the transition a successful one.