Years ago, knowing when to retire was easy. Back then, you probably would have taken it for granted that you would retire when you turned 65. Or, if you worked for the same employer your entire career (which was much more common in decades past) you would retire when you had worked enough years to qualify for a full pension.
Today it’s different. The decision of when to retire is no longer clear-cut.
It’s much less likely that you’ll stay at the same employer long enough to qualify for a meaningful pension. Many companies don’t even offer pensions any more, offering only tax-sheltered savings plans (such as a 401(K)) instead. And the window in which you can begin to collect Social Security has widened to age 62 to 70.
In fact, the average age at which American workers retire is now 62. Americans also retire an average of three years earlier than they had planned. This may be come about due to health issues or needing to care for a loved one with health issues, being laid off and unable to find a new job, or being offered an attractive early retirement package.
You may find yourself facing the decision of whether or not to retire sooner than you expect. How can you decide if it’s the right time to retire?
It’s a complicated decision, and there are many factors to consider. This article will help you navigate some of these issues and answer some of the many questions you are facing.
Are you emotionally ready to retire?
I had to confront this dilemma two years ago. I was planning to retire in September, 2017, when I would be 60 years old and have 21 years of service with my employer. I would be qualified for full retirement and full stock vesting. But in 2013, my company offered a very generous early retirement package, the centerpiece of which was enough money in a sheltered retirement medical account to pay for health insurance for my husband and me for about seven years. That should cover us up to the time when we will qualify for Medicare.
After six months of pondering my options and running our finances through numerous scenarios using online retirement projection tools (Fidelity has a good one), I finally came to a stark realization.
I was ready. I really wanted it. My career wasn’t going anywhere and I no longer felt much joy in what I was doing every day. I was willing to sacrifice some of the things a couple more years of earned income would provide and live a little more frugally in exchange for my freedom.
Halfway through 2013, I decided to take the package. My last day was December 31, 2013. I was 56 years old; two months shy of 57.
My financial advisor was not amused. But with her expertise and with a commitment from my husband and me to control spending and do a few things to earn some extra income, we were able to construct a plan to make it work.
My story illustrates one of the key factors in making this decision.
Often, the decision to retire is an emotional one, not a logical one.
In reality, this is how we humans make most of our choices. We make our decisions based on emotion first, then select the facts we need to support our choice.
If you want to retire so badly you can taste it, it’s vitally important that you diligently guard against skewing the facts and data to support your decision. That leads to the next big question…
Are you financially ready to retire?
This is a complicated, multi-faceted assessment to make.
I’m not a financial adviser, and I strongly suggest that you seek the assistance of one if you don’t have one already.
That said, I recommend that you consider this issue more deeply than simply applying a formula.
You’ve probably read various claims that you should expect to live on 80% of your current income after you retire. Other sources say 75%, 85%, or even 100%. Other sources quantify the amount you’ll need as a target figure, say $1 million or even $1.5 million.
How can you know which of these formulas applies to you?
You can’t. These are general guidelines for average people. You probably aren’t average (whatever that is). These figures will put you in the ballpark, but how much money you’ll need depends upon the lifestyle you wish to enjoy after you retire.
Here are some questions to ask yourself (and your spouse, if you have one), if you haven’t already. The more you can gain clarity on these matters, the better you will be able to estimate how much you’ll spend each month in retirement.
- Where do you plan to live after you retire? Will you move to an area where the cost of living is higher, lower, or comparable to your current location? Will you maintain two or more homes for seasonal migration? If you plan to move to a senior active living community with amenities such as golf and tennis, what will the monthly fees be?
- Do you plan to downsize? Do you plan to stay in your current house as long as you can? Or do you hope to move to someplace more upscale than your current surroundings?
- How much do you plan to travel? What kinds of travel do you envision (for example, luxury cruises, camping or RV living, resorts, guided tours)? How expensive will this be?
- What hobbies and activities do you plan to engage in during retirement? Will they cost a lot of money (for example, country club memberships or greens fees)? Might they actually make some money (for example, selling books you write or artwork you create)?
- Do you anticipate any financial windfalls, such as an inheritance or the sale of your business?
- Do you anticipate any financial hardships, such as caring for an aging parent, a special needs child or relative, or health issues of your own?
- Are you willing to work part-time, or engage in other activities that will bring in some extra money?
- Are you willing to change your spending habits, if necessary, in exchange for retiring earlier? When you’re making good money and the paychecks are rolling in regularly, it’s easy to get in the habit of not thinking about how much you’re spending and on what things. Will you be able to shift your focus from buying things you want (often on impulse) to only buying things you need, if that’s necessary?
Here’s some important advice: Build some extra padding into your budget, especially in the areas of household maintenance and health care.
You will spend more money on things than you expect. Unexpected expenses will arise. The health insurance plan you buy on the open market probably won’t provide as much coverage as you are accustomed to on your employer’s plan, especially in the areas of prescription drug coverage and dental plans.
In the first year of my retirement, we had to replace both of our air conditioners at a cost of over $17,000. OUCH. So far this year, I have required four crowns and a root canal. OUCH. That has been more painful for my wallet than for my mouth!
If you’re cutting your budget too close to the bone in order to try to make this work, you may not be financially ready to retire yet.
Have you planned what you will do with your time after you retire?
While it’s perfectly fine to take a few weeks or even a few months to decompress after a long work career, ultimately you need to have a good idea of what you’re going to do with all this leisure time you will have on your hands.
Ideally, your life should include a balance of activities that will include physical activity, mental stimulation, socialization, and fulfillment.
In other words, you shouldn’t just think about what you are going to retire from, you need to have a good idea what you’re going to retire to.
How will your view of yourself change after you retire? Will you miss your job title? Will you miss the sense of purpose and fulfillment that comes from doing your job?
One of the best ways to feel good about being retired is to know that your sense of worth and purpose doesn’t have to depend on your job function. It’s up to you to figure out what pursuits will bring you happiness and fulfillment from now on.
Retirement offers you the enviable opportunity to design your life to be the way you want it!
Your retirement can be your Renaissance, if you approach it that way.
What will your new life look like? What do you think your new daily routine will become?
In my case, I often feel like I’m busier now than I was while I was working! And for most of my life, I’ve kept a pretty full schedule. But now I’m busy with the things I want to be busy with, and in most cases there is little or no consequence if I don’t get everything on my to-do list done by a certain time. I’m much more in control; it is busyness of my choosing.
It’s true that you will be able to spend your days at a more relaxed pace and you’ll have considerably more flexibility in terms of what you do each day. But you need to have a fairly good idea of what you are going to do. Otherwise, your retirement will be filled with inertia and boredom, ultimately leading to more rapid decline.
If you are having trouble answering these questions in a clear, specific way, or if you haven’t thought about them until now, you might not be ready to retire yet.
But if you have a clear picture of how this wonderful new chapter of your life will unfold, if you and your spouse are on the same page on most issues, and if you’re confident that you will have the financial resources to enable you to enjoy your new lifestyle, then go for it!
Now it’s your turn!
If you are currently wrestling with the issue of when you can retire (or you will soon), what are your biggest questions and concerns?
If you’re already retired, what have you learned since retiring that you wish you had thought of before deciding to retire?
Please share in the comments!
© 2015 Dave Hughes. All rights reserved.
Photo credit: Alan Cleaver. Some rights reserved.