Most people have a pretty good idea of what they want their retirement to look like by the time they hit their 40s.
For some, it means leaving work before 60, with plenty of time to golf, fish, travel, and follow your passions. For others, it means pursuing your career as long as possible, then sharing your time and resources with family, friends or a favored charity.
Whatever your ideal retirement looks like, if you’ve planned carefully, it should be the stage of life when your money and your values align—and that happens at different ages for different people.
So, what age should you retire? Let’s start by looking at social security.
Understanding Social Security Retirement Age
Full retirement age for Social Security purposes is the age at which you can claim your full benefits whether you continue to work in retirement or not. If you retire before you reach full retirement age, your monthly check may be permanently lower than if you wait. Not only that, if you continue to work after you retire, Social Security can deduct a percentage of your salary from your monthly benefit check until you reach full retirement age.
If you were born before 1937, your full retirement age is 65. For those born after 1960, you’re eligible for full retirement at 67. If you were born somewhere between 1937 and 1960, your full retirement age is somewhere in between (you can check yours with the Social Security Benefits Planner).
The Social Security full retirement age isn’t as important today as it was in the past, at least according to the Bureau of Labor Statistics. More seniors age 65 and over are working than at any time in the past 50 years, and it’s not because they can’t afford to retire. Nearly 11 million seniors, with a median net worth of nearly $1 million, have chosen to remain in the workforce well past age 65. Longevity may play a part: A person turning 65 today can expect to live at least another 20 years.
Important milestones to keep in mind
Seniors can elect to receive their Social Security benefits as much as 36 months before they reach full retirement age. However, the monthly benefit is permanently reduced by 0.55% for each month you collect Social Security before full retirement age. If your full retirement age is 65 and you begin collecting benefits at age 62 and 6 months, your monthly check will be reduced by about 17%.
On the other hand, you can delay collecting Social Security until age 70 and permanently increase your monthly benefit by as much as 32%. There’s no advantage to delaying beyond age 70 because the increase tops out once you reach your 70th birthday. If you have an IRA or 401(k), you can take distributions without penalty once you reach age 59-½. If you take early distributions, they may be subject to a 10% penalty. If you use the money for a hardship, such as to pay health insurance premiums after a job loss, the withdrawal may be exempt from the penalty.
Even if you continue to work past full retirement age, you can’t leave your money in your IRA or 401(k) indefinitely. Your required minimum distributions (RMDs) kick in at age 72 as of January 1st, 2020. When you turn 72, you need to take either a lump-sum withdrawal or schedule a series of withdrawals based on your date of birth, account balance and estimated annual return.
When can you afford to retire?
Your first step is calculating your income needs in retirement. It’s impossible to predict with certainty what you’re actual expenses will be, but most experts suggest you need between 70% and 85% of your income just before retiring to live comfortably after you leave work. It’s a good starting figure to create your retirement plan.
Next, you need to estimate your guaranteed income. In 2020, the maximum monthly Social Security benefit at full retirement age is $3,011, or $3,790 if you delay benefits until age 70. If you’re married, your spouse can claim benefits based on his or her work history or 50% of your benefit, whichever is greater. You can get up-to-date estimates (and check the accuracy of your work record) by logging into your account on the Social Security website.
Although the majority of retirees will depend on an IRA or 401(k) for income in retirement, some—mostly public employees—are entitled to pension payments. If you receive pension retirement benefits, you probably know what you’ll receive when you leave your job. If you’re married, it’s important to consider how your payout is structured. Most pensions offer a payout based solely on your life expectancy or a “joint and survivor” option that pays your surviving spouse after you die.
If this is all beginning to seem overwhelming, you may benefit from a retirement cash flow analysis to give you a snapshot of where you are today and how your financial habits now will affect your retirement savings goal.
Getting an accurate estimate of your income needs in retirement is essential; even small increases in your planned distributions can have a major impact on your nest egg. Check out the chart below showing the depletion date for a $1 million account based on different monthly distributions*:
*Based on an annual rate of return of 4.5% in retirement, 3% annual inflation increase, and a 22% federal marginal tax rate.
As you can see, if you underestimate your needs by just $1,000 a month, you lose four years of income. And if you’re not investing your retirement savings with an eye toward protecting and growing your capital, you could struggle to achieve 4.5% returns, depleting your nest egg even more quickly.
What Age Should You Retire? 4 Ages to Consider for Retirement
Your retirement savings strategy looks different depending on when you want to retire. Someone planning an early retirement is operating with an entirely different set of assumptions than someone planning to work until 70. As you’ll see, a lot of factors should be considered to help you decide what age you should retire.
Retiring at age 55
In our experience, people who plan to retire before age 60 are typically very frugal in their financial habits. They save and invest aggressively right from the start because they understand their nest egg will have to sustain them for 30 years or more. In addition, they’ll need enough money tucked away in savings or brokerage accounts to cover all their expenses until they can start drawing down their IRAs and 401(k)s. They’ll also need to cover their health care costs for 10 years until Medicare kicks in.
If you’re planning to retire early, you may want the equivalent of 10 years’ salary in your retirement accounts—at a minimum—before you leave work.
Retiring at age 62
This is the earliest age you can begin taking Social Security benefits, but it’s not always in your best interests to do so. Let’s look at lifetime benefits for someone entitled to the maximum monthly payment in 2020*:
*This table does not factor in potential cost of living increases in Social Security.
If you’re in poor health and don’t expect to live to age 75, you come out ahead taking your Social Security benefits early. As the table illustrates, you don’t come out ahead delaying benefits to age 70 unless you live at least to age 90.
You also need to factor in the additional depletion of your retirement account to cover your health insurance and income needs until you reach Medicare eligibility and you elect to take Social Security. Remember, if you continue to work, even part-time, your Social Security benefits may be lowered until you reach full retirement age.
How much do you need to retire comfortably at age 62? That depends on your income needs, but you can check out our case study on early retirement with a $2 million portfolio to see how you might fare.
Retiring at age 66
Unsurprisingly, most Americans choose to retire between age 63 and 66, when they reach full Social Security retirement age at 66 and 2 months. At 65, you’re eligible for Medicare, and as the table above illustrates. Additionally, you get a higher lifetime Social Security benefit by retiring at 66, unless you live past age 90, which is a definite possibility given today’s higher life expectancies.
Retiring at age 70
Some people love working longer and see no reason to retire—and that’s perfectly okay! At this stage, there’s no reason to delay Social Security benefits because you’re already entitled to the maximum. You need to stay on top of your RMDs, however, because the penalties can be severe: 50% for every dollar not withdrawn on time.
What if I’m not on track for my retirement goals?
For some people, gaming out retirement scenarios is a real wakeup call. If you’re not on track to retire at your chosen age, there’s still time to make changes.
Diversify your portfolio
It’s easy to get into a set-it-and-forget-in mindset with your IRA and 401(k) investments, but that approach usually means you’re missing out on opportunities to grow your nest egg. Although the U.S. stock market has outperformed its global counterparts in recent years, that isn’t always the case: In six of the last 11 decades, the global market delivered better returns.
Diversifying your portfolio to capture the growth potential in global and emerging markets may boost your returns and help you reach your retirement goals without significantly increasing your contributions.
Make catch-up contributions
If you haven’t maxed out your IRA and 401(k) contributions every year—and only 12% of U.S. workers do—you can take advantage of catch-up contributions after you reach age 50.
Depending on the type of account, you may be able to contribute an extra $1,000 to $7,000 a year in catch-up contributions. These contributions not only get you closer to your retirement savings goals, but they also lower your taxable income, a win-win situation.
Take advantage of health savings accounts
HSAs are underrated as retirement savings vehicles, but they are one of the most advantageous accounts you can have. First, they are triple-tax advantaged: Contributions are not taxed, the money grows tax-free, and you pay no taxes on qualifying withdrawals. Plus, contributions rollover indefinitely; there are no RMDs on HSAs.
Before age 65, tax-free withdrawals are limited to qualifying medical expenses, but once you reach age 65, you can withdraw the money tax-free for any reason at all. This is a huge advantage over distributions from traditional IRAs and 401(k)s, which are taxed as normal income. Roth IRAs get around the income tax requirement in retirement, but your contributions are taxed. HSAs are the most efficient savings vehicles from a tax perspective.
If you’re eligible to open an HSA, you can contribute up to $3,500 a year for individuals, or $7,000 for a family. If you’re 55 or over, you can make additional $1,000 a year catchup contributions.
Retiring Confidently
As you can see, ”what age should you retire?” isn’t an easy question to answer. At Covenant Wealth Advisors, our goal is to help you achieve your financial goals so you can enter retirement with the income you need to enjoy your life. Ultimately, avoiding running out of money is a major goal, but so is maintaining your lifestyle. We are one of the few fully independent, fee-only wealth management firms in the Richmond and Williamsburg area. We look forward to working with you to create a financial plan so you can retire confidently at whatever age you choose.
Mark Fonville, CFP®
Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.
The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.