11/6/2012 7:00 PM ET|
A 25-point retirement age checklist
Deciding when to retire can involve a complex set of factors. Here's what to consider when making the big decision.
If you're going to do it -- retire, that is -- you might as well do it at the right age. And doing it at the right age, according to the authors of a soon to be published paper, involves a bit of homework.
Retiring at the optimal age should not be left to chance, according to Kenn Tacchino, a professor of taxation and financial planning at Widener University, and Patricia Tacchino, the co-authors of a research paper to be published in Benefits Quarterly.
Rather, choosing a retirement age needs to be a rational decision that accounts for a variety of confusing and competing considerations, the Tacchinos write. And to reach a rational decision, the authors say, would-be retirees can benefit from using a checklist of factors to make the optimal choice.
Not surprisingly, the Tacchinos have created such a checklist. But it's no ordinary one. It's a checklist of 25 factors that would-be retirees can use to reach what the authors say would be a rational decision about the optimal retirement age.
This approach considers the financial feasibility of retiring, a would-be retiree's ability to continue working, the psychological factors surrounding the retirement decision, and the would-be retiree's personal situation.
So what's on the checklist? Well, the whole paper is 5,500-plus words and 25 pages long, but what follows is the essence of it, edited for average would-be retirees.
By applying weight or attaching value to each item in the checklist, you can hone the decision process to its logical conclusion (retire by choice, keep working by choice, retire by necessity or keep working by necessity) and avoid irrational choices, the authors write.
Also, the Tacchinos recommend that you use this checklist at various stages of your life: in the middle of your career, 10 to 15 years away from retirement and when retirement is imminent.
1. Calculate available retirement income and assess adequacy
Determine how much income you'll get in retirement from all available sources (pensions, Social Security, retirement accounts, work and the like). If this doesn't give you your desired lifestyle, given whatever withdrawal strategy you plan to use, consider not retiring. Not retiring when you don't have enough income to support your desired lifestyle isn't necessarily a bad thing, by the way. Also, it's quite possible that if you don't have the income to maintain your lifestyle in retirement, you should still examine the 24 other factors.
In addition, the authors say, not retiring serves four primary functions: It preserves your assets; it gives you a chance to keep building your nest egg; it shortens the period of time you'll be drawing down your assets; and it increases the monthly income you'll get from Social Security, provided you delay claiming it.
2. Consider life expectancy, expenditures and risks
Consider all the risks that you might face in retirement and how you'll mitigate those risks, be it the risk of outliving your assets, inflation or sequence of return risk. If you haven't addressed those risks, you might consider not retiring until you do. Of note, the Institutional Retirement Income Council has published a brief that quantifies six major risks (.pdf file) that both retirees and employees approaching retirement face in retirement.
3. Perform analysis to model plan functionality
How sound is your plan? Is there a 90% chance that it will work or just a 50% chance? If nothing else, you want to get a sense of the trade-offs and choices you have to make to ensure your plan is as sound as possible.
4. Evaluate the impact of your debt
If you have a lot of debt, especially mortgage debt, as you head into retirement, it could affect your ability to increase the amount of money you save for retirement. What's more, you shouldn't retire if you don't have sufficient income to service your debt, especially if you have a home equity loan that converts from interest-only payments to principal-and-interest payments while you're in retirement.
5. Determine the availability of health insurance
It might seem obvious, but if you don't have health insurance coverage, consider delaying retirement, the authors write. What's more, consider delaying retirement until you've earmarked either assets or income for out-of-pocket health care expenses in retirement. As various studies have shown, the net present value of health care costs ranges anywhere from $250,000 to $900,000 for a 65-year-old couple retiring today. Of course, before making your decision to retire or not, you should consider all sources of health insurance, including employer-sponsored retiree health insurance, spousal insurance, COBRA coverage, Medicare and Medicaid.
6. Examine the impact of various Social Security claiming-age options
Make no mistake about this one. There are plenty of Social Security strategies, many of which can increase your monthly benefit and overall benefit. One bit of advice as you contemplate when to retire and when to take Social Security: Distinguish between the Social Security claiming age and the optimal retirement age, the Tacchinos write. The two are not inextricably linked. In other words, choosing the ideal age at which to claim Social Security is a different and separate decision from when to retire.
So be sure to examine not just the best age to retire but also the best age (or ages, if you're married) to claim Social Security.
7. Assess the type of retirement plan and the plan's features
Some, though not all, workers have employer-sponsored pension plans with different features and different distribution options, as well as contribution or benefit formulas. Knowing what you have is part of deciding your optimal retirement age.
8. Analyze the financial status of investments
If you retire before or during a down market, you stand a good chance of running out of money. They call this, in some circles, the sequence of return risk. For some, it means reducing the percentage of money you might put in risky assets and delaying retirement. For instance, retirees need fewer stocks and more annuities.
For those who think the stock market might rise in the five- to 10-year period around retirement, it might be OK to retire.
9. Examine earnings prospects if you remain employed
What do you stand to earn if you keep working, versus the joy you would get from being retired and enjoying a life of leisure? That's the trade-off that must be evaluated. "Significant opportunity cost reduces the probability of retiring," the authors write. If you stand to earn a significant salary and/or receive nonqualified deferred compensation by working, you are more likely to keep working, write the Tacchinos. Of course, working might also increase the desire to retire.
10. Appraise the availability of phased retirement
You might be more likely to select a retirement age if you knew you could ease into retirement -- a phased retirement, so to speak. In other words, retiring isn't always about leaving the workforce and relying on income from a pension or Social Security, the authors write. It could also mean working part time or seasonally, presuming of course there are such job opportunities.
11. Factor in early retirement incentives
If you're lucky enough to get a golden handshake, God bless. "But don't be blinded by offers that are desirable in the short term, but could leave (you) short of financial resources in the long term," the authors write.
Also consider negotiating sweeteners (maybe retiree health insurance or a bigger severance package) long before your employer offers you a retirement incentive package. "Employers may be eager to release a long-service employee who is relatively higher paid in favor of a young employee who is not," write the Tacchinos.
12. Consider your willingness to compromise financial goals
There's the lifestyle you want in retirement and the lifestyle you might have to settle for, given your resources. If you're willing to reduce your standard of living, you might be able to retire at your ideal age instead of delaying it. And studies have shown that satisfaction in retirement tends to be high regardless of income, assuming you retired on your terms, are in good health and are married.
13. Assess whether you are and/or will be healthy enough to continue working
If you're not in good health, you may have to retire involuntarily, and it's unlikely to be at your optimal retirement age. This is something you might have to factor into your plans or your possible scenarios.
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Pray like h*ll the government will stop squeezing the retirees...
Worked and saved all my life....
Only to see government intervention a real scare.
Unsure of social security, medicare, safe haven for investments, and capital gains taxes.
Since I'm an AVERAGE AMERICAN with a corrupt Republican corporate MONARCHY INSURANCE POLICY 401k, AT AGE 65 I could retire on $80 a month! So, I will continue working to the age of 102!
Or, as an AVERAGE AMERICAN, we could fight back for GUARANTEED PENSIONS that they STOLE FROM US and REPLACED IT WITH 401k!
I might never retire--I love my work, my co-workers are hard working and interesting people, and I have the best bosses ever in my 40 years of work. I get enough personal leave time to satisfy my love of travel, and I make enough money to travel pretty much anywhere we want. We are not high-roller type travellers, which helps.
So I'll just keep working until either I die or my working conditions change.
For those of you who were fortunately enough to have a pension, retirement is the reward to good planning and working for the right company. Unfortunately, a pension is becoming an extinct animal so the "wealthy job creators" can feather their own nest some more.
If you want to blame someone / something for your lack of a comfortable retirement, may I suggest the greedy wealthy who could never get enough profits and wanted your paid healthcare, retirement pension and living wages too. Economic slavery is their goal.
I consider my husband and myself very fortunate in our retirement years, We retired 15 years ago, I was 51 he was 57, our home is paid off and we have no outstanding debt what so ever. We both receive social security and our pension. Health insurance is great, our former employer pays 100% of the monthly premium and also reimburses us the monthly part B premium that's taken out of our social security checks. We also had put into a 401K for years. The most important thing is that we both are healthy. This didn't just happen overnight it took years of saving, budgeting and doing without, but it has paid off for us in the long run.
When I am 55, I will hopefully have 31 years with my company and be able to retire with my pension and 401K. It won't be as much money as if I waited until I was 65 and had 41 years but I will be much happier those 10 extra years.
Plan to sell the house and everythign I have to buy a yacht and sail the world for the rest of my life. I can visit whatever country I wish. As long as it has a coast.
Like most people have the money mentioned here for healthcae NOT!!!!!!! Again these articles are written for the wealthy rather than the average middle class person.
You really don't want to work til you drop dead. In retiring like life you just have to take the chance and do it. Hopefully it will work out and it will give the old body a chance to rest and catch up again. The main thing is that your health holds up and that you have enough money for food and medicines.
Ideally yes we would like lot of dollars available to enjoy it but it doesn't usually happen unless you are wealthy.
Unfortunately getting old is part of it.
If your job is secure & your health is good, YOU better really think about what your doing in regard to money & how you will fill 24 hours a day 7 days a wk.golf & making bird houses grows very old after 5yrs. The money don't go very far when (NOT IF) illness it hits. Without going into the dollar & cents, you still must deal with: taxes, medicare & supp.(est.$500 mon. for2) & inflation. Plus if you go @ 62 figure minus %25 SS & three yrs. of paying out of pocket health care, A BIG BUCK. I know, I've been retired 11 yrs !!
If you're going to retire, do it while you are young enough and in sufficiently good health to be able to enjoy it and do the things you want to do (have a bucket list). You don't need a million+ in your retirement account. In fact, you don't need anything if you are willing and able to use your immigration and skills. I have seen many retired men and women who have little or nothing but are retired and having a great time. You don't need to have something to leave to your kids. You don't need to worry about personal medical conditions unless they already exist. Too many people want impossible conditions before they retire. Retirement isn't just for those who can afford it, it is for those who want it.
From someone, now 83 who retired at 53 without having enough according to my friends.
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