When you’re planning for retirement, should your retirement age be dictated by your Social Security full retirement age?
Social Security’s full retirement age, or FRA, is currently between 66 and 67, depending upon your year of birth. Once you achieve this milestone, you qualify for full benefits. You can increase your monthly payout by 8 percent for each year that you defer your start date up to age 70. You can also begin collecting Social Security when you turn 62, however, your monthly benefit will be reduced by 30 percent.
When do Americans Retire?
Early retirement is the norm for Americans. According to a LIMRA analysis of census information, 18% of all Americans retire by age 60. 51% retire between 61 to 65. That’s a total of 69%, or more than two-thirds of all retirees, who stop working before reaching their Social Security FRA.
Although there are numerous articles about deferring retirement, retiring after 65 is the exception. Only 12% retire between age 66 to 69, 10% between age 70 to 74, and 9% at 75 and older.
When Should You Retire?
The age at which you should retire is one of the most, if not the most, important decisions that you will ever make. The traditional age of 65 doesn’t need to be your retirement age. There are numerous financial and nonfinancial considerations that come into play. The latter are very important and strongly influence the ultimate decision for most people.
Retirement planning is a very personal process. People need to think about, envision, and plan for retirement beginning in their 30’s. Given the fact that there’s a strong possibility that you will retire by 65, you may need to support yourself, and potentially a spouse, for up to 30 or more years without a traditional paycheck.
The earlier you begin planning for, and setting aside funds toward, retirement, the more flexibility you will have when it comes to the choice of a retirement age. Income tax consequences of projected lifetime contributions and withdrawals are extremely important when determining the allocation of savings between retirement vs. nonretirement investment vehicles.
Protect Your Retirement
When you buy a house, the purchase price and associated financing is the initial cost. There will be ongoing expenses, including annual protection, i.e., homeowners insurance. Just like you protect your home, you need to protect your retirement.
When you save for retirement, a portion of your savings should be dedicated toward protecting you and your family from known risks. These include health, disability, extended care, longevity, and death. The earlier you recognize, understand, and protect against these risks, the smaller the potential lifetime expense. Although it’s never cheap, insurance is generally the most cost-effective risk transfer strategy.
Peace of mind is key to a successful retirement. Forgetting about cost, the emotional and physical consequences to individuals and families as a result of uninsured or underinsured events can be devastating. As an example, the health of family caregivers is typically compromised as are sibling relationships in the absence of a thoughtful extended care plan.
The most important recommendation that I can make when it comes to planning when to retire is to be flexible. Include a range of potential ages in your retirement plan. The earlier you begin your planning, the wider the range. I generally recommend using increments of five years beginning at age 55 up to 75 as potential targets.
Don’t rule out any age. Despite the best of intentions, many people are forced to retire early because of health issues, inability to find work, or to provide care for family members. On the opposite end of the spectrum, there are those who have the financial ability to retire before age 66 that choose to defer their retirement for various reasons.
Where Does Social Security Fit In?
Social Security, which is an important, if not the only, source of income for many retirees, is one of numerous considerations when deciding when to retire. Given the eight-year range of starting ages, beginning at 62 and extending through 70, there are several possibilities. Married individuals are faced with additional decisions, including the use of different starting ages for each spouse.
Unless financial necessity or health is an issue, you should generally wait until at least your full retirement age to begin collecting Social Security retirement benefits. Age 62, full retirement age, and age 70 should be included as potential starting ages in your retirement planning scenarios.
Generally speaking, your retirement age shouldn’t be dictated by any single financial or nonfinancial variable. This includes your Social Security full retirement age which is but one cog in the ever-turning wheel of retirement planning.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.