The question on most people’s minds when they think about retirement isn’t if they’ll retire, but when? There’s a fair amount of strategy involved when it comes to retirement age. And there’s no clear general answer about when to leave work, it really depends on each individual. Factors include health, birth year, nest egg health, social security benefits, and employment situation.
It’s important to sit down and look at the big picture and ask yourself some tough questions in order to navigate the next phase of your life is financially secure.
Your Social Security benefits are a complex matter. When you begin claiming benefits really makes a difference in how you navigate the system. It all comes down to your Full Retirement Age (FRA). Depending on when you were born, your FRA is between 65 and 67 years old, but you can claim social security as young as 62 years old, though your money can accumulate until you’re 70. And here’s where it gets complicated. Let’s iron it out.
The 62-year old who claims Social Security enjoys income, but the money from the pot is drawn out over a longer period of time. That means smaller incremental payments. If you still work and you deduct, those payments shrink more, though, since you’re under the FRA. Here’s where it gets tricky. There’s a limit each year, in 2018 it’s $17,040, and so for every $2 you earn above that limit, $1 is deducted from social security payments. Once you reach your actual FRA year, after a new limit, in 2018 it’s $45,360, for every $3 you earn, a dollar is deducted from payments. That sounds like a raw deal, but those deducted dollars do get repaid back to you later in the form of increased benefits. So really, you’re just getting less now, not overall.
On the other hand, if you wait until age 70, the age in which benefits are maxed out, you enjoy a bonus on top of your full benefits. So you’ll get more money each month. That said, for the long haul, these higher payments only work to your advantage if you live to age 80. The person who took benefits at age 62 will out-earn you until then.
Which is to say, if you think you’re in excellent health and will live a long life, it’s a good idea to wait until age 70 so you get the most money overall. But, if your health history is not great and you don’t think you’re going to live a long time, it’s to your advantage to start claims at age 62.
Your Savings Status
Those who have a flush nest egg have a lot more planning freedom than anyone with thin savings. Most people don’t, so don’t despair if you feel like your savings account is a little low, you’re in the majority. While Social Security can really make a difference, particularly if your overhead is temporarily higher than usual (like for a medical issue), if you don’t feel good about your savings, you should work until age 70. You can continue to add to your Social Security until then, which will increase your payments, and you can add to your savings account.
If you feel good about savings, then retiring early shouldn’t be a problem. It’s a good idea to wait on deducting from your Social Security until age 70 so you get that bonus. Your savings can make up for the benefits until then.
It’s a depressing topic, but you need to think about how long you’ll live. While no one can really predict this, of course, there are some factors you can consider. The first is your family history. If you come from a family while lives a long time, then you’ll probably be around for a while. But those who have family health histories like heart attacks and cancer may not have the same longevity. Of course looking at your own health is a prime factor. Have you had heart attacks? Do you have diabetes or cholesterol problems? These are important issues to look into. This will help determine how much you need to save, when to deduct Social Security, and when to leave your job.
Health, Insurance, and Medicare
While your intention may be to work until you’re 70, it could be that health prevents you from achieving that goal. 37% of retirees said health was a major factor in deciding to retire. There’s an issue here, of course, and that’s that when you leave your job, you lose your insurance coverage, too. You can apply for COBRA, which allows you to continue your employer’s insurance plan. This option is expensive and lasts only 18 months, but if you’re 63 or 64 and have enough money to cover the cost, this might be a good solution. Medicare is available to seniors at age 65, so you could fill in the time gap effectively. Other options include buying into an individual insurance plan or buying into the Affordable Care Act. You’ll need to do some investigating since both the ACA and individual coverage varies per state.
If you wait until you’re 70, you slide right into Medicare while enjoying five years of company health insurance, which is much easier to navigate than Medicare.
Much of whether you decide to retire at 62 or 70 has to do with your work situation. Do you like your job? Are you burned out and can’t wait to leave? Taking financials and health out of the equation, ask yourself if you still want to work? Do you want to work, but not as hard? While working is great for your mental health, physical health, and financial status, it does mean that you sacrifice healthy years of retirement, which may not be that appealing.
If you retire at 62, you probably still have the mobility to travel, do fun things with your grandchildren, take up new hobbies, and experience your new life without limitations. When you’re older, these things become more difficult, so if you work until you’re 70, it might be that you’re too tired to go to the amusement park with your grandchild, and the idea of a trip to Asia sounds more exhausting than fun. This has to do with your health and life expectancy, too. As with any factor in retirement, look honestly at your set up, and try to realistically envision what’s in front of you. Once you do that, you’ll know exactly when to retire.