Deciding When to Retire
By: Source: AARP.org Date Posted: 2006-02-02 15:15:00-05:00
By the National Endowment for Financial Education
Thoughts of retirement may be on the distant horizon or as near as the front doorstep. How far off may depend on your feelings about your job or career and how prepared you think you are to leave the 9-to-5 grind behind. You are ultimately the only one who can decide if and when the time is right to retire. The best step is to do your homework so you're prepared for this important step in life.
Revisit Your Goals
Imagine what you would like your retirement to look like. Money, work, health, housing, and lifestyle will all factor into your retirement. So ask yourself these questions:
- How much money do I have for retirement?
- How much money will I need to pay bills in retirement?
- Do I want to travel?
- What's the cost of living where I plan to live?
- Will I have my mortgage paid off?
- How much should I budget for medical expenses and/or insurance?
- What debts can I pay off before retiring?
Your answers to these questions are important. They will help you decide how much money you'll need for the type of retirement lifestyle you want. By knowing how much money you can count on and how much you expect to spend, you can decide if you can afford to retire.
Retirement Reality Check
Find out how much money you'll need to live the retirement lifestyle you want. Financial experts say you'll need at least 70 percent of your pre-retirement income to live comfortably in retirement. However, if you expect to replace work-related expenses with travel, entertainment, or other activities, you may need more. With good health, your retirement could last 30 years or more.
Use AARP's retirement calculator to estimate what you'll need for retirement.
Plan for How Long You Expect to Live
While no one can plan how long they'll live, there are several ways to make an educated guess. Factors such as family history, personal health, and lifestyle will affect your estimated longevity. Some of your later years may not be as active as your early ones, but they might be just as expensive thanks to medical costs. These are important factors in planning for how long your retirement next egg needs to last.
Social Security Decisions
Many people don't realize that the earliest you can start receiving Social Security is age 62. If you choose to draw benefits at 62, you will only receive 80 percent of what you would if you waited until your "normal" retirement age.
And many people don't realize that the "normal" retirement age for Social Security is no longer 65. It is gradually moving up to age 67. If you wait until age 70, your monthly benefits will be even higher.
Some choose to defer their Social Security benefits for as long as possible to increase the monthly benefits. Others start at age 62 even though the benefits are less. Why? Because they get almost three years of extra payments that they then invest.
The Inflation Factor
Like predicting how long you'll live, trying to anticipate inflation over the next 20, 30, or even 40 years isn't an exact science. But what may look like a hefty retirement account now may shrink substantially down the road because of inflation.
For example, let's assume that inflation increases at 3 percent a year. If you retire at age 60 on a yearly income of $40,000, you'll need $72,000 by the time you're 80 to maintain your standard of living. At age 85, or 25 years after you retire, you'll need $83,800.
Making the Leap
Deciding if you can afford to retire is personal and the answer is different for everyone. The best strategy is to do your homework and determine how much money you need to set aside to pay for the retirement lifestyle you want.
Take Action
- Get a retirement reality check.
- Use the Social Security Administration's retirement planner to help make decisions about when to start getting benefits.
- Learn how working in retirement affects your social security benefits.
- Get more information from the AARP series Money Matters.
This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.
Note: The content areas in this material are believed to be current as of this printing, but, over time, legislative and regulatory changes, as well as new developments, may date this material.
The National Endowment for Financial Eduction® (NEFE®) is a non-profit 501 (c) (3) foundation dedicated to helping all Americans acquire the information and gain the skills neccesssary to take control of their personal finances.
©2005 National Endowment for Financial Education. All rights reserved.
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