For some workers, retirement is a stage of life that can’t come too soon. Others intend to stay on the job as long as they physically can. More likely, you fall somewhere in the middle—and your feelings on the matter are likely to change over time.
Given this fluidity, saving toward retirement shouldn’t necessarily assume a specific date, explains Jackie Calandriello, a wealth planner with Fidelity Investments. “In my practice, I generally focus on a goal of financial independence, not retirement,” Calandriello says. “It’s about having the freedom to stop working if or when you choose.”
Many workers don’t spend enough time considering the non-financial aspects of the retirement decision, explains Jeff Edwards, a regional vice president at Fidelity Investments Life Insurance Company. “It’s easy to get stuck focusing only on the functional aspects of retirement, yet there are huge emotional and relational elements to this decision, from questions about how it might impact your sense of self and identity to what it means for not just yourself, but your whole family,” Edwards says. “That’s why it’s important to think about retirement in a way that gets us to a strong financial plan as well as emotional preparedness.”
Trying to figure out when you can retire? The questions below can help you get a handle on the timing that works for both your finances and your family.
Can you comfortably cover your expected retirement expenses?
The general guideline is to assume you’ll spend up to 80% of your pre-retirement income post-retirement to maintain your current standard of living. But that number is wildly subject to change, depending on numerous factors, including your projected non-essential expenses, the cost of living in your local area, and how well your health holds up over time. “Because so much is subject to change, especially as you age, I stress test my clients’ retirement plans under multiple scenarios,” Calandriello says. She also helps create plans for her clients to help them decide when and how to tap different types of retirement accounts. “It’s also important to think about liquidity, not just net worth. Even if you have millions, if most of it is illiquid you may still not be able to cover your expenses—or in order to do so, you may be forced to liquidate at an inopportune time with a potentially hefty tax bill,” Calandriello points out.
Edwards suggests padding your budget for unexpected expenses that inevitably crop up. “Life happens. I’ve seen everything from central air conditioning not working in July in Arizona, to a roof rotting in Seattle.” Or you may be saving for bucket-list plans, such as one client of Calandriello’s who hopes to take all his children and grandchildren on an African safari.
Will you continue to work?
“This may sound counterintuitive, but nowadays ‘retirement’ doesn’t necessarily mean not working,” says Edwards. Today’s retirees are living longer, healthier lives, and appreciate the social and emotional benefits gained from workplace interactions. The Employee Benefit Research Institute has found that three-quarters of workers expect to work for pay in retirement,1 a figure that’s been steadily growing over time.
If you’re considering working in retirement, you need to understand the potential financial impacts. Your earnings could increase your Medicare premiums; if your income is above a specific limit, the federal government will add an additional surcharge or surtax known as IRMAA (Income-Related Monthly Adjustment Amount). If you are already claiming Social Security, your Social Security income may also be subject to additional taxes.
On the plus side, as long as you continue working, you can continue bolstering your savings by contributing to your retirement savings accounts like traditional IRAs, Roth IRAs, or 401(k)s. And while you’ll need to start taking required minimum distributions (RMDs) from your IRAs starting the year you turn 73, you aren’t required to take RMDs from your 401(k) if you’re still eligible to make contributions to that account.
How will you cover your health care needs?
If you’re considering retiring before you’re eligible for Medicare at age 65, you’ll likely need to think through the options for early-retiree health care coverage. Talk to your human resources department to find out if there are any medical benefits available to retirees—or whether part-time work might enable you to continue your current coverage. If your spouse is still working, getting coverage under their employer plan is usually the most cost-effective option. Otherwise, you’ll need to compare prices for other coverage options, which include buying your own insurance through either the public exchanges or a private plan, and COBRA, short for the Consolidated Omnibus Budget Reconciliation Act, which allows you to extend your employer-sponsored coverage for a period of time, generally at a higher cost.
It's also important to make a plan for long-term care costs, which generally aren’t covered by Medicare. The US Department of Health and Human Services estimates that someone turning 65 today has almost a 70% chance of needing some type of long-term care services over their lifetime.2 Options for long-term care coverage can include traditional long-term care policies, a hybrid product, which combines long-term care coverage with life insurance or annuities, and self-insuring. A financial professional can help model the impacts of the various options on your retirement plan and talk through the benefits and considerations of each.
Where will you live?
Housing is typically the largest cost for retirees, according to the Bureau of Labor Statistics, and the choice of where you plan to spend your retirement years will have an outsize impact on your budget. Studies have found that the majority of retirees hope to stay in their current home, but some may need or want to move, for more aging-friendly accommodations, a lower cost of living, or proximity to family. As you crunch those numbers, make sure to be realistic about how those choices might change your bottom line. A move to a more tax-friendly state, for example, might be offset by an increase in other cost-of-living line items, while aging in place might require extensive, and expensive, renovations to your home.
How might retirement change your family dynamic?
Spouses often have different visions of retirement plans, including different hoped-for retirement dates. “First, ask yourself: ‘Does my spouse or partner want me around this much?’” jokes Edwards. Your children, too, may have preconceived ideas about what retirement means. Some retirees for example, assume they’ll be spending more time with their children or grandchildren, only to discover that their kids can’t accommodate extended visitors in their busy lives. Or a child may assume retired parents will help with childcare, while the parent intends to spend much of the time traveling. Schedule a time to sit down with your partner, and possibly your kids as well, to have an open discussion about your retirement timing and future lifestyle.
Finally, consider meeting with an advisor, who can help you think through the numerous decisions around retirement, check your investment strategy, and identify potential opportunities for tax-smart investing3 and wealth transfer. “The objective is to understand what’s most important to you, put a plan in place to help meet whatever your needs and goals are today—and adapt that plan as your life changes,” says Calandriello.