When do you want to retire? This is a vital question because your answer will affect many aspects of your life both now and in the future. It’s a difficult decision, with many considerations in choosing your ideal date.
If you’re not certain when you should leave the workforce, answering these three questions will help you figure out what’s best for you.
1. Would you prefer more small Social Security checks or fewer large ones?
For most people, it’s not possible to give up their paychecks without Social Security. If so, your preferred retirement age will also be the age you claim your retirement benefits, and it’ll profoundly impact your monthly checks.
That’s because early filers — those who claim benefits before full retirement age (FRA) — are subject to penalties applicable for each month they’re early. These add up to about a 6.7% annual reduction in benefits if you claim up to three years ahead of FRA, and an additional 5% reduction for each year before that. Late filers, on the other hand, earn delayed retirement credits for every month they wait between their FRA and 70. These raise the standard benefit by 8% each year.
In other words, if you start getting Social Security ahead of schedule, you’ll get more checks than if you’d waited, but each one will be smaller. If you delay, you’ll miss out on many months of benefits. But when you eventually start getting them, each will be larger.
Ultimately, you’ll need to decide if you’d prefer fewer checks but bigger ones, or if you want to start benefits ASAP to get the maximum number of monthly payments, with less money in each one.
2. How aggressively can you save for your future?
Depending on Social Security as your sole retirement income source is a recipe for disaster since your benefits are supposed to replace only about 40% of pre-retirement income. That won’t maintain your standard of living, so you’ll need income from investments to make up the shortfall.
If you can invest a lot of money throughout your career, you should amass the nest egg necessary as a retiree even if you quit work pretty early. But the longer you wait to start saving and the less you invest each month, the greater the chances your savings will be insufficient unless you work past the traditional retirement age.
Based on your current savings rate (and the amount you plan to save in the future), you can estimate how long it will take to amass enough to support you in conjunction with your Social Security checks. If it’ll take you 30 years and you’re 35 already, your ideal retirement age shouldn’t be until age 65 or later.
3. What are your retirement plans?
Lastly, think about how you’ll spend your later years.
If you have lots of plans for your time (and the money to fulfill them), you may want to retire as soon as possible so you can do all you’ve dreamed of. But if you’re not clear how you’ll spend your later years, while work gives structure and purpose to your life, you may be better off working as long as possible.
Everyone’s ideal retirement timeline is unique. By considering your plans, the amount you can feasibly save, and your preferences for Social Security, you can pick the perfect date to leave the workforce.
