What’s the best age to retire? «
Retiring at the optimal age should not be left to chance, according to Kenn Tacchino, a professor of taxation and financial planning at Widener University, and Patricia Tacchino, co-authors of a soon-to-be-published paper in Benefits Quarterly .
Rather, choosing a retirement age needs to be a rational decision that accounts for a variety of confusing and competing consideration, the Tacchinos wrote. And to reach a rational decision, the authors say, would-be retirees would benefit from using a systematic checklist of issues to make the optimal choice.
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/conga/personal-finance/retirement_seo.html 259847 Not surprisingly, the Tacchinos have created such a checklist. But it’s no ordinary checklist. It’s a checklist of some 25 factors that would-be retirees can use to reach what the authors say would be a logical and rational decision about the optimal retirement age.
This approach considers financial feasibility of retiring, a would-be retiree’s ability to continue working, the psychological factors surrounding the retirement decision, and the would-be retiree’s personal situation.
So what’s on the checklist? Well, the whole paper is 5,500-plus words and 25 pages long, but we’ll do our best to capture the essence of it (in a manner edited for average would-be retirees).
By the way, by applying weight or attaching value to each item in the checklist, you can hone the decision process to its logical conclusion (retire by choice, keep working by choice, retire by necessity, or keep working by necessity) and avoid irrational choices, the author wrote.
Also, the Tacchinos recommend that you use this checklist at various stages of your life: in the middle of your career, 10-15 years away from retirement, and when retirement is imminent.
1. Calculate available retirement income and assess adequacy
Determine how much income you’ll get in retirement from all available sources (pensions, Social Security, retirement accounts, work and the like). If it doesn’t give you your desired lifestyle given whatever withdrawal strategy you plan to use, consider not retiring. Not retiring when you don’t have enough income to support your desired lifestyle isn’t necessarily a bad thing by the way. By the way, it’s quite possible that if you don’t have the income to maintain your lifestyle in retirement, you should still examine the other 24 factors.
Also, the authors say, not retiring serves four primary functions: One it preserves your assets; two, it gives you a chance to keep building your nest egg; three, it shortens the period of time that you’ll be drawing down your assets; and four, it increases the monthly income you’ll get from Social Security, provided you delay claiming it.
2. Consider life expectancy, expenditures, and risks
Consider all the risks that you might face in retirement and how you’ll mitigate those risks, be it the risk of outliving your assets, or inflation or sequence of return risk. If you haven’t addressed those risks, you might consider not retiring until you do. Of note, the Institutional Retirement Income Council this week published a brief that quantifies six major risks that both retirees and employees approaching retirement face in retirement.
Read that brief.
Also read, the Top 10 retirement risks you face.
And read this Society of Actuaries report, Managing Post-Retirement Risks: A Guide to Retirement Planning.
3. Perform analysis to model plan functionality
How sound is your plan? Is there a 90% chance that it work, or just a 50% chance? If nothing else, you want to get a sense of the trade-offs and choices you have to make to make your plan as sound as possible.
4. Evaluate the impact of your debt
If you have a lot of debt, especially mortgage debt as you head into retirement, it could affect your ability to increase the amount of money that you save for retirement. What’s more, you shouldn’t retire if you don’t have sufficient income to service your debt, especially if you have a home-equity loan that converts from interest-only payments to principal-and-interest payments while you’re in retirement.
Read Home-equity loans could sink your retirement.
5. Determine the availability of health insurance
It might seem obvious, but if you don’t have health insurance coverage, consider delaying retirement, the authors said. What’s more, consider delaying retirement until you’ve earmarked either assets or income for out-of-pocket health care expenses in retirement. As various studies have shown the net present value of health care costs range anywhere from $250,000 to $900,000 for a 65-year-old couple retiring today. Read Retiree Health-Care Costs Surge. Of course, you should consider—before making your decision to retire or not—all sources of health insurance, including employer-sponsored retiree health insurance, spousal insurance, COBRA, Medicare and Medicaid.
6. Examine the impact of various Social Security claiming-age options
Make no mistake about this one. There are plenty of Social Security strategies, many of which can increase optimize your monthly benefit and overall benefit. One bit of advice as you contemplate when to retire and when to take Social Security: Distinguish between the Social Security claiming age and the optimal retirement age, wrote the Tacchinos. The two are not inextricably linked. In other words, the ideal age at which to claim Social Security is a different and separate decision from when to retire, the Tacchinos wrote.
So be sure to examine not just the best age to retire, but also the best age (or ages if you’re married) to claim Social Security.
Read How to hike your Social Security benefits.
7. Assess the type of retirement plan and the plan’s features
Some, though not all workers, have lots of employer-sponsored pension plans with different features, different distribution options, and contribution or benefit formulas. Knowing what you have is part of weighing your optimal retirement age.
8. Analyze the financial status of investments
So, here’s the deal with this: If you retire prior or during a down market, you stand a good chance of running out of money. They call this, in some circles, the sequence of return risk. For some, it means reducing the percent of money you might put in risky assets and delaying retirement. Read Retirees need fewer stocks, more annuities.
For those who think the stock market might rise in the five to 10-year period around retirement it might be OK to retire.
9. Examine earnings prospects if your remain employed
What do you stand to earn if you keep working vs. the joy you would get from being retired, enjoying a life of leisure? That’s the trade off that must be evaluated. “Significant opportunity cost reduces the probability of retiring,” the authors wrote. If you stand to earn a significant salary and/or receive nonqualified deferred compensation by working, then you are more likely to keep working, wrote the Tacchinos. Of course, working might also increase the desire to retire.
10. Appraise the availability of phased retirement
You might be more likely to select a retirement age if you knew that you could ease into retirement, a phased retirement so to speak. In other words, the authors wrote that retiring isn’t always about leaving the workforce and relying on income from a pension or Social Security.