You always knew retirement was coming. But now, seemingly suddenly, the end of your work days are in the not-too-distant future, an actual event you can foresee.
As of 2021, the U.S. Census Bureau reports that men retire at the average age of 65 and women at 63. But no one’s life is an average. After all, many Americans would like to retire young, others can’t imagine not working and some need to work as long as possible. So ultimately, your retirement date isn’t a question based on age—or even having a certain amount in the bank. It’s entirely personal to you, and how you plan to live in retirement.
If you’re debating retirement in the next five years—versus the next year—here’s how to evaluate your retirement plan so far, to see if you're ready.
Can you support your lifestyle?
First, take a realistic look at how much money you’ll need to live the lifestyle you’d like to enjoy in retirement. You’ve likely spent decades thinking about a retirement “savings” plan, but now it’s time to create a realistic “spending” plan, says Christopher M. Moore, director of financial readiness at Texas A&M’s financial planning program. Moore says that small change can put you in the right mindset, shifting your thinking in a valuable way. “Changing that one word—from ‘saving’ to ‘spending’—helps people visualize what they’re trying to accomplish,” Moore says.
Moore recommends working with a financial advisor to calculate an accurate wage replacement ratio. That term simply refers to how much of your current income you’ll need in retirement. The rule of thumb is that you’ll need about 70% to 80% of your current annual income each year in retirement. Factor in inflation over the decades of your retirement as well.Consider your current monthly expenses and see which ones will and won’t carry over into retirement.
Have you factored in all your income streams?
Once you estimate how much money you’ll need, add up anticipated income streams—including Social Security benefits, pension payments, 401(k)s, 403(b)s, IRAs, plus any other savings and investments. Although you’ll be eligible for Social Security at 62, waiting past full retirement age of 66 until age 70 can result in as much as 8% more in retirement benefits each year you wait. If your savings and income streams don’t match your goal, it’s clearly not time to think about retirement yet.
Age can typically come with medical expenses you didn’t have before, and Medicare retirement benefits could assist in paying for those bills.
Are you prepared to cover large expenses?
You earned your retirement! If you want to spend more time vacationing or pick up a hobby, consider how that will affect your current pool of retirement savings. If you can’t afford to cover basic living expenses and enjoy retirement, you may want to consider working for a few more years.
On the flip side, you should still have money set aside in an emergency fund for unexpected expenses such as auto repairs, medical bills, etc.
Will you still have a mortgage?
Moore encourages pre-retirees to pay off a home mortgage before they stop working completely. Because your living expenses are often one of the largest line items in your budget, freeing yourself of that payment each month will free up funds for other needs or wants. There's also future potential interest you may have to pay on debt that would eat up retirement savings. If you haven’t knocked out that debt, Moore says it’s not time to stop working yet. You can also consider downsizing, which would allow you to tap into the equity in your current mortgage.
You should also consider other types of debt you may have incurred, such as credit card debt or auto loans.
How much could you save in five extra years?
Moore requires his students to build scenarios to show how working longer can affect retirement savings. Consider the following, which shows how clearly working five or 10 more years can be exponentially more lucrative in the long term.
At age 36, a worker makes $100,000 and contributes 3% of his income to a 401(k) that already has a balance of about $114,000. His company offers a 5% match and he gets an 8% annual return on his investment, plus a steady 3% raise every year. If he keeps making his contributions, here’s how his balance can potentially grow:
● Age 60: $1.96 million
● Age 65: $3.04 million.
● Age 70: $4.67 million.
Remember that your 401(k) is just one retirement account. If your personal finance plan includes multiple retirement accounts as well as general savings accounts, mutual funds, and investment portfolios, your final retirement savings could be even larger if you work as long as possible.
Compare your savings to how much the average person has saved at your age.
Would you miss out on catch-up contributions?
The government offers catch-up contribution options for most retirement accounts for those approaching retirement age. Usually, at age 50 you will qualify to put more money away into tax-deferred accounts. If you are thinking about retiring this year, you may want to consider how working five more years could be beneficial for your taxes. Max out your 401(k) and rake in company matching funds. If you don’t have an IRA, open one and contribute the max allowed.
FAQs
The rule of thumb is that you'll need about 70% to 80% of your current annual income each year in retirement. Factor in inflation over the decades of your retirement as well. Consider your current monthly expenses and see which ones will and won't carry over into retirement.
Should I work one more year or retire? ›
Now, not only do you get to save more and spend less (two great recipes for financial health), but perhaps the largest benefit for many is an extra year of compound interest on their retirement assets. By delaying retirement a year, you won't touch your assets for an extra year.
Should I continue to work or retire? ›
There are a couple of key financial benefits of working in retirement. First, there's a greater likelihood that you can put off collecting Social Security. Until age 70, for every year you delay past your full retirement age — 66 or 67, depending on the year you were born — your benefit will rise by 8%.
Is 5 years before retirement critical? ›
The last five years before you retire is a critical point in time—at least when it comes to retirement planning. That's because you must determine whether you can truly afford to quit working. This determination will hinge heavily on the amount of preparation you've done, and the results of that preparation.
How many years does the average person work before retiring? ›
If you spend four years in college before starting your career at 22, you'll work for 40 years before you can claim your Social Security benefits. The average age of retirement, however, is about 64. This suggests a working career of 46 years is someone who starts at 18, and 42 years for a college graduate.
Are people happier working or retired? ›
Retirees are generally happier in retirement than in the workforce, but like many things in life, there are gaps between expectation and reality according to the latest MassMutual Retirement Happiness Study.
Should I keep working if I have enough money to retire? ›
If you can't afford to cover basic living expenses and enjoy retirement, you may want to consider working for a few more years. On the flip side, you should still have money set aside in an emergency fund for unexpected expenses such as auto repairs, medical bills, etc.
What is the best age to retire? ›
The normal retirement age is typically 65 or 66 for most people; this is when you can begin drawing your full Social Security retirement benefit. It could make sense to retire earlier or later, however, depending on your financial situation, needs and goals.
When to know it's time to retire? ›
If you feel like you've completed what you set out to do with your work, that is one indication it may be time to let it go. When you are financially secure enough that you no longer need the income, and feel that you have done all you need to do at your job, retiring might be the right choice.
Are you happier when you retire? ›
Early Retirement And Mental Health
Many individuals report feeling less stressed and more relaxed without the pressures and demands of a full-time job. This newfound freedom can allow for more time to pursue hobbies, travel, and engage in activities that bring a sense of fulfillment and joy.
The 5-year rule regarding Roth IRAs requires a waiting period before you can withdraw earnings or convert funds without a penalty. To withdraw earnings from a Roth IRA without owing taxes or penalties, you must have held the account for at least five tax years.
What is the 3 rule in retirement? ›
A 3 percent withdrawal rate works better with larger portfolios. For instance, using the above numbers, a 3 percent rule would mean withdrawing just $22,500 per year. In this case, you may need additional income, such as Social Security, to supplement your retirement.
What age does Suze Orman say you should retire? ›
Orman notes that for married couples it might be okay for the spouse earning less to retire at age 67, but the higher earner must wait until 70. The only exception is if one of you has a medical condition that prevents you from working or makes it unlikely you'll live into your late-80s or 90s.
At what age do most Americans retire? ›
What is the average age of retirement in the United States? Right now, the average age for men to retire is 65 while the average age for women to retire is 63. While many people say they will work for as long as they can, others retire earlier than expected.
Should I retire early or keep working? ›
Pros of retiring early include health benefits, opportunities to travel, and starting a new career or business venture. Cons of retiring early include a strain on savings, and a depressing effect on mental health. There may be ways to chart a middle course: cutting back on work without fully retiring.
How much money do most people have when they retire? ›
What are the average and median retirement savings? The average retirement savings for all families is $333,940, according to the 2022 Survey of Consumer Finances. The median retirement savings for all families is $87,000.
What age is the best year to retire? ›
67-70 – During this age range, your Social Security benefit, if you haven't already taken it, will increase by 8% for each year you delay taking it until you turn 70. So, if your benefit will be, say, $2,500/month if you start at your full retirement age, it would be more than $3,300/month if you can wait.
What is the one more year syndrome retirement? ›
The “one more year syndrome” is a debilitating syndrome faced by people who want to retire but keep putting retirement off. Before you know it, the one more year syndrome might turn into five years or even 10 years of still working at the same place.
Is it better to retire at end of year or mid year? ›
If you're retiring before reaching FRA but expect to earn more than $1,580 a month in income, and you will reach FRA sometime during the year you plan to retire, you should probably wait until after your birthday to retire and claim Social Security retirement benefits.
