Deciding When to Retire

by Steve Schou | VP - Trust Investment Officer

When do I retire? This is one of the most important decisions an individual will make in their lifetime. Having a spouse or partner can make the timing more involved with all of the different aspects of dual retirement. Here are some factors to consider when making this important decision.

Financial Well-Being

Financial well-being or income during retirement. This is traditionally thought to come from three main sources, commonly referred to as a “three-legged financial stool”: Social Security benefits, pensions, and personal retirement savings. Individuals can claim Social Security benefits at any age between 62, the earliest eligible age (EEA), and age 70, and this choice affects the size of the benefit. Benefits that are initiated prior to an individual’s full retirement age (FRA) are proportionately reduced for the life of the individual and any future spousal benefit.  At FRA, retirees receive their full scheduled benefits. Between their FRA and age 70, delayed retirement credits are applied, permanently increasing the monthly benefit amount. According to a particular set of questions asked in a Health and Retirement study from the Social Security policy, ages 62 and 65 are the ages most frequently chosen for retirement. Only 13 percent of the participants reported an age other than 62 or 65 as being their chosen retirement age.

Some retirees receive pension benefits upon retirement. However, those numbers continue to decrease each year since most employers have replaced pensions with 401(k) or 403(b) plans. This changing pension environment has increased the importance of an individual’s personal retirement savings. In today’s work environment, most retirees must depend on a “two-legged stool” instead of the traditional “three-legged stool”. Individuals should start saving as early as possible and allocate at least 10-20 percent of their working income to their 401(k) or 403(b) plans. Rarely have I met a retiree who said they accumulated too much money for retirement. The most common concern is, “Do I have enough money to retire?” Fidelity Brokerage Services suggests saving at least 1 times your salary by age 30, 3 times by age 40, 6 times by age 50, 8 times by age 60, and 10 times by age 67. If you’re behind, don’t worry. There are ways to catch up and work with your Certified Financial Planner toward your financial accumulation goals.

Insurance Status

Health/medical insurance status can have an impact on when an individual chooses to retire. On average, the 62- and 65-year-old groups who retire early didn’t say that health was the reason for their decision. Various studies found that being “tired of work” was the main reason for people who retired at 62. In fact, based on a study of early retirement-age retirees by the Employee Benefit Research Institute, only about 15 percent of survey respondents reported early retirement due to health issues. Sometimes the age 65 retiree group stayed in the workforce longer than the age 62 group to get closer to their full retirement age benefits while waiting for their Medicare eligibility for continued medical insurance.

Emotional Impact

The emotional effects may significantly impact an individual as they transition from working to retirement. Many retirees are aware of the financial and medical insurance needs for retirement, but tend to overlook the importance of the emotional adjustments in retirement. Future retirees may be excited about life without work and the leisure opportunities retirement allows; however, contemplating retirement can introduce negative emotions as well. During this transition, people may go through various emotions from euphoria to depression and even low self-worth before settling down to a comfortable retirement life. Once the initial euphoria is over, there may be fear of boredom or being less engaged in society. It is important to try to visualize what downtime will really look like. For example, volunteer with organizations that you are passionate about. Start thinking about something that you have always wanted to do, but never had the time. Maybe there is a hobby that you already enjoy or one that you have always wanted to start. Do both of you enjoy traveling, gardening, golfing, and other activities? It is important to create a retirement plan with your partner so that you are on the same page.

In summary, the question of when to retire is filled with financial, medical, and emotional decisions for an individual and can be more complex for couples. It can be healthy for the relationship to allow each partner the opportunity to have their own leisure activities, while also sharing a life together.

Without proper thought and planning, leaving the workforce can be both exciting and stressful. To help navigate this exciting yet daunting next step, consider seeking the guidance of a knowledgeable and experienced Certified Financial Planner to assist you.