I’m often asked the questions of when to retire and how much money do I need. Let me answer the second question first. As a general rule you need to replace 70% to 90% of your annual pre-retirement income. For example, let’s say a person who is about to retire is making $60,000 per year. This translates to $42,000 to $54,000 per year in retirement income. Now, the question regarding when you should retire requires a more nuanced answer. Let’s look at social security benefits, which the vast majority of people are depending on their retirement.
When to Retire Matters
You can choose to retire at age 62, but doing so may result in a reduction of benefits of as much as 30 percent. If you are able to delay your retirement to the full retirement age, which now stands at 66, then you will receive full benefits. If you delay your retirement to age 70, you will receive more. Let’s look at a simple example. If you were born on January 1, 1959 (as of 2021 you would be 62) and had an average annual salary of $50,000, you would get a monthly benefit of $1,264 if you elect retirement at age 62. If you wait until full retirement age (66), your monthly benefit will be $1,785. If you delay until you are 70 years old, your monthly benefit will be $2,237.
You Will be Rewarded for Delaying Retirement
The difference between retiring at age 62 and 70 is almost $1000 per month. Given that we are all living longer, the difference over time is huge. In ten years, that $1000 per month difference balloons to $120,000. Another important consideration for retirement is how much you have in your 401k plan. For those between the age of 60-69, the average 401k balance, with 11% contribution, is $182,100.1 Also, if your money is in an investment portfolio, then you have to consider withdrawal rates. How much can you withdraw from your portfolio without depleting your funds. A good rule of thumb is to minimize, or avoid withdrawals all together, during bear markets.
Ask a Qualified Financial Expert
The question of when to retire should not be answered on your own. You need to sit down with a qualified and experienced financial planner to explore your options. If you are not close to retirement, you need to take steps now to ensure you prepare for a comfortable retirement. These steps include contributing more to your 401k plan and looking into multiasset class investment options that can potentially offer you consistent returns while managing risk. I urge you to read my book, Redefining Financial Literacy, where you will find invaluable information about retirement planning and Investment strategies.
1 Time Parker, “Properly Planning for Retirement,” Investopedia, March 17, 2021.