When Should I Retire?
This is perhaps the number one question I’m asked as a financial planner. The answer is much more nuanced than you could imagine. While men retire at an average age of 64 and women at 62, there are certain considerations we all need to understand. First, we are all living longer, which means it will cost us more to sustain a longer retirement. Second, and perhaps more important, is that few of us have the financial means to retire at the age of 62. If you decide you want to retire at age 62, then you need to be aware of this sobering fact: Retiring at the age of 62 means that your monthly Social Security check will be nearly 30% less than the standard retirement age of a little over 66 years. Now, if you choose to retire at the age of 70, your Social Security check will increase by 32%. The type of retirement you envision now may determine how long you keep working. I strongly urge people to seek out the services of a professional financial planner for your specific retirement advice.
Can I Rely on Social Security and 401(k)?
Let’s look at the first part of this question. Can you retire on Social Security alone? In my opinion, Social Security benefits alone are not enough to offer you a comfortable retirement. Consider that 20% of married couples and almost 50% of unmarried beneficiaries depend on their Social Security checks for 90% of their retirement income. The fact the average beneficiary receives $1,503 per month means that retirement will be much more bare-bones than many of you have imagined. When you supplement your Social Security checks with a pension or 401(k), then you have the potential to retire relatively comfortably for a longer period of time. I always advise my clients to build an emergency fund. This fund will help you avoid tapping into your 401(k). One of the things the COVID-19 pandemic revealed was that 40% of Americans have less than $400 in the bank. If you do not build an emergency fund and your circumstances suddenly change (like the COVID-19 pandemic), you will be forced to tap into your 401(k). This will leave you more dependent on Social Security, which as I’ve noted is likely not enough for a comfortable retirement.
Why Financial Literacy is the Key
In my book, Redefining Financial Literacy, I repeatedly stressed the importance of obtaining retirement advice from an experienced and qualified financial planner. The reason is simple: the more knowledge you gain, the more empowered you will be to ask the right questions, which will help you take actionable steps that will improve your actions and choices. Think about this for a moment: the less financial literacy you have, the less likely you will ask questions about topics that you may not be aware of. Think of financial literacy as your first, and most important, investment. Financial literacy will help you make sense of retirement advice by wisely planning today.
Should I get help from a qualified and experienced financial planner?
The immediate answer is likely yes, you should consider seeking out the advice of a qualified and experienced financial planner. Let me introduce you to a psychological phenomenon – known as the Dunning-Kruger Effect – which is the belief that we know far more about a topic than we actually do. One of the unintended consequences of the digital age is that we have a near-infinite supply of information, and yet we cannot read. We live in a Google-ized world where we can search any conceivable topic and only read the first few lines. We skim through massive amounts of data, only to gain a superficial understanding. This type of surface understanding is what artificially inflates our ego, to the point that we convince ourselves that we know all there is to know about any given topic. When it comes to finance, we tend to ignore retirement advice from professionals, believing we know what to do. The only problem is that this kind of ignorance can potentially cost you thousands of dollars in the long run.
Daniel Kurt, “When to Retire: The Pros and Cons of Different Ages,” Investopedia.com, November 13, 2020.
Dayana Yochim, “When to Take Social Security benefits: 62, 67 or 70?” nerdwallet.com, March 17, 2021.