When should I retire?
Planning for your retirement is not something that should be taken lightly. Of course, everyone’s financial situation is different, and so is their retirement plan. But the two should go hand in hand.
You'll need to ask yourself all sorts of questions about retirement before solidifying your plan. For example, what sort of retirement do you want? What assets do you have to supplement your pension? And what about Social Security? Ensuring you're attuned to the ins and outs of retirement is a surefire way of improving your prospects once you finish working for good.
Retiring earlier than 65
The original rules on Social Security offered full benefits to those that retired from age 65 onwards. And although this has risen to 66 or 67 for some people, 65 remains the unofficial retirement age.
The earliest you can take Social Security is 62, but taking benefits before the standard retirement age will reduce the amount you receive. If you’re planning to retire early, you should first evaluate your financial position and ask yourself whether you have enough retirement savings to sustain the life you want to lead. That said, early retirement is something that millions of Americans pursue; the average retirement age in the US is 64.6 years old for men and 62.3 years old for women.
Pension Plans, IRAs
Access to your pension plan or IRA can depend on your employer(s). Federal employees, for example, can withdraw their retirement plan savings from age 55. Meanwhile, all employees can withdraw from their qualified plans and IRAs without penalty at 59.5. However, withdrawal before this age may result in a 10 percent penalty.
This means for your 401(k), you are free to empty your 401(k) after the age of 59.5 but will face a penalty of ten percent for drawing it out before then. However, various rules and tax implications for your retirement may impact how much you receive - so spend time weighing up the best option for you before proceeding.
From the start of 2020, the SECURE Act came into place in the US, pushing the required age for individuals to start withdrawing money from their retirement accounts from 70.5 to 72. This bill also enabled working individuals to continue contributing to traditional IRAs beyond the age of 70.5.
Social Security considerations
The longer you work, the more you can increase your Social Security benefits. Waiting to take the benefits past the normal retirement age can boost your benefit amount. This could put you in a far more secure financial situation than if you took early retirement.
This is because there are reductions in the Social Security benefits you are entitled to if you retire at 65 or earlier. Doing so will cut the amount you receive to 75 percent, while the benefit your spouse receives will decrease to 70 percent.
Do you have cash reserves?
Depending on when you retire and the lifestyle you want to live once you’re finished with your working life, it is often recommended to have a chunk of cash reserves in the bank. This will cover your expenses for the first few years and will reduce any need for you to dip into any retirement accounts that could harm your financial future.
If you want to retire at 62, for example, but don’t want to start withdrawing your Social Security benefits until the official retirement age – avoiding reductions – then a cash reserve to support your retirement lifestyle until then will be extremely beneficial.
If you don’t have these cash reserves, it may influence whether you can and should retire before you start receiving benefits.
Will you continue to work part-time after retirement?
Rather than going cold turkey with working life, some people choose to supplement their retirement pot with part-time work. There are various ways of working in a semi-retired fashion: becoming a consultant, starting a small business, or simply reducing your hours.
If Social Security is your only source of income when you retire, you may feel that you need to keep working part-time to fulfill your retirement lifestyle. Plus, earning money in your later years may help you delay taking your Social Security and thus allow for higher benefits.
However, you’ll need to do the math before taking this route. If your part-time work paired with your retirement income combine to a certain amount, you may end up in a higher tax bracket or reduce your Social Security benefits. For the latter, the exempt limit is $21,240 in 2023. Those making more than this will see their monthly benefits reduced by $1 for each $2 over the limit until they reach retirement age. After retirement age, these reductions sit at $1 for every $3 over the limit of $56,520.
What is the bottom line?
Everyone approaches retirement differently. Unique financial and lifestyle situations call for vastly different planning, and ultimately, you’ll need to make a call on retirement that works for you. However, it is always important to ensure that you are able to sustain yourself financially – particularly if you have eyes on an early retirement.
Cash reserves or an investment portfolio may enable you to take the hit and reduce your Social Security benefits, but it’s something that you should spend time calculating or receive expert advice on from a financial advisor.
Don’t forget your retirement is one of the most significant financial decisions you’ll make. Having an expert financial advisor on hand to offer advice can help you protect your finances once you finish work.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.