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Answering the question “When can I retire?” requires comparing expected future expenses with expected future income. When you’re young, you pretty much have to guess. When you’re within 10 years of retirement, though, you should have a much better idea of what those numbers will be.
Here are the questions you need to answer to get a handle on when you can retire.
The average benefit is $1,543 per month in 2021. The maximum Social Security benefit at full retirement age is $3,148. The maximum benefit for someone who applies at age 70 is $3,895.
Social Security is a big part of most people’s retirement income, and research has shown most are better off waiting at least until full retirement age, if they can. Social Security benefits rise by about 5% to 8% for each year you delay. That’s an outstanding guaranteed return in today’s low-rate environment, which is why many financial planners recommend working longer or tapping other retirement funds if that allows you to put off your application.
The Social Security site offers personalized estimates. You can sign up for a free account to access those.
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Some private sector jobs still have traditional pensions, also known as defined benefit plans, but they’re much more common if you’re a government worker or a union member. Payouts typically start at 65, but you may get a smaller amount if you begin earlier. If you get a pension from a job that did not pay into Social Security — that includes many teachers as well as some state and local government workers — it may affect how much Social Security you get because of something known as the windfall elimination provision. You can read more about that on Social Security’s site.
The classic rule is to withdraw no more than 4% in the first year and to adjust the amount by the inflation rate every subsequent year. If you withdraw $30,000 and inflation is 5% that year, you increase the next year’s withdrawal by $1,500 (.05 times $30,000) to $31,500. If the next year’s inflation rate is 10%, you add $3,150 to the previous year’s withdrawal, and so on. You may want to start withdrawals at 3% or even less if you’re retiring early, to compensate for the risk of bad markets. that could let you withdraw more if you’re willing to cut back spending occasionally.
can be an enormous help in closing the gap between what you have and what you need to retire. Even a part-time job can reduce what you need to draw from your savings. Also, trying to get back into the job market can be hard if you miscalculate and need to resume work. Keeping a part-time job or side gig could make it easier to transition back to earning more income, should you need it.
You can tap home equity by selling your house, moving to a less expensive home and using the amount you clear to beef up your investments. Or you can consider a , which allows you to borrow against your home equity. You can get a lump sum, a stream of payments or a line of credit. Reverse mortgages don’t require you to make payments, but the amount you owe grows over time, typically at variable interest rates, and the loan must be paid off when you sell the home, die or move out.
It’s risky to count on an inheritance before you actually get one. The person who would make the bequest could change their minds, or need the money themselves, or make bad investment choices.
Financial planners often suggest people think of their expenses as three buckets: must-haves, wants and contingencies. If Social Security and pensions don’t cover all of your must-haves, you may want to consider using some of your savings to buy an that would provide a larger stream of guaranteed income. Money for your wants or discretionary expenses might come from other income, such as retirement plan withdrawals or other investments. Finally, your contingency reserve would be kept intact for unexpected expenses and long-term care.
These are the questions you’ll need to answer.
Must-have expenses are the costs you’ll need to cover, no matter what. Must-have costs differ from discretionary costs, which can be reduced or put off if necessary. Must-haves include:
Most people’s tax rates drop in retirement, but taxes still take 5% to 6% of a typical retired household’s budget. If you’re not working, you’ll no longer pay Social Security or taxes, but you may owe taxes on your Social Security benefits if you also receive income from other sources. In addition, pension income and retirement plan withdrawals are typically taxable.
Health care costs also are a significant part of most retirees’ expenses, averaging 10% to 15% of their total spending.
You can use to hone your numbers.
Any expense that can be trimmed or put off if necessary goes into this category, including:
If markets go into an extended downturn, these expenses would be the first to cut. If your investments are doing better than expected, or you get an inheritance or other windfall, you may be able to boost spending here.
Life often doesn’t go as expected. An unanticipated repair bill or medical expense can be harder to manage when you can’t volunteer for an extra shift or otherwise easily increase your income. That’s why many planners recommend retirees have a larger emergency fund -- perhaps six to 12 months’ worth of expenses, rather than the typical three to six months recommended for working people.
You’ll also need to think about how to pay for long-term care, since nursing home stays and other custodial care aren’t covered by Medicare. Long-term care insurance is one possibility. Tapping your home equity or earmarking some savings or investments for this expense are others.
Even a mild inflation of 3% will cause prices to double over 24 years, and health care costs typically rise at an even higher rate. That’s why financial planners often recommend new retirees keep 40% to 50% of their portfolios in stocks, which are the only investment class that consistently beats inflation. Rent from real estate investments and Treasury inflation-protected securities are two other hedges against inflation. Social Security offers cost-of-living adjustments; pensions may or may not. can be purchased with inflation adjustments, although that means your checks will be smaller at the beginning. You also could plan to curtail expenses — traveling or eating out less, for example.
Learn more about inflation and purchasing power with .
Even hardcore do-it-yourselfers before retiring. After all, you’ve never done this before, and any mistakes you make may be irreversible.
If you're looking for a personal financial advisor, check out our top picks for online financial planners below, or see our full roundup of the .