Timing is not everything, it's the only thing!
When to Retire
Previous pages of this Retirement Planning Section presented information on Setting Retirement Goals, Establishing a Retirement Budget, Saving for Retirement, and utilizing a Pre-Retirement Checklist. Armed with retirement goals, knowledge of your Net Worth (from the Retirement Savings page), a retirement expense budget, and a pre-retirement checklist, you are now in a position to calculate when you’ll be able to retire and/or how much financial flexibility you’ll have in retirement.
Before creating a tentative Retirement Financial Plan and seeing if it works, you'll need to consider a major factor in the plan -- how long you’ll let your Social Security benefits grow until you elect to start receiving them. The longer you wait, the higher your monthly benefits. Many people elect to start receiving Social Security benefits at age 62 and pay the price of reduced income.
The following table illustrates Social Security benefit reductions at age 62 based on your birth year:
Social Security Benefit Reduction
|At Age 62|
|1937 or earlier||65||36||$800||20.00%|
|1938||65 and 2 months||38||$791||20.83%|
|1939||65 and 4 months||40||$783||21.67%|
|1940||65 and 6 months||42||$775||22.50%|
|1941||65 and 8 months||44||$766||23.33%|
|1942||65 and 10 months||46||$758||24.17%|
|1955||66 and 2 months||50||$741||25.83%|
|1956||66 and 4 months||52||$733||26.67%|
|1957||66 and 6 months||54||$725||27.50%|
|1958||66 and 8 months||56||$716||28.33%|
|1959||66 and 10 months||58||$708||29.17%|
|1960 and later||67||60||$700||30.00%|
- If you were born on January 1st, you should refer to the previous year.
- If you were born on the 1st of the month, the benefit is figured as if your birthday was in the previous month. You must be at least 62 for the entire month to receive benefits.
- Percentages are approximate due to rounding.
Investment Nest Egg Rules of Thumb
A frequently asked question is "How much investment assets will I need to retire?" There is no simple answer to this question since the answer is determined by:
- What percent of your pre-retirement salary will you need?
- When do you plan to begin receiving social security benefits?
- Do you have other income such as pensions, dividends, annuities, rental income, etc.?
- How are your assets invested?
- Are you retiring with debt, such as a mortgage, car loan, etc.?
The table below shows that if you need 80% of your salary in retirement, retire in 2022 with a full social security benefit, have no other income, have no debt, earn 4% on your investments and withdraw these earnings to help fund your retirement, you will need investment assets of $200,000 to $1,800,000 depending on your pre-retirement salary. (This does not account for increasing salary requirements due to inflation.)
|Annual Salary||80% of Salary||Social Security||Additional Needed||Required Investment Assets|
The Investing Section will help you determine how much you'll need to invest while still working to build your retirement nest egg. It assumes 50% income requirement and 6% investment growth instead of the 4% assumed here.
Retirement Financial Plan
With your annual expense budget and a feel for your tolerance for accepting reduced Social Security benefits, you’re now in position to determine if/when you’ll have sufficient income to retire. This is simply a matter of determining when your regular retirement income checks plus investment drawdowns will meet your budget over your projected lifespan. To perform this calculation, you’ll need to make several assumptions regarding average annual cost-of-living (COL) increases (for both income and expense), portfolio investment growth, and how long you plan to live. To assure not running out of money you may wish to add ten years to the Social Security Life Expectancy Tables shown earlier. Also, you may wish to not spend all of your assets thereby saving some for your heirs.
Let's assume that you are 57 years old and considering retiring at age 63. Following is a simple table (Retirement Financial Plan) that projects your ability to retire in December 2027 based on these assumptions:
- You are 57 years old in 2022,
- You retire in December 2027 at age 62.
- You have $500.000 in Retirement Assets and continue to save while working,
- You invest an additional $10,000 this year and $3,000 extra each year until retirement.
- Your retirement annual expense budget is $85,000 and grows by 3% a year,
- You start collecting Social Security ($2,000/mo.) and a company pension ($2,500/mo.) in January 2028,
- Annual inflation is 3%, portfolio growth is 6%, and SS increases by 2%.
Note that Assets build up to the start of retirement value, and afterwards are adjusted each year for Growth minus Drawdown (to meet income shortfall). Income (SS & Pension) plus Portfolio Drawdown equals Expense. When you reach the age of 70 1/2, your asset drawdown from any IRA investment funds will be influenced by Required Minimum Distributions (RMDs).
Note that in the example below, portfolio growth exceeds investment drawdown in the first 11 years of retirement. Afterwards, retirement assets reduce each year by an increasing greater amount. The good news in this example is that at age 90, the retiree will still have almost half of his/her retirement nest egg.
Retirement Assets Drawdown to Cover Cost of Living
|Taxable Income Required||Retirement Income Sources||Retirement Assets|