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When Can I Retire?

Knowing when you can retire goes beyond age. You should also consider your life expectancy, savings and debts, among other things.

June 29, 2021

For many, the end of our working days is something we look forward to for years and years. As the average age of retirement continues to climb and the necessary savings follow suit, it’s something we have to think about — and most importantly, plan for — for years and years, too.

Are you wondering, how much do I need to retire? You’re in the right place.

As you sort through the logistics of when (and how) you can retire, check out this helpful guide to prepare you for the big day, whenever it may come.

Normal retirement age

couple on a bench

The “normal retirement age” isn’t just a phrase indicating what the average person chooses to do. It’s a specific age, as determined by the Social Security Administration, that determines when you can begin withdrawing full benefits from the SSA. Right now, it ranges from 65 to 67 based on what year you were born — the normal retirement age (NRA), also referred to as “full retirement age,” gets later and later with each passing year.

Sources of income

Retiring at age 67 leaves you plenty of time to travel, relax, take up hobbies and so on — but with what money?

We’ll break down each of the most common sources of income for retired individuals to help you assess your current (and prospective) financial situation.

How much will I get from Social Security?

In order to qualify for Social Security retirement benefits, you need a certain number of credits, which correspond to years of employment — for anyone born in 1929 or after, the minimum is 40 credits, or 10 years. They don’t have to be consecutive to qualify, but they are absolutely necessary to receive payments later on.

As for the money you receive, it’s based on your total lifetime earnings. The more you made as an employee, the more you’ll earn as a retiree.

The amount is also based on when you decide to retire, with three distinct categories of benefits:

  • Early retirement – If you choose to retire at age 62, you’re still eligible for Social Security retirement benefits but at a:

    • If you retire up to 36 months early, your benefit is reduced by five-ninths of a percent for every month before NRA.

    • If you retire earlier than that, your benefit is reduced by an additional five-twelfth of a percent for every month beyond 36.

If your full benefit at age 67 would have been $1,000 per month, your reduced benefit from retiring at 62 would be $700/month, for a total loss of 30%. This reduction is, unfortunately, permanent — you won’t suddenly start receiving your full benefit amount after your 67th birthday.

  • Standard retirement – Anyone that retires on the SSA’s exact timeline will receive their full benefit amount at the beginning of the month after they stop working.

  • Delayed retirement – As a reward for working past your normal retirement age, the SSA will increase your Social Security retirement benefits in two ways:

    • Simply, you’ll have increased your lifetime earnings. By working three more years, for example, you’ll have three more annual salary amounts to add to your amassed income.

    • You’ll get a delayed retirement credit, which boosts your benefit by a certain percentage for each additional year of work. The is between 3% and 8% based on your birth year — 3% for those born 1917–1924 and 8% for 1943 and onward, with incremental increases in between.

Do I have a pension?

Most public and many private employees will receive access to an employer-sponsored pension plan. Teachers, government officials and law enforcement employees are common beneficiaries of traditional pension plans.

You may have one of two types of pension plans (and if you don’t now, you may want to inquire about one or the other):

  • Defined benefit plans – Considered the more traditional of the two, defined benefit plans are seen throughout the public sector (have access to this plan type). The employee, upon retiring, will receive a fixed amount based on their years of service and salary earned, even if the invested money doesn’t yield returns.

  • Defined contribution plans – Plans like these, namely the, are seen more commonly in private companies. Instead of being promised a defined amount of pension payout, the employee can make a certain contribution each year. Upon retirement, they’ll receive payments based on how much their contributions made while invested in various stocks, bonds, and funds.

When can you withdraw from retirement accounts?

Depending on the individual retirement account you have — 401(k) or IRA — there are different rules in place that dictate how much you can withdraw and when.

For 401(k)s, here’s the general timeline:

  • You can withdraw before age 55 but only through a 401(k) loan, hardship withdrawal or by transferring your money into an IRA. Otherwise, you’ll lose protection of your funds from garnishment by creditors and may face a tax penalty.

  • You can start making penalty-free withdrawals at age 55, as long as you leave the bulk of your money in your 401(k) and don’t retire before the year you turn 55 — in that case, you’ll be charged 10% as an early withdrawal penalty.

  • You can access your 401(k) funds at age 59 and a half, as long as you retire after turning 55 and still have some money in your account. If you’re still working at age 59 and a half, you may be able to withdraw your money but not necessarily with full access if you’ve switched employers.

  • You must start receiving 401(k) distributions at age 72. There may be some exceptions if you’re still working past this age, but you have to be an employee, not a business owner.

For IRA accounts, you can withdraw penalty-free after age 59 and a half. Before that age, you’ll face a 10% withdrawal fee.

With a Roth IRA, the same age limit applies but your account must have been open for at least five years to avoid tax payments and penalty fees. The penalties depend on whether you meet one, both or neither of these requirements:

  • If you’re 59 and a half or older but haven’t had your account for at least five years, you’ll pay tax on your earnings but no penalty fees.

  • If you’re younger than 59 and a half but you have had your account for five years or more, you’ll pay tax and a 10% penalty on your earnings, unless you have a, which protects you from both.

  • If you’re younger than 59 and a half and you haven’t had your account for at least five years, you’ll pay tax and a 10% penalty on your earnings. A qualified exception may protect you from the penalty but

    not the tax payment.

Does my home equity help?

If you own a significant portion of your home, you can leverage this financial asset in retirement in a few different ways:

  • A home equity loan lets you borrow 80% or 85% of your home equity (the amount you own, equal to the property’s value minus your liabilities and outstanding mortgage balance). You receive the full amount as a lump sum that you must begin repaying immediately.

  • A home equity line of credit lets you borrow money throughout a “draw period,” usually up to 10 years. Interest payments are required during the draw period, but you don’t have to repay your line of credit until after the draw period ends, and the interest rates are usually lower than for a home equity loan.

  • A reverse mortgage essentially translates your home equity into tax-free payouts from your lender. You don’t have to pay it back until you move out, in which case the sale of your property will usually cover the loan repayment.

The other option is to downsize to a smaller house, apartment or condo and use the profits to pay for some of your day-to-day living expenses during retirement.

Should I consider part-time work during retirement?

Supplementing your retirement income with part-time employment can provide semi-retirees with the security they need to live comfortably. However, there are certain restrictions and consequences that come with working while retired.

If you start collecting disbursements at age 62 (considered “early retirement”), you can only earn a certain amount before your income reduces your benefits. In 2021, the max is $18,960. Your benefits would be cut by $1 for every $2 you made over that.

However, you’ll also receive higher benefits later on because you continued to increase your lifetime earnings, plus you’ll have more liquid cash in your pockets to spend as you choose.

Am I transitioning into retirement or choosing a specific date?

This is a personal choice that all future retirees will have to make. Weigh your options carefully by asking yourself these important questions:

  • Am I financially prepared for retirement? If you’re ready to retire and have the means to live comfortably, it makes sense to choose a hard stop date and enjoy your freedom. If you want to increase your benefits or earn some extra cash before retirement, you may want to work more years but on a reduced schedule.

  • Will I be bored or unhappy without my job? Plenty of people love their job, regardless of their age. If you’re working happily, why stop just because you’ve celebrated your 65th birthday? Instead, consider transitioning slowly into retirement to adjust to the new retirement lifestyle.

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How much money do I need to retire?

Unfortunately, there is no magic number that everyone needs to live happily ever after in retirement — the question is, what are your financial retirement needs? The dollar amount that makes sense for you will depend on a number of factors.

How much do you need each year to retire?

Many financial experts claim that retirees need about 70% to 80% of their pre-retirement income to live comfortably.

This can come from Social Security retirement benefits; 401(k), Roth or traditional IRA withdrawals; home equity loans or lines of credit; and any other active or passive sources of income you maintain during retirement, whether a rental property, part-time employment or side hustle.

So now you’re probably asking yourself, How much should I save for retirement? The often-cited 4% rule suggests that if you withdraw just 4% of your entire retirement fund each year, you shouldn’t run out of money. For a yearly budget of $40,000, you’d need about a million dollars saved up.

What are necessary retirement expenses? What aren’t?

The same expenses that were deemed necessary while you were working are likely still necessary, and consist mostly of life’s essentials:

  • Housing, whether in the form of monthly rent or mortgage payments.

  • Food, specifically groceries, but not necessarily dining out.

  • Medical expenses, including doctor’s visits, procedures, prescriptions and perhaps eventually, at-home care.

  • Utilities, including electricity, water, gas and others.

  • Clothing that provides warmth, comfort and coverage — not luxury items.

  • Taxes and insurance payments.

Discretionary expenses are everything else, including travel, entertainment, luxury purchases, sports and hobbies and so on. However, many of life’s unnecessary expenses are what make retirement worthwhile, so try to budget for at least some fun and games.

What is a good monthly retirement income?

In 2021, the average monthly SSA retirement disbursement is $1,544. If you own your home and receive two benefit checks between you and your spouse, this is a solid monthly income to put toward essentials and other discretionary expenses.

If, however, you’re still paying rent or mortgage payments, and/or live alone with only one income source, you may not have enough to cover everything you need.

Longevity trends: How long can you expect to live?

The life expectancy for the average American is 78.7 years — 81.2 for women and 76.2 for men. In addition to gender, there are also variations between states, socioeconomic classes, occupations and more.

To prepare for retirement based on the current normal retirement age (67) and median pre-retirement wages (about $47,000 for women and $57,000 for men):

  • Women would need $37,600 annually and $533,920 altogether.

  • Men would need $45,600 annually and $419,520 altogether.

This is based on the assumption that retirees need 80% of their pre-retirement income and spend about the same each year.

Checking all the boxes before retirement

Retirement is something to look forward to, but all the work leading up to it? It’s necessary but not exactly thrilling. Make sure you have all your ducks in a row before clocking out on your final day.

Accounting for current and future debts

Run a thorough diagnostic check of your existing debts to create a repayment plan before you enter retirement.

In the years leading up to your retirement, try to make a concerted effort to pay off debts from:

  • Credit cards

  • Student loans

  • Car loans

  • Mortgages

If you are entering retirement with remaining debt, factor these payments into your monthly budget before allocating funds to other expenses like entertainment and new clothes.

Calculating inflation

Unfortunately, inflation doesn’t retire just because you have. The idea that gets tossed around most often is that the price of goods and services rises by about 3% each year — that’s inflation.

If your money isn’t invested, it’s essentially losing value each year in relation to the cost of living. If it is invested, however, it’s growing an average of 6% to 7% annually, which offsets the rate of inflation. That’s why it’s so important to keep your money in your 401(k) or IRA and withdraw incremental amounts.

As we’ve mentioned, the ideal incremental amount is about 4%. But that’s just for your first year of retirement. The following year (and all subsequent years), consider adding 3% to your previous withdrawal to account for inflation.

finance calculations

Accounting for unanticipated events

Between costly medical bills, funerals, unexpected travel and any number of emergencies or disasters, your yearly budget may fall short.

To prepare for these incidents in retirement, consider:

  • Purchasing long-term care insurance to cover medical expenses as you age.

  • Creating an emergency cash reserve so you don’t have to withdraw from long-term investments.

  • Living modestly in your early retirement to save more for later when your expenses are likely to increase.

Having a detailed financial plan

The best thing you can do for your current and future self is meet with a financial advisor to create:

  • An immediate investment strategy

  • A short- and long-term budget

  • A retirement plan and prospective budget

  • Emergency funds

  • Savings and growth goals

If you don’t know how much to save for retirement, an advisor can help you figure out that number and exactly how to do it. Working with a financial advisor along with using Tally for debt management can be a good way to reach your retirement goals.