Fitt FinancialBob Fitt, Investment Mgmnt Consultant®Branch Manager1190 Old York RoadSuite BHartsville, PA 18974215-675-8440Fax: 215 [email protected]
Deciding When to Retire: When Timing Becomes Critical
May 20, 2013
Deciding when to retire may not be one decision but aseries of decisions and calculations. For example,you'll need to estimate not only your anticipatedexpenses, but also what sources of retirement incomeyou'll have and how long you'll need your retirementsavings to last. You'll need to take into account yourlife expectancy and health as well as when you wantto start receiving Social Security or pension benefits,and when you'll start to tap your retirement savings.Each of these factors may affect the others as part ofan overall retirement income plan.
Thinking about early retirement?Retiring early means fewer earning years and lessaccumulated savings. Also, the earlier you retire, themore years you'll need your retirement savings toproduce income. And your retirement could last quitea while. According to a National Vital StatisticsReport, people today can expect to live more than 30years longer than they did a century ago.
Not only will you need your retirement savings to lastlonger, but inflation will have more time to eat away atyour purchasing power. If inflation is 3% a year--itshistorical average since 1914--it will cut thepurchasing power of a fixed annual income in half inroughly 23 years. Factoring inflation into theretirement equation, you'll probably need yourretirement income to increase each year just to coverthe same expenses. Be sure to take this into accountwhen considering how long you expect (or can afford)to be in retirement.
Current Life Expectancy EstimatesMen Women
At birth 76.3 81.1
At age 65 82.8 85.4
Source: National Vital Statistics Report, Vol. 61, No.6, October 2012
There are other considerations as well. For example,if you expect to receive pension payments, early
retirement may adversely affect them. Why? Becausethe greatest accrual of benefits generally occursduring your final years of employment, when yourearning power is presumably highest. Early retirementcould reduce your monthly benefits. It will affect yourSocial Security benefits too.
Also, don't forget that if you hope to retire before youturn 59½ and plan to start using your 401(k) or IRAsavings right away, you'll generally pay a 10% earlywithdrawal penalty plus any regular income tax due(with some exceptions, including disability paymentsand distributions from employer plans such as401(k)s after you reach age 55 and terminateemployment).
Finally, you're not eligible for Medicare until you turn65. Unless you'll be eligible for retiree health benefitsthrough your employer or take a job that offers healthinsurance, you'll need to calculate the cost of payingfor insurance or health care out-of-pocket, at leastuntil you can receive Medicare coverage.
Delaying retirementPostponing retirement lets you continue to add toyour retirement savings. That's especiallyadvantageous if you're saving in tax-deferredaccounts, and if you're receiving employercontributions. For example, if you retire at age 65instead of age 55, and manage to save an additional$20,000 per year at an 8% rate of return during thattime, you can add an extra $312,909 to yourretirement fund. (This is a hypothetical example andis not intended to reflect the actual performance ofany specific investment.)
Even if you're no longer adding to your retirementsavings, delaying retirement postpones the date thatyou'll need to start withdrawing from them. That couldenhance your nest egg's ability to last throughout yourlifetime.
Postponing full retirement also gives you moretransition time. If you hope to trade a full-time job forrunning your own small business or launching a new
Retirement: a state ofmind
Don't underestimate thepsychological issuesinvolved in deciding whento retire. Many peoplewelcome the opportunity toreinvent themselves. Otherspostpone retirement orreturn to some form of workso they can continue to feelconnected and productive.You'll also need to shift yourmental focus fromaccumulating savings toinvesting for income andmanaging income streamsfrom various sources.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013
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career after you "retire," you might be able to lay thegroundwork for a new life by taking classes at night ortrying out your new role part-time. Testing your planswhile you're still employed can help you anticipate thechallenges of your post-retirement role. Doing areality check before relying on a new endeavor forretirement income can help you see how muchincome you can realistically expect from it. Also, you'lllearn whether it's something you really want to dobefore you spend what might be a significant portionof your retirement savings on it.
Phased retirement: the best of bothworldsSome employers have begun to offer phasedretirement programs, which allow you to receive all orpart of your pension benefit once you've reachedretirement age, while you continue to work part-timefor the same employer.
Phased retirement programs are getting moreattention as the baby boomer generation ages. In thepast, pension law for private sector employersencouraged workers to retire early. Traditionalpension plans generally weren't allowed to paybenefits until an employee either stopped workingcompletely or reached the plan's normal retirementage (typically age 65). This frequently encouragedemployees who wanted a reduced workload buthadn't yet reached normal retirement age to takeearly retirement and go to work elsewhere (often for acompetitor), allowing them to collect both a pensionfrom the prior employer and a salary from the newemployer.
However, pension plans now are allowed to paybenefits when an employee reaches age 62, even ifthe employee is still working and hasn't yet reachedthe plan's normal retirement age. Phased retirementcan benefit both prospective retirees, who can enjoy amore flexible work schedule and a smoother transitioninto full retirement; and employers, who are able toretain an experienced worker. Employers aren'trequired to offer a phased retirement program, but ifyours does, it's worth at least a review to see how itmight affect your plans.
Key Decision PointsAge Don't forget ...
Eligible to taptax-deferredsavingswithout penaltyfor earlywithdrawal
59 1/2* Federal incometaxes will be dueon pretaxcontributionsand earnings
Eligible forearly SocialSecuritybenefits
62 Taking benefitsbefore fullretirement agereduces eachmonthlypayment
Eligible forMedicare
65 ContactMedicare 3months beforeyour 65thbirthday
Full retirementage for SocialSecurity
65 to 67,depending onwhen you wereborn
After fullretirement age,earned incomeno longer affectsSocial Securitybenefits
*Age 55 for distributions from employer plans upontermination of employment
Check your assumptionsThe sooner you start to plan the timing of yourretirement, the more time you'll have to makeadjustments that can help ensure those years areeverything you hope for. If you've already made sometentative assumptions or choices, you may need torevisit them, especially if you're considering takingretirement in stages. And as you move intoretirement, you'll want to monitor your retirementincome plan to ensure that your initial assumptionsare still valid, that new laws and regulations haven'taffected your situation, and that your savings andinvestments are performing as you need them to.
Deciding when to retirewill have a substantialimpact on your SocialSecurity benefits. If youdecide to start receivingpayments at age 62, theywill be lower than if youwaited until your fullretirement age. Contactthe Social SecurityAdministration for moreinformation.
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