When Should I Retire?

Few decisions in your life are as complex and fraught with significant consequences as the decision on when to retire. For most of us, this decision will affect more than just ourselves. Your decision cannot be made in a vacuum if you have a significant other, spouse, or others that depend on your paycheck. Many will consider issues such as the size of their retirement and investment portfolios, age, physical health, and the state of the economy. Still, others look to stagnation and boredom with their careers, the availability of a pension or social security, or even an inheritance.

Many books have been written about retirement and there is a wide spectrum of opinion on when people should retire, especially given that people are generally living longer. It was not so long ago that people rarely lived into their 70’s. Today, it is common for people to live to their 90’s or beyond. The fact that our lifespans are increasing with advances in medicine and technology begs the question: should we retire at all?

A very large segment of the country retires at age 62, which coincidentally is the earliest age you can qualify for social security retirement benefits. However, for the eager beavers who decide to do so, they should know that those benefits could potentially be permanently reduced by about 25 percent. For someone who might be around until age 92, that’s a lot of income to forgo. It is possible you may spend three decades in retirement. What the heck are you going to do with yourself for all those years? Visit the grand-kids, play golf, or work in the garden?

Before you even consider the idea of when to retire, engage the services of a financial and retirement income advisor team. Ideally, you will want to work with individuals who have decades of experience working with people similar to you. You will want to look for someone who is not close to retiring themselves.  Imagine how hard it could be to find someone you can trust 10 years from now when your advisor retires.  That is the last thing you will want to do while enjoying your Golden Years.

With all this said, remember that the decision as to when to retire does not just affect you. Your loved ones deserve to be part of the conversation and the decision-making process. Make sure your planning takes into account the financial aspect of retirement and also the life and living parts. You may have bid your spouse goodbye five days a week at 8:00 am for decades. But when that stops, things will change. That change may be for the better or worse, and you need to plan for that, too.

 

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Step 1 – How much money will I need in retirement?

How much money will I need to have set aside at retirement that I can then turn into an income stream for my retirement?

Our first step is determining how much money you will need to have sitting there at retirement, which you can then turn into an income stream for retirement so you hopefully never have to go back to work.  You will be paying yourself not to work!  How great is that?

The chart you will see below is an excel program I created so we could quickly come up with an approximate number using just your current income, years until retirement, what we assume the inflation rate will average per year and how much of your current income you think you will need to replace at retirement.  Many financial and economic experts recommend around 80% of your pre-retirement income should be replaced in retirement.  I will caution you though; I have worked with many people who spent MORE in retirement and many who have spent a lot less.  Use this as a general guide to get you started.

Also, if your income is going to most likely change significantly over time, you will want to account for that as well.  Hypothetically speaking, if you are a medical resident earning $50,000 a year but will be making $350,000 a year in private practice, you will want to use the $350,000 number as that will be the lifestyle you will be accustomed to.  This holds true for any profession where your income will most likely change considerably as time goes on.

 

“If you want to have a better performance than the crowd, you must do things differently from the crowd.”  –  Sir John Templeton

 

The way you read this chart is left to right.  Pick a number in the first column that is close to your current income or the income you feel you will most likely be at fairly soon.  In my chart I picked 30 years until retirement and used the long-term historical average for inflation as my theoretical assumption.  I also used a 75% income replacement rate for when you retire.  So if you are making $40,000 a year and have about 30 years until retirement then you will need about $1,456,000 sitting there at retirement.

Assumptions: This final sum of money is expected to produce an income stream for at
least 20 years if you withdrew exactly 5% and took no risk with the funds.  If you put the money in an interest bearing account, it could last longer.  If you choose to
invest it in variable, market based, investments it could last a lot longer or not as
long, depending on market performance.  Each person would want to analyze independentlywhat would be best for them and their assumed life expectancy.

Retirement Next Egg Chart

This hypothetical example is for illustrative purposes only. Not based on any particular investment. Investments will fluctuate and when redeemed, may be worth more or less than originally invested. Figures do not include transaction costs, taxes, or expenses.

If you are making $240,000 a year and have about 30 years until retirement you will need about $8,738,000.  The numbers look so big because the rising costs of goods and services over 30 years will be significant if we average 3% inflation.  Just ask your parents what they paid for their first home or first car and you will quickly realize what affect time has on money.

If you want a custom one for you please feel free to email me at larry@midwestwealthadvisors.com and I can send you one right away.  Just let me know the income you want me to use, how long until you retire, and the inflation and replacement rates you are comfortable using.

After the foregoing, let me hopefully give you some good news.  If you are participating in a 401k or 403b, hopefully your employer provides a match on the dollars you put in.  Even if it’s 1%, every little bit helps you in pursuit of your number.  Also, you may have an employer pension that could contribute to your retirement income in the future, that will help as well.  For those who feel social security will provide something at retirement, you could factor that in as well.  So the number might not be as daunting as you think.

 

For Step 2, please see the next post…Step 2 – Monthly Savings to Reach Retirement Goals

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Which pension option should I choose when I retire?

This question is a big deal!  Why?  Because the vast, vast majority of the time, your decision is irreversible.  You can’t change your mind later.

Always, always, get as much detail as you can from your Human Resource department or whoever handles your pension benefit options.  There, often times, many options to pick from and the whole situation can get confusing real fast.  Also, HR folks are not supposed to give advice. They can tell you your options but not which option is appropriate for you.  This is for good reason, given that they don’t know your whole situation and therefore cannot provide sound advice.

Please, please, please sit down with a trusted advisor, one you have known for years or one you can pay hourly to help you make an informed decision.  It will require some time together and you should disclose your financial situation and most importantly your future life goals.  That will enable your advisor to give you a recommendation that takes into account your entire situation.

I believe that the most critical variable for most when choosing which pension option to go with is the amount of survivor benefit you wish to leave behind for a spouse.  I have seen plans that allow you to leave up to 100% of your pension benefit behind, to as low as 1%.  What this means in practical terms is – say as a hypothetical example for illustrative purposes-  your employer says you are eligible for $4,000 a month of pension benefit for as long as you are alive.  If you pass away, the survivor benefit you leave your spouse could be as much as $4,000 or you could choose to leave $0 behind, the choice is yours and in a lot of states, your spouse as well.  Nothing is free in this world, regardless of what politicians tell us J, so you will also be presented with the costs to leave money behind.

In my above example, say you are eligible for $4000 a month of retirement benefit.  You might then be told that to leave $4000 behind to your spouse should you die first, then you will actually get $3600 a month of benefit, so the cost to leave behind $4000 is $400 a month.  Or you may say your spouse only needs $2000 a month should you die.  The cost then might be $200 a month, therefore your retirement benefit would be $3800.  These are just two examples, of the myriad of options that may be presented to you through your plan.

The reason I say you would meet with an advisor and disclose your whole financial situation is you may have existing financial products or accounts that can be used in concert with whatever pension payout you choose, for your retirement income needs. I have seen this many times, old financial strategies that may just need a second look with an eye to your current needs and situation.

In conclusion, if you are eligible for a pension from your current or past employer, first and foremost consider yourself lucky (these are disappearing rapidly in the modern economy), secondly you may benefit from a Pension Analysis to see if you can possibly help maximize them. Pensions are a great retirement tool, however; very few who receive this income stream really know how it works and give much thought to the irrevocable decision they are about to make. If you have a pension plan as a piece of your retirement, consider seeking assistance from a retirement income specialist who understands the structure and what options are available to maximize your income and leave the most behind for your spouse, beneficiary’s or estate.

As always, please email me at larry@midwestwealthadvisors.com anytime if you think I can be of help.

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