Making the Big Leap – Deciding On When to Retire

Do I retire early…and what is early?
Most people are not forced to retire anymore, so depending on your health, the ball is in your court. Often the biggest reason to retire early is to do something different and or just work part-time. Few people have pensions from their employers anymore, so it’s often not necessary to work a set number of years at a company to reach a certain age in to get your benefits in retirement.

For those lucky enough to have traditional pensions, a reduced pension at an early age may be available. That may give you the freedom to quit your current job and go do something else you might enjoy more. However, whether you have a pension or not, must carefully calculate your required expenses and cash flow before quitting. The biggest expense people neglect to consider is health-care insurance. The earliest you can get Medicare is age 65. So if you retire before that age, you either need a retiree health plan from your former employer or you'll have to buy expensive private health insurance. What you need is always a variable. You can’t get at your IRA until you are age 59 1/2 or you'll owe a 10% penalty as well as ordinary income tax on your distribution. There are ways around that penalty (called 72t distributions), but they lock you into very rigid distributions over the greater of five years or until you are age 59 1/2. You can take distributions from your company retirement or 401k before age 59 1/2 without penalty. Of course you will have to pay income taxes on distributions which is the case no matter what your age. To do that you must be age 55 and separated from service from your company. Just make sure you know what your plan's rules are--I've seen some plans that allow only one distribution per year while others let you take distributions any time you choose.

If you're contemplating early retirement, you also need to consider other company benefits like deferred compensation plans or stock options. If you start early enough, you can set up your deferred comp so that it is paid out over a series of years between your early retirement date and age 59 1/2. Most companies have restrictions on how quickly you must do something with your stock options. Again, I've seen a wide variety of policies; some force you to exercise within 30 days of retirement while others allow you to hold the options until the grant expires.

If you think you’ll need less money in retirement than you need now, you should test that theory before you actually retire. Most folks continue to spend as much as they did while they were working, often more because they have so much free time. Remember all those trips you’ve been planning.

Next you’ll have to pull together all of your income sources, such as Social Security, which you can start taking at age 62. (widows or widower can start at age 60.) But if you think you may want to work part-time, you may not want to do that. If you are under full retirement age and earn more than $12,960 per year, the government will take back $1 for every $2 you earn over that threshold. 

If you can, wait until you are fully retired to take Social Security, You will get more money by waiting longer and you won't have to give back part of your benefit. Once you hit full retirement age, you can work and still get 100% of your benefit.

Retiring Later.
If you're really worried about outliving your assets or you just love your job, you should wait until closer to age 70 to retire. Social Security will pay you a premium (above and beyond your full benefit) to wait and obviously not worry about early distribution penalties from retirement accounts if you retire after age 59 1/2. However, There are Minimum Required Distributions (MRD) that must be taken from your traditional IRA, which you will have to start taking minimum by age 70 1/2. The downside is that you may get short-changed, so be sure to do the fun things you really want to do whether you're working or not. Try making a list of all the things you might like to do when you retire, and see how many things on your list could be done right now with a little more flexibility in your work schedule. I've seen many people who are very hesitant to retire (usually from some kind of fear--real or imagined) who found it easier to phase into retirement by scheduling longer and more frequent vacations from their current jobs. That gave them a chance to see how it felt to do some other activities.

Retiring with maximum benefit…financial as well as life!
People are living longer and Social Security has started delaying the age at which you are eligible for full benefits based on when you were born. Most people will probably choose to retire about at the age when they will get full Social Security benefits. Retirement is serious business, so it is important that you fully understand the IRS rules and laws as well as the financial markets. If you don’t have the inclination to spend your waking hours studying and constantly updating yourself on these subjects, hire someone to help. With careful planning, you can take charge of your retirement and make it a time to live a more fulfilling life--no matter what your age.

Keith W. Springer is Registered Investment Advisor and President of Capital Financial Advisory Services, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith Springer at 916-925-8900 or keith@capfas.com