One of the most common questions we hear is, “When is the best time to retire?”. People spend decades saving for their retirement, and timing it right can improve the quality of your post-work life. Although retirement is associated with older adults, younger adults have the option of early retirement if their financial security allows. The most fundamental issue that will determine your ability to retire is your expected retirement income for the duration of your life. In other words, you need to have a retirement plan in place that assures you of the funds you need to maintain your standard of living.
What is the Retirement Age in the USA?
The average retirement age for men is 65, and for women, it is 63, although this depends a lot on educational attainment.
The United States has a “normal retirement age,” or NRA. The NRA is the age at which a person’s retirement benefits (before rounding) equal their “primary insurance amount” (PIA).
What’s the PIA? That is the benefit that retiree receives when they begin receiving retirement benefits at their normal retirement age. If you retire at the NRA, your benefits are not increased because of delayed retirement or reduced because of early retirement.
The NRA depends on when a person is born. For instance, a person born in 1960 or later has an NRA of 67. A person born in 1959, on the other hand, has an NRA of 66 years and ten months.
Do You Get Money When You Retire?
Yes. A person becomes eligible for Social Security benefits when they turn 62, but you only qualify for full monthly benefits when you achieve your NRA.
Say you were born between 1943 and 1954, and you want to retire at the age of 62, which is below the NRA of 66. This means that the federal government will have to support you for more years than they planned. You will only receive 75% of your PIA to compensate for that. Your spouse will only receive 35% of your PIA instead of the 50% she would be entitled to.
Benefits of Early Retirement
- The most obvious benefit of early retirement is that it frees you from the drudgery of work and allows you to do all the things you always said you wanted to do. You can learn new skills, travel the world, spend time with your friends and family, and a host of other things.
- It has been found that early retirement improves a person’s health and life satisfaction. In fact, people who are forced into early retirement due to health issues, typically become better during their retirement.
- Retirement can help you improve your relationships with your loved ones, simply because you have more time and attention to give. This closeness to the people you love will make you happier and deepen your emotional life.
5 Tips For Planning When To Retire
Although early retirement is attractive, it is essential to note that you need to have the financial resources to afford this extended retirement period. For most people, accumulating these resources takes time. However, if you are at the start of your career, you should start thinking about retirement planning to have more options in the future and can retire early if you wish. Here are some retirement planning tips that you will find helpful.
- Know Your Retirement Needs
According to the Department of Labor, you will need around 70% to 90% of your pre-retirement income to maintain your standard of living in your retirement years. Life expectancy in the United States is 81 years for women and 77 years for men. That should tell you how much money you need for your retirement. The healthier you are, the longer you live and the more money you need.
- Start Saving
Your financial wealth determines when you can retire. So you need to have a savings plan and start saving very early in your career. A person becomes eligible for Medicare at 65, and apart from that, you have to realize that Social Security is often not enough money for most people. Therefore, the earlier you want to retire, the more savings you will need. Furthermore, you only become eligible for Medicare at 65, so you will have many out-of-pocket expenses to contend with.
A savings plan will tell you when you should be able to afford to retire. But, of course, the more aggressively you save, the earlier you can retire.
- Contribute to your employer’s retirement savings plan
If your employer offers a retirement savings plan, such as a 401(k), you should enroll in the plan and begin contributing as much as you can. It will reduce your taxes and may lead to your company contributing even more to the plan. In addition, it is straightforward to set up. Thanks to automatic deductions.
If you contribute long enough, your savings and tax deferrals will become something significant.
- Contribute to an Individual Retirement Account
You can fund an Individual Retirement Account (IRA) for as much as $6,000 a year, and once you turn 50, you can contribute even more.
Like retirement savings plans, IRAs come with tax advantages for your contributions and withdrawals. However, the tax deferrals you are entitled to depend on whether you get a traditional IRA or a Roth IRA.
Like employee retirement plans, traditional IRAs are easy to set up. For example, you can instruct your bank to automatically deduct a fixed amount and deposit it into your IRA.
To build wealth, you need to invest at an expected rate of return greater than inflation. Invest in safe, long-term assets such as an equity index that you can hold for an extended period.
You need to stay invested in asset markets. This is as important as saving or contributing to a plan. Wealth is built by accruing assets, and the more assets you have, the richer you are. Invest prudently and with a margin of safety. The simplest and safest investment option is a passive index fund that holds the S&P 500.
In answering the question, “When is the best time to retire?” it’s essential to recognize that the earlier you retire, the more money you need in savings. This is because benefits such as Medicare only kick in at 65, and early retirement means that you get a lower PIA than if you retired at your NRA. Therefore, to retire early, you should plan far in advance and get a financial target based on your retirement needs, start saving, invest in your employer’s retirement savings plan and an IRA, and invest in asset markets. If you follow these simple principles, you will set yourself up for early retirement, or retirement on your terms, without hurting your standard of living.
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