The retirement question you need to answer

If you're in your 50s or 60s, deciding when and how to leave the workforce for good is one of the most important decisions you'll face during the rest of your life. You'll want to consider and balance many factors when making a thoughtful choice. Fortunately, help is available from the Society of Actuaries (SOA), which recently published a brief titled "When Should I Retire?" It's part of the organization's "Managing Retirement Decisions" series.

Its opening sentences are very appropriate: "Advertisements frame retirement as an extended vacation, brimming with fulfillment of life-long passions and dreams. But for many people, retirement is more like driving on a long trip with question marks posted in places where road signs would help." 

The SOA then offers a series of questions that serve as those needed road signs. In effect, the questions provide a useful checklist:

  • Do I have enough money
  • What will be the impact of working one more year? Two more years?
  • When is best for my spouse and I to claim Social Security benefits?
  • Have I identified passions and things I wish to pursue in retirement? Is special travel on my agenda? 
  • Is my spouse retired? Do we have dreams we wish to pursue together?
  • Does my spouse need support and help? Do other family members wish to have support and care? 
  • What are my preferences regarding work, retirement and a different set of activities?
  • For how long of a period do I need to plan?
  • What's likely to change during retirement, and how does that affect my plan? 
  • Where will I get medical benefits? 
  • Are plans in place, or in process, regarding family members or family members needing care? 
  • Have I built enough flexibility into my plans? 

The brief provides insights into many of these questions. Specifically, it offers two useful examples of people who are trying to determine when to retire.

First is a 62-year-old single woman who has a 401(k) balance of $242,567. She's analyzing the impact of retiring at age 62, 64 or 66.

  • If she retires at 62, starts her Social Security benefit immediately and buys a lifetime monthly annuity that increases for inflation, her total monthly income from Social Security and the annuity would be $1,701.
  • If she continues working and contributing to her 401(k) plan until 64 and then retires, her total monthly income from Social Security and the annuity would be $1,989, a 17 percent increase in income compared to retiring at 62.
  • If she continues working and contributing to her 401(k) plan until 66 and then retires, her total monthly income from Social Security and the annuity would be $2,334, a 37 percent increase compared to retiring at 62.

Second is a married couple in which the husband is 64 and the wife is 62. Their combined 401(k) balances are $511,339. They're analyzing the impact of retiring when the husband is age 64, 66 or 68.

  • If they both retire when the husband is 64 and the wife is 62, start their Social Security benefits immediately and each buys a lifetime monthly annuity that increases for inflation, their total combined monthly income from Social Security and the annuities would be $3,761.
  • If they both continue working and contributing to their 401(k) plans until the husband is 66 and the wife is 64 and then both retire, their total combined monthly income from Social Security and the annuities would be $4,412, a 17 percent increase compared to retiring at 64/62.
  • If they continue working and contributing to their 401(k) plans until the husband is 68 and the wife is 66 and then they both retire, their total combined monthly income from Social Security and the annuities would be $5,206, a 38 percent increase compared to retiring at 64/62.

These examples illustrate the type of analyses that older workers can use to decide when to retire. And they illustrate the power of delaying retirement. However, the results depend highly on individual facts and circumstances. 

Older workers who need help with this type of analysis may want to find a qualified retirement adviser who has their best interests at heart.

It will take a lot of time and effort to make careful decisions about your retirement. That's OK, since you're planning for the most important part of your life -- the rest of it.  You'll be glad you made this effort when you reach your 80s and 90s, and you don't have to worry about running out of money.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.