Retirement Planning: Is There a Best Time?

Life expectancy and health care needs

While you can never know how long you will live, you can shake the family tree for an educated guess. If most of your relatives are long-lived, the odds are that you will be too. Social Security estimates the life expectancy for men reaching age 65 on April 1, 2023, is age 84.1; for women, it’s age 86.8. You may choose to delay your retirement age to increase savings for that long haul.

On the other hand, health issues may force you to retire early. Health care remains one of the biggest expenses for retirees, potentially totaling about 15% of retirement expense. One study estimated that a 65-year-old couple retiring in 2022 could expect to spend an average of $315,000 on health care and medical expenses in their retirement. Perhaps more worrisome is that many Americans have wildly underestimated what those costs can be.

Another consideration is that when you retire, you not only lose a paycheck—you also may lose employer-provided health insurance. Although there are some exceptions, most people are not eligible for Medicare until age 65. If, for example, you retire at 62 for health reasons, how do you fill that health insurance gap until age 65?

Your employer should know whether you will have health insurance benefits after you retire or if you are eligible for temporary continuation of health coverage. If your spouse is employed, you may be able to switch to their health insurance. Otherwise, your best bet until age 65 may be private insurance versus the health insurance marketplace.

Savings and expenses

More than an ideal age, there may be an ideal number. The median American has around $65,000 in retirement savings but believes they will need at least at least $1.25 million to retire comfortably. That is quite a disparity.

It’s best to periodically review what you’re saving to be certain you’ll meet your goals. Tally the amounts in investments, an IRA or 401(k), and what you may receive from an annuity or pension benefits. You can get an accurate estimate by age of future monthly Social Security benefits by creating a personal account to access the calculator on the Social Security website. The sum of all those can give you a credible tally of your annual retirement income stream.

Next, determine how much money you would need annually to fund your lifestyle if you were to retire today. A rule of thumb is to multiply that number by 20 (for the average number of years you may live beyond age 65). For example, if your number is $100,000 a year, you would need $2 million in today’s retirement dollars. That is before factoring in inflation.

Now tally expenses, such as housing, health care, food, taxes, leisure, and travel. Use what you spend today, but be aware that as people age, spending patterns are likely to change. Starting at age 55, spending tends to increase slightly, as some younger retirees travel or take on new pursuits. Around 65, there potentially is a significant drop in overall spending.

Finally, will you be supporting children or grandchildren far into the future? Are education costs and student loans ongoing or paid off?

Inflation and volatility

Are you accounting for inflation?  Generally, almost everything—from big-ticket items like houses to small things like a pack of gum—goes up in value over time. Your income will likely have to increase year over year just to maintain the same standard of living. At an inflation rate of 4% a year, prices double in just 18 years and at 3% a year, prices will double in about 24 years.

Volatility in prices and volatility in markets will always be with us, but they may not necessarily force you to bench retirement plans, provided that your investments are well-managed, and risk is diversified. A market shift up or down, though, may push you to adjust spending expectations.

Is there enough savings to live the way you want?

What does retirement look like to you—will you be relaxing on the patio or sailing the seven seas? Maybe you’re OK living frugally, or are you thinking about spoiling the grandkids or buying that lakefront house you’ve had your eye on?

Where you want to live is also a consideration. If you hope to move, you’ll need to plan your expenses around the cost of living in that location. How far is it from family, and how often will you plan to visit?

Do you really want to retire?

If you enjoy what you are doing, why stop? With more companies allowing remote or flexible work arrangements, you may also have the time for travel or the other things you always talked about doing in your later years while still earning a salary and relying less on your savings. And if your latest year of earnings is one of your highest years, your Social Security benefit will be recalculated higher.

You can also choose to retire from one career but decide to start another or devote more time to volunteer and charity work.

Continuing to work does not prevent you from also taking Social Security benefits. But if you are between age 62 and full retirement age and earn more than the yearly earnings limit, your benefit will be reduced. Beginning with the month you reach full retirement age, your earnings no longer reduce your benefits, no matter how much you earn.

Continuing to work also extends the time for you to max out contributions to a 401(k) or IRA. Penalty-free withdrawals can begin at age 59½; Required Minimum Distributions (RMDs) begin at age 73.