Calculating your earliest retirement age involves many factors, but it boils down to having a concrete plan in place. By balancing your yearly planned expenses against your income from all sources, you can take steps to be assured of a comfortable retirement.
In this case study, we will evaluate the considerations a couple should be using to determine if they can retire now or if they should wait until they reach 65. The husband is 60, and his wife is 62. Both are working and have each made $100,000 per year for the past 10 years. They both have pensions and have been saving into their respective retirement accounts.
Her 401(k): $1.25 Million
His 401(k): $1.1 Million
Her Pension at 65: $1,300/month
His Pension at 65: $1,200/month
His Social Security beginning at 62: $2,400
His Social Security beginning at 67: $2,700
Her Social Security beginning at 62: $2,500
Her Social Security beginning at 67: $2,800
Primary House: $650,000
Mortgage: $50,000 (monthly payment $1,500)
Beach Condo: $450,000
Mortgage: $150,000 (monthly payment $1,200)
When we target a specific retirement age, there are a few key components that hold the most weight in the conversation. The first, and probably most important, is how much an individual or couple will spend per month or per year. A lot of people haven’t put much thought into this – they might have a budget and they probably have some retirement savings, but they have not considered how the two will work in tandem once they do retire. To make this part of the conversation easier, we walk clients through their cash flow and allocate expenses into buckets of “needs” versus “wants”. The next piece to look at is how much of your money is in contractual dollars versus variable dollars: pensions, social security, and cash value life insurance versus traditional investments that vary based on the market. In this example, at retirement the couple will have roughly $6,500-$7,000 coming in per month between their pensions and social security, depending on when they begin drawing on it. The third important consideration is what the tax consequences of drawing on retirement savings: how much is held in taxable accounts versus tax-deferred accounts.
This case study appears simplistic, but there are many factors that can affect an individual or couple’s success in maintaining their chosen quality of life (in this case, spending $10,000 per month) through retirement. This couple will not receive their pension until age 65, and their Social Security will be reduced if they begin drawing on it before full retirement age. If they were to retire early, for the first few years they would have to pay for their lifestyle out of their savings, and without health insurance through their employers, they would also have to pay for private health insurance until they qualify for Medicare at age 65.
In this case, given these factors, retiring early is possible but probably not advisable because of the impact it would have on their overall plan. Dipping into their savings at the beginning of retirement, before they have access to their pensions and regular Social Security, will have a long-term impact. If this couple had started their financial planning sooner, they could have moved more money into appropriate buckets to allow them to bridge the gap in income from age 63 to age 65 or even 67.