It's natural to view retirement as the finish line of a marathon. Once the end of a long career of hard work starts to come within sight, you can't wait for the moment when you can take it easy.
However, when it comes to planning for retirement, the race doesn't really have a clearly defined finish line the way a marathon would. After all, retirement is not just the end of having to amass retirement savings -- it's the start of another phase. The minute you finish running one race, you start another.
That's important to understand as you decide when to retire, because the sooner you end the career part of the race, the tougher the subsequent part will be. So, before you decide when to retire, there are some things you should know that could make it easier on you in the long run.
What to consider in preparation for retirement
You should understand these general concepts as you start getting ready for retirement:
- Once you give up your income, it will be tough to get it back
In most careers, people are able to steadily work their way up to higher pay levels over time. Once you retire, you may find it difficult to get another job if you have second thoughts, much less come back at your previous pay level. Retirement may not necessarily be final, but it can have an irreversible impact on your marketability and earning power.
- You may be cutting short your prime saving years
Tax laws let you make extra contributions to 401(k) plans and IRAs once you reach age 50. Between that and generally higher earnings, your late career may be the opportunity to save the most money for retirement. Think twice before cutting those prime retirement savings years short.
- Your job benefits may have considerable value
Healthcare, retirement contributions and other employee benefits have a definite economic value. If your company has good benefits, you are giving up much more than your salary when you retire. Think about the economic value of these benefits and what it will cost to replace them.
- Collecting social security earlier means a lower annual benefit
You can start collecting social security as early as age 62, and this may help you retire a little earlier. However, each year you wait up until age 70 will increase the amount of your annual benefit, so weigh that against the appeal of an earlier retirement.
- The earlier you retire, the more years of retirement you'll have to fund
You don't know how long you're going to live, but you can control when you retire -- and that can add or subtract years from your eventual retirement period. It takes more money to fund a longer retirement, so waiting a couple years could help you continue saving for retirement and, therefore, make retirement more affordable.
Use our retirement calculator to see how much your retirement savings should grow
How to plan for retirement
Once you recognize the retirement dynamics described above, you can start planning not just how much money you will need to retire, but when to retire as well. Here are some steps to help you plan:
- See what kind of budget your savings will support
Use a retirement calculator that can translate total savings into annual retirement income. See if you have saved enough to afford the retirement lifestyle you envision, and test what impact waiting a couple years would have.
- See if you can downshift your job responsibilities
This doesn't have to be an all-or-nothing decision. If you are ready to slow down, talk to your employer to see if there is a way you could stay on in a reduced role, perhaps with less management responsibility or by working part time.
- Consider your social security options
The Social Security Administration has a calculator that can help you estimate your benefits. You can use this to see the impact of holding off for a couple years before collecting social security benefits.
- Adjust your asset allocation
If you feel you are close to retirement, you should consider becoming somewhat more conservative in your mix of growth vs. stable assets to guard against a sudden market downturn radically altering your plans.
- Create a liquidity plan
It's one thing to have a retirement nest egg; it's another to have money available when you need it. There are tax consequences to think of, plus you should try to avoid having to force sales of long-term securities to meet short-term liquidity needs. Consider putting retirement plan distributions into a CD ladder set up to provide liquidity when you need it.
You may be aching to take that leap into retirement; but at this crucial point of your career, be sure to look before you leap.
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