This is an important question that we are asked often. And while retirement isn’t one size fits all, we’ll give you some scenarios to consider that may be right for you.
Oftentimes, the desire to retire is based on a financial assessment. The market can influence your decision; the amount in your nest egg could play a part; and the timing of Social Security benefits can impact your decision to retire. Start by aligning your financial goals with the lifestyle you’d like live in retirement.
First, you’ll want to outline your sources of income, including Social Security benefits, pensions, wages, and any earned interest, dividends or IRA withdrawals. Next, you’ll want to take an inventory of your expenses and capture a realistic view of what you’ll need to live in the days following retirement. You’ve worked a lifetime to save for this moment, so your savings and assets may look ample, but remember, retirement could last up to 30 years!
In addition to financial positions, your decision to retire could be affected in other ways as well, such as life expectancy, marital status, and even gender, since women tend to outlive men. And in some cases, people choose to work well into their 70s because they find enjoyment in their work.
Typically, when you decide to stop working full time is the time you decide to start collecting Social Security benefits. You can start claiming as early as 62, but your monthly checks will be reduced by about 30 percent. Full retirement age is between 65 and 67, depending on the year you were born. Everyone born after 1960 will reach full retirement age at 67 in which you’ll be eligible to claim 100 percent of your benefits. If you can wait even longer, say until 70, your monthly benefits will increase to 132 percent. It’s always best to let your money build, unless there’s a specific reason that warrants an early claim. By postponing drawing benefits, you won’t adversely affect them.
Take a look at SmartAsset’s Social Security Calculator and plug in your information for a monthly benefits projection. Let’s say a 45-year-old today makes $100,000 annual income and decides to retire at 67. They would begin claiming about $50,000 a year (assuming they have worked for 35 years). If the person requires about the same income in retirement, the other $50,000 will need to be taken out of their retirement savings portfolio. So, how much do you need in investments to make up the difference throughout the longevity of retirement?
Most financial advisors go by the 4% rule, which refers to the withdrawal rate. This rule says a retiree can start withdrawing 4% from their portfolio during the first year of retirement, increasing the withdrawal each year to cover inflation for 30 years. In this situation, the retiree will need $1,250,000 in their investment portfolio to withdraw $50,000 the first year. Please note: The 4% rule isn’t always a surefire philosophy to anticipate a desired outcome because market performance will determine return on investment, which will vary from year to year. Studies have shown this rule is a general, overarching guideline in which to strive, but be sure to work with an advisor on a more precise method based on your personal situation.
It’s also important to keep in mind that Social Security benefits and investment withdrawals may be subject to federal and state income tax.
If you would like to put together a more robust retirement plan, including tax-advantaged withdrawal strategies, please contact our office to get started.
Stuart Steinberg, CFP, CPA, MBA has been working with families and their money situations since 1988. He can be reached at 61 Water Street, #2, Newburyport, MA 01950 and at (978)864-9581 and stu@eaglerockfinancial.net.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.
Securities and Financial planning offered through LPL Financial, a registered investment advisor. Member FINRA www.finra.org / SIPC www.sipc.org.