When is the right time to retire? There’s no single answer. The best time to retire depends on your finances, health, access to health insurance, Social Security and pension benefits, and what you want your life to look like after work.

For some people, early retirement is an exciting opportunity to travel, spend more time with family, or pursue new interests. For others, leaving the workforce sooner can create financial challenges, especially if you have fewer years to save and more years to fund.

Nearly 60% of Americans say they want to retire early.¹ But before you make the leap, it’s important to look beyond whether you want to retire and consider whether you’re financially and personally prepared. Here are some key questions to help you decide when retirement may be right for you.

Keep in mind: leaving the workforce earlier than your full retirement age means that you’ll have fewer years to save, and more years to stretch those savings over. Here are some key things to consider as you contemplate your own retirement and begin to plan.

What are the financial risks of retirement?

There’s no sugar-coating it: the risks can be significant, and most people worry about that. Often, I hear questions like:

• How long will I live? Will I run out of money?
• Will I need to find a part- or full-time retirement job to live comfortably?
• Can I afford rising health care costs, especially as I age?
• Where will I turn for long-term care and who will pay for it?
• What are the ways I can stay productive and find meaning?

Whether you’re hoping to retire early by choice—or your employer has made you a buyout offer—it makes good sense to ask these questions right now. Taking time to reflect on your own unique answers can help you anticipate and minimize these risks.

How will I get health insurance before Medicare?

Health insurance is a major expense. If you leave the workforce before you’re eligible to enroll in Medicare, it’s important to compare your options and what they will cost you. As we age, premiums tend to rise. This is especially true for those of us with major health-related issues. 

Ask yourself:

1. Does my spouse or partner have employer-sponsored health insurance?

In many cases, this will be your least expensive option and—if you’re eligible to join—you can sign up as part of a special enrollment period.

✅ Yes
      See if you’re eligible to join and what the new premiums will be.

❌ No
      Go to Question 2.

2.  Can I sign up for continuation coverage through my work?

Many (though not all) employers must offer COBRA coverage, which lasts for 18 months. You’ll be responsible for paying the premiums; there’s no employer offset.

✅ Yes
      Make sure it fits your budget; you’ll pay 102% of your previous plan’s premium.

❌ No
      Go to Question 3.

3.  Can and should I sign up on the insurance marketplace?

You have 60 days after leaving your job to enroll in an ACA Marketplace plan. Plans and prices vary; premium subsidies and tax credits may also be available.  

✅ Yes
      You’ve researched the costs and they fit into your budget.

❌ No
      Your retirement income is low and you instead might qualify for Medicaid.

How will early retirement affect my Social Security and/or pension benefits?

Social Security benefits are another potential concern. If you stop earning a regular income, you also stop contributing to your Social Security retirement benefit account. This may mean lower lifetime payments.

Use the Social Security benefits calculator on the Consumer Financial Protection Bureau's website to determine your potential income benefit if you:

• Retire at age 62
• Retire before your full claiming age
• Retire at your full claiming age
• Delay retirement until age 70 

The same consideration exists for pension plan benefits. Most defined benefit pension plans base retirement benefits on a formula that includes years of service. Fewer years means less money. In the case of an employer buyout offer, ask whether the offer includes compensation for lost years in the benefit formula.

Consideration: Drawing down retirement savings

If you plan to access IRA or qualified plan benefits and you are younger than 59 ½, you may be facing a 10% tax penalty on amounts you withdraw. Remember, too, that whatever you withdraw will be taxable. With the penalty, that may mean you will have an effective tax rate of 30% or more on any withdrawals. That should be part of your decision-making process.

How will you maintain social connections and sense of purpose?

Social connection is vital to our mental health at every age and stage. How much will you miss your workmates and the interaction you share? Most people do not maintain connections with coworkers after leaving the job. Do you have a support network to help you through the adjustment?

Consider, too, what you will do with your newly free time. How will you spend your days? Do you have a plan to remain active? Many people plan to work part-time to help provide money and fill some of the extra time during “retirement” days. Doing this may also help provide beneficial social engagement.

The bottom line

No matter your age, the decision to retire (or not) is highly personal. How does the idea make you feel? Can you afford to pay for health insurance if you leave the workforce before you’re eligible for Medicare? Are you comfortable leaving Social Security money on the table if you retire before your full benefit age? Will you be fine paying taxes and penalties on early 401(K) or other defined benefit withdrawals? Do you have ongoing outlets for social connections and ways to spend your time?

If many of your answers are “yes,” you may be ready to make the leap. If more are “no,” you may want to delay retirement for a bit if you can. Sometimes, even a little more time in the workforce can make a big difference in how you live later on.

For job-hunting help, see our 7 effective job-search strategies for older adults, or learn about the Senior Community Service Employment Program (SCSEP). 

Want more retirement planning tips?

• Get 7 tips to max out your Social Security benefits.
• Discover 5 simple ways to build your retirement confidence.
• Explore 6 common financial misconceptions people make about retirement.

Source

1. The Financial Brand. Magical Retirement Thinking: Most Americans Want to Retire Early, But Few Have Plans to Get There. August 7, 2024. Found on the internet at https://thefinancialbrand.com/news/financial-education/magical-retirement-thinking-most-americans-want-to-retire-early-but-few-have-plans-to-get-there-180422