Wednesday, June 20 , 2018, 12:00 pm | Overcast with Haze 65º

 
 
 
Your Health
A Noozhawk partnership with Cottage Health

Deciding When to Retire: When Timing Becomes Critical

There are several factors to consider, and each could affect the others as part of an overall income plan

Deciding when to retire may not be one decision but a series of decisions and calculations.

For example, you’ll need to estimate not only your anticipated expenses, but also what sources of retirement income you’ll have and how long you’ll need your retirement savings to last. You’ll need to take into account your life expectancy and health as well as when you want to start receiving Social Security or pension benefits, and when you’ll start to tap your retirement savings. Each of these factors may affect the others as part of an overall retirement income plan.

Thinking About Early Retirement?

Retiring early means fewer earning years and less accumulated savings. Also, the earlier you retire, the more years you’ll need your retirement savings to produce income. And your retirement could last quite awhile. According to a National Vital Statistics Report, people today can expect to live more than 30 years longer than they did a century ago.

Not only will you need your retirement savings to last longer, but inflation will have more time to eat away at your purchasing power. If inflation is 3 percent a year — its historical average since 1914 — it will cut the purchasing power of a fixed annual income in half in roughly 23 years. Factoring inflation into the retirement equation, you’ll probably need your retirement income to increase each year just to cover the same expenses. Be sure to take this into account when considering how long you expect (or can afford) to be in retirement.

Current life expectancy estimates are, at birth, 75.7 for men and 80.6 for women, and at age 65, 82.3 for men and 85 for women (National Vital Statistics Report, Vol. 59, No. 4, March 2011).

There are other considerations as well. For example, if you expect to receive pension payments, early retirement may adversely affect them. Why? Because the greatest accrual of benefits generally occurs during your final years of employment, when your earning power is presumably highest. Early retirement could reduce your monthly benefits. It will affect your Social Security benefits, too.

Also, don’t forget that if you hope to retire before you turn 59½ and plan to start using your 401(k) or IRA savings right away, you’ll generally pay a 10 percent early withdrawal penalty plus any regular income tax due (with some exceptions, including disability payments and distributions from employer plans such as 401(k)s after you reach age 55 and terminate employment).

Finally, you’re not eligible for Medicare until you turn 65. Unless you’ll be eligible for retiree health benefits through your employer or take a job that offers health insurance, you’ll need to calculate the cost of paying for insurance or health care out-of-pocket, at least until you can receive Medicare coverage.

Delaying Retirement

Postponing retirement lets you continue to add to your retirement savings. That’s especially advantageous if you’re saving in tax-deferred accounts, and if you’re receiving employer contributions. For example, if you retire at age 65 instead of age 55, and manage to save an additional $20,000 per year at an 8 percent rate of return during that time, you can add an extra $312,909 to your retirement fund. (This is a hypothetical example and is not intended to reflect the actual performance of any specific investment.)

Even if you’re no longer adding to your retirement savings, delaying retirement postpones the date that you’ll need to start withdrawing from them. That could enhance your nest egg’s ability to last throughout your lifetime.

Postponing full retirement also gives you more transition time. If you hope to trade a full-time job for running your own small business or launching a new career after you “retire,” you might be able to lay the groundwork for a new life by taking classes at night or trying out your new role part-time. Testing your plans while you’re still employed can help you anticipate the challenges of your post-retirement role. Doing a reality check before relying on a new endeavor for retirement income can help you see how much income you can realistically expect from it. Also, you’ll learn whether it’s something you really want to do before you spend what might be a significant portion of your retirement savings on it.

Phased Retirement: The Best of Both Worlds

Some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age, while you continue to work part-time for the same employer.

Phased retirement programs are getting more attention as the baby-boomer generation ages. In the past, pension law for private-sector employers encouraged workers to retire early. Traditional pension plans generally weren’t allowed to pay benefits until an employee either stopped working completely or reached the plan’s normal retirement age (typically age 65). This frequently encouraged employees who wanted a reduced workload but hadn’t yet reached normal retirement age to take early retirement and go to work elsewhere (often for a competitor), allowing them to collect both a pension from the prior employer and a salary from the new employer.

However, pension plans now are allowed to pay benefits when an employee reaches age 62, even if the employee is still working and hasn’t yet reached the plan’s normal retirement age. Phased retirement can benefit both prospective retirees, who can enjoy a more flexible work schedule and a smoother transition into full retirement; and employers, who are able to retain an experienced worker. Employers aren’t required to offer a phased retirement program, but if yours does, it’s worth at least a review to see how it might affect your plans.

Check Your Assumptions

The sooner you start to plan the timing of your retirement, the more time you’ll have to make adjustments that can help ensure those years are everything you hope for. If you’ve already made some tentative assumptions or choices, you may need to revisit them, especially if you’re considering taking retirement in stages.

And as you move into retirement, you’ll want to monitor your retirement income plan to ensure that your initial assumptions are still valid, that new laws and regulations haven’t affected your situation, and that your savings and investments are performing as you need them to.

— Anita Peca, CPA, PFS, represents Walpole & Co LLP, 70 Santa Felicia Drive in Goleta. Click here for more information, call 805.569.9864 x127 or email .(JavaScript must be enabled to view this email address).

Support Noozhawk Today

You are an important ally in our mission to deliver clear, objective, high-quality professional news reporting for Santa Barbara, Goleta and the rest of Santa Barbara County. Join the Hawks Club today to help keep Noozhawk soaring.

We offer four membership levels: $5 a month, $10 a month, $25 a month or $1 a week. Payments can be made through PayPal below, or click here for information on recurring credit-card payments.

Thank you for your vital support.

Become a Noozhawk Supporter

First name
Last name
Enter your email
Select your membership level
×

Payment Information

You are purchasing:

Payment Method

Pay by Credit Card:

Mastercard, Visa, American Express, Discover

Pay with Apple Pay or Google Pay:

Noozhawk partners with Stripe to provide secure invoicing and payments processing.

  • Ask
  • Vote
  • Investigate
  • Answer

Noozhawk Asks: What’s Your Question?

Welcome to Noozhawk Asks, a new feature in which you ask the questions, you help decide what Noozhawk investigates, and you work with us to find the answers.

Here’s how it works: You share your questions with us in the nearby box. In some cases, we may work with you to find the answers. In others, we may ask you to vote on your top choices to help us narrow the scope. And we’ll be regularly asking you for your feedback on a specific issue or topic.

We also expect to work together with the reader who asked the winning questions to find the answer together. Noozhawk’s objective is to come at questions from a place of curiosity and openness, and we believe a transparent collaboration is the key to achieve it.

The results of our investigation will be published here in this Noozhawk Asks section. Once or twice a month, we plan to do a review of what was asked and answered.

Thanks for asking!

Click Here to Get Started >

Reader Comments

Noozhawk is no longer accepting reader comments on our articles. Click here for the announcement. Readers are instead invited to submit letters to the editor by emailing them to [email protected]. Please provide your full name and community, as well as contact information for verification purposes only.

 

Special Reports

Heroin Rising
<p>Lizette Correa shares a moment with her 9-month-old daughter, Layla, outside their Goleta home. Correa is about to graduate from Project Recovery, a program of the Santa Barbara Council on Alcoholism & Drug Abuse, and is determined to overcome her heroin addiction — for herself and for her daughter. “I look at her and I think ‘I need to be here for her and I need to show her an example, I don’t want her to see me and learn about drugs’,” she says.</p>

In Struggle to Get Clean, and Stay That Way, Young Mother Battles Heroin Addiction

Santa Barbara County sounds alarm as opiate drug use escalates, spreads into mainstream population
Safety Net Series
<p>Charles Condelos, a retired banker, regularly goes to the Santa Barbara Neighborhood Clinics for his primary care and to renew his prescription for back pain medication. He says Dr. Charles Fenzi, who was treating him that day at the Westside Clinic, and Dr. Susan Lawton are some of the best people he’s ever met.</p>

Safety Net: Patchwork of Clinics Struggles to Keep Santa Barbara County Healthy

Clinics that take all comers a lifeline for low-income patients, with new health-care law about to feed even more into overburdened system. First in a series
Prescription for Abuse
<p>American Medical Response emergency medical technicians arrive at Santa Barbara Cottage Hospital with little time to spare for victims of prescription drug overdoses.</p>

Quiet Epidemic of Prescription Drug Abuse Taking a Toll on Santa Barbara County

Evidence of addiction shows an alarming escalation, Noozhawk finds in Prescription for Abuse special report
Mental Health
<p>Rich Detty and his late wife knew something was wrong with their son, Cliff, but were repeatedly stymied in their attempts to get him help from the mental health system. Cliff Detty, 46, died in April while in restraints at Santa Barbara County’s Psychiatric Health Facility.</p>

While Son Struggled with Mental Illness, Father Fought His Own Battle

Cliff Detty's death reveals scope, limitations of seemingly impenetrable mental health system. First in a series