If you are going to do it - retire, that is - you might as well do it at the right age. And doing it at the right age, according to the authors of a soon-to-be published paper, involves a bit of homework.
Retiring at the optimal age should not be left to chance, according to Kenn
Tacchino, a professor of taxation and financial planning at Widener University,
and Patricia Tacchino, co-authors of a soon-to-be-published paper in Benefits
Quarterly .
Rather, choosing a retirement age needs to be a rational decision that accounts for a variety of confusing and competing consideration, the Tacchinos wrote. And to reach a rational decision, the authors say, would-be retirees would benefit from using a systematic checklist of issues to make the optimal choice.
Not surprisingly, the Tacchinos have created such a checklist. But it’s no ordinary checklist. It’s a checklist of some 25 factors that would-be retirees can use to reach what the authors say would be a logical and rational decision about the optimal retirement age.
This approach considers financial feasibility of retiring, a would-be retiree’s ability to continue working, the psychological factors surrounding the retirement decision, and the would-be retiree’s personal situation.
So what’s on the checklist? Well, the whole paper is 5,500-plus words and 25 pages long, but we’ll do our best to capture the essence of it (in a manner edited for average would-be retirees).
By the way, by applying weight or attaching value to each item in the checklist, you can hone the decision process to its logical conclusion (retire by choice, keep working by choice, retire by necessity, or keep working by necessity) and avoid irrational choices, the author wrote.
Also, the Tacchinos recommend that you use this checklist at various stages of your life: in the middle of your career, 10-15 years away from retirement, and when retirement is imminent.
1. Calculate available retirement income and assess adequacy
Determine how much income you’ll get in retirement from all available sources (pensions, Social Security, retirement accounts, work and the like). If it doesn’t give you your desired lifestyle given whatever withdrawal strategy you plan to use, consider not retiring. Not retiring when you don’t have enough income to support your desired lifestyle isn’t necessarily a bad thing by the way. By the way, it’s quite possible that if you don’t have the income to maintain your lifestyle in retirement, you should still examine the other 24 factors.
Also, the authors say, not retiring serves four primary functions: One it preserves your assets; two, it gives you a chance to keep building your nest egg; three, it shortens the period of time that you’ll be drawing down your assets; and four, it increases the monthly income you’ll get from Social Security, provided you delay claiming it.
2. Consider life expectancy, expenditures, and risks
Consider all the risks that you might face in retirement and how you’ll mitigate those risks, be it the risk of outliving your assets, or inflation or sequence of return risk. If you haven’t addressed those risks, you might consider not retiring until you do. Of note, the Institutional Retirement Income Council this week published a brief that quantifies six major risks that both retirees and employees approaching retirement face in retirement.
3. Perform analysis to model plan functionality
How sound is your plan? Is there a 90% chance that it work, or just a 50% chance? If nothing else, you want to get a sense of the trade-offs and choices you have to make to make your plan as sound as possible.
4. Evaluate the impact of your debt
If you have a lot of debt, especially mortgage debt as you head into retirement, it could affect your ability to increase the amount of money that you save for retirement. What’s more, you shouldn’t retire if you don’t have sufficient income to service your debt, especially if you have a home-equity loan that converts from interest-only payments to principal-and-interest payments while you’re in retirement.
5. Determine the availability of health insurance
It might seem obvious, but if you don’t have health insurance coverage, consider delaying retirement, the authors said. What’s more, consider delaying retirement until you’ve earmarked either assets or income for out-of-pocket health care expenses in retirement. As various studies have shown the net present value of health care costs range anywhere from $250,000 to $900,000 for a 65-year-old couple retiring today. Of course, you should consider - before making your decision to retire or not - all sources of health insurance, including employer-sponsored retiree health insurance, spousal insurance, COBRA, Medicare and Medicaid.
6. Examine the impact of various Social Security claiming-age options
Make no mistake about this one. There are plenty of Social Security strategies, many of which can increase optimize your monthly benefit and overall benefit. One bit of advice as you contemplate when to retire and when to take Social Security: Distinguish between the Social Security claiming age and the optimal retirement age, wrote the Tacchinos. The two are not inextricably linked. In other words, the ideal age at which to claim Social Security is a different and separate decision from when to retire, the Tacchinos wrote.
So be sure to examine not just the best age to retire, but also the best age (or ages if you’re married) to claim Social Security.
7. Assess the type of retirement plan and the plan’s features
Some, though not all workers, have lots of employer-sponsored pension plans with different features, different distribution options, and contribution or benefit formulas. Knowing what you have is part of weighing your optimal retirement age.
8. Analyze the financial status of investments
So, here’s the deal with this: If you retire prior or during a down market, you stand a good chance of running out of money. They call this, in some circles, the sequence of return risk. For some, it means reducing the percent of money you might put in risky assets and delaying retirement.
For those who think the stock market might rise in the five to 10-year period around retirement it might be OK to retire.
9. Examine earnings prospects if your remain employed
What do you stand to earn if you keep working vs. the joy you would get from being retired, enjoying a life of leisure? That’s the trade off that must be evaluated. “Significant opportunity cost reduces the probability of retiring,” the authors wrote. If you stand to earn a significant salary and/or receive nonqualified deferred compensation by working, then you are more likely to keep working, wrote the Tacchinos. Of course, working might also increase the desire to retire.
10. Appraise the availability of phased retirement
You might be more likely to select a retirement age if you knew that you could ease into retirement, a phased retirement so to speak. In other words, the authors wrote that retiring isn’t always about leaving the workforce and relying on income from a pension or Social Security.
It could also mean working part time or seasonally, presuming of course there are such job opportunities.
11. Factor in early retirement incentives
If you’re likely enough to get a golden handshake, God bless. “But don’t be blinded by offers that are desirable in the short term, but could leave (you) short of financial resources in the long term,” the authors wrote.
Consider too negotiating sweeteners (maybe retiree health insurance or a bigger severance package) long before your employer offers you a retirement incentive package. “Employers may be eager to release a long-service employee who is relatively higher paid in favor of a young employee who is not,” wrote the Tacchinos.
12. Consider your willingness to compromise financial goals
There’s the lifestyle you want in retirement and the lifestyle you might have to settle for given your resources. If you’re willing to reduce your standard of living, you might be able to retire at your ideal age vs. delaying it. And, for what it’s worth, studies have shown that satisfaction in retirement tends to be high regardless of income assuming you retired on your terms, are in good health, and are married.
13. Assess whether you are and/or will be healthy enough to continue working
If you’re not in good health, you may have to retire involuntarily and it’s unlikely to be your optimal retirement age. And this is something that you might have to factor into your plans or at least your possible scenarios.
14. Examine whether your situation will require caregiving for a loved one
In other cases, it’s not you who’s in bad health, but a spouse or loved one for whom you have to provide caregiving. The authors note that 20% of those who leave the workforce earlier than they planned to did so to care for a loved one.
And even if you don’t leave the workforce, it still might cost you: You might have to hire a caregiver, for instance.
Yes, you might be able to take advantage of the Family and Medical Leave Act, but that’s not a long-term solution. Consider, too, if you don’t have it, buying long-term care insurance to cover this kind of expense or commitment. Having a policy in place could help you identify your optimal retirement age.
15. Are you concerned that perceived future health limitations will interfere with personal retirement goals?
Plenty of folks they should retire while they are still healthy, and can enjoy retirement. But don’t let fears of impending health problems dictate an earlier retirement, the Tacchinos wrote. “Some (people) choose a retirement age based on their perception that they only have so many good years left and they want to enjoy some time with good health in retirement.”
Remember: Research has shown that your perception of your health will typically have a stronger effect on the retirement age decision than the actual, medically determined status of health, the authors wrote.
16. Evaluate whether you will need to retire in order to raise grandchildren
About 6.3% of children under the age of 18 are living with grandparents. Is this in your future? If so, consider how you might have to keep working to afford to raise grandchildren or consider how you might have to retire to care for the grandkids, the Tacchinos wrote.
17. Appraise the likelihood of your job terminating suddenly and prematurely
What are the odds of you being downsized or losing your job for other reasons. Take a look at your employer and consider whether you are at risk of losing your job. By way of background, many older workers either have their position or shift abolished, according to AARP’s Public Policy Institute. In other cases, there’s not enough work, and in still others a plant or company closed down or moved.
18. Assess job satisfaction and potential changes in job satisfaction
Being unhappy with your work is not the best way to determine your ideal retirement age, but it’s certainly a factor. Try to get a handle on whether you are fixing to tell your boss to take his job and shove it or whether your employer is trying to get you to leave.
19. Understand and broaden your expectation of how to determine an appropriate retirement date
“Perhaps the trickiest and most subjective set of considerations to analyze centers around (your) own personal psyche,” the authors wrote. “In essence, (your) mind-set is ultimately responsible for driving the desired retirement age.”
For instance, you might say I plan to retire when I’m 65, the years since your birth. Instead, you might want to examine your retirement age in others ways: years until death (your remaining life expectancy) or your work/retirement ratio (75% work/25% retirement), the authors wrote.
“Why should chronological age be the deciding factor?” the authors asked.
20. Evaluate your ability to adapt to retirement
What’s your self-efficacy? Do you think that you will be able to cope with the changes that come with retirement? If you can predict your level of comfort, if you think that you will be able to adapt, that’s a good thing because this is a major factor in determining your retirement age, the Tacchinos wrote.
“One researcher theorized that some who view themselves as unable to adjust to retirement either recognize their own need to work to feel good about themselves or ascribe to the belief that retirement is a time of dissatisfaction, isolation, and decline,” the authors wrote.
21. Assess the identity, fellowship, and status you receive from working
It’s quite possible that your work defines who you are, that you derive a sense of self-worth from work and that you might find it hard to retire. In other cases, you might want to keep working because you enjoy and want to keep busy.
“Consider that while most (people) value the retirement lifestyle, they may not realize what they are losing by ending the work lifestyle,” the authors wrote. “It is important for (people) to discern exactly what the loss of their main job will do to their sense of self. Unfortunately we often do not realize what we have until we no longer have it.”
22. Determine your willingness to work
If you’re unsatisfied with the day-to-day grind of working, well, that’s going to drive your decision to retire - optimal time or not.
23. Determine your desire for leisure
And if what you want is a life of leisure, this too might drive your decision to retire early, as well. Just remember: “It is important for (you) to imagine the daily routine brought about by a lifestyle of leisure,” the authors wrote. “Filling up free time with meaningful activity requires thought and planning.”
24. Weigh the balance between work satisfaction and retirement satisfaction
According to the Tacchinos, the difference between your current satisfaction with work and your anticipated satisfaction in retirement predict your anticipated retirement age.
25. Examine the potential for joint retirement
And lastly, you are likely not alone in this decision to retire. The balance between work and retirement may be related to your ability to retire with your spouse or not, the authors wrote.
READ MORE
Rather, choosing a retirement age needs to be a rational decision that accounts for a variety of confusing and competing consideration, the Tacchinos wrote. And to reach a rational decision, the authors say, would-be retirees would benefit from using a systematic checklist of issues to make the optimal choice.
Not surprisingly, the Tacchinos have created such a checklist. But it’s no ordinary checklist. It’s a checklist of some 25 factors that would-be retirees can use to reach what the authors say would be a logical and rational decision about the optimal retirement age.
This approach considers financial feasibility of retiring, a would-be retiree’s ability to continue working, the psychological factors surrounding the retirement decision, and the would-be retiree’s personal situation.
So what’s on the checklist? Well, the whole paper is 5,500-plus words and 25 pages long, but we’ll do our best to capture the essence of it (in a manner edited for average would-be retirees).
By the way, by applying weight or attaching value to each item in the checklist, you can hone the decision process to its logical conclusion (retire by choice, keep working by choice, retire by necessity, or keep working by necessity) and avoid irrational choices, the author wrote.
Also, the Tacchinos recommend that you use this checklist at various stages of your life: in the middle of your career, 10-15 years away from retirement, and when retirement is imminent.
1. Calculate available retirement income and assess adequacy
Determine how much income you’ll get in retirement from all available sources (pensions, Social Security, retirement accounts, work and the like). If it doesn’t give you your desired lifestyle given whatever withdrawal strategy you plan to use, consider not retiring. Not retiring when you don’t have enough income to support your desired lifestyle isn’t necessarily a bad thing by the way. By the way, it’s quite possible that if you don’t have the income to maintain your lifestyle in retirement, you should still examine the other 24 factors.
Also, the authors say, not retiring serves four primary functions: One it preserves your assets; two, it gives you a chance to keep building your nest egg; three, it shortens the period of time that you’ll be drawing down your assets; and four, it increases the monthly income you’ll get from Social Security, provided you delay claiming it.
2. Consider life expectancy, expenditures, and risks
Consider all the risks that you might face in retirement and how you’ll mitigate those risks, be it the risk of outliving your assets, or inflation or sequence of return risk. If you haven’t addressed those risks, you might consider not retiring until you do. Of note, the Institutional Retirement Income Council this week published a brief that quantifies six major risks that both retirees and employees approaching retirement face in retirement.
3. Perform analysis to model plan functionality
How sound is your plan? Is there a 90% chance that it work, or just a 50% chance? If nothing else, you want to get a sense of the trade-offs and choices you have to make to make your plan as sound as possible.
4. Evaluate the impact of your debt
If you have a lot of debt, especially mortgage debt as you head into retirement, it could affect your ability to increase the amount of money that you save for retirement. What’s more, you shouldn’t retire if you don’t have sufficient income to service your debt, especially if you have a home-equity loan that converts from interest-only payments to principal-and-interest payments while you’re in retirement.
5. Determine the availability of health insurance
It might seem obvious, but if you don’t have health insurance coverage, consider delaying retirement, the authors said. What’s more, consider delaying retirement until you’ve earmarked either assets or income for out-of-pocket health care expenses in retirement. As various studies have shown the net present value of health care costs range anywhere from $250,000 to $900,000 for a 65-year-old couple retiring today. Of course, you should consider - before making your decision to retire or not - all sources of health insurance, including employer-sponsored retiree health insurance, spousal insurance, COBRA, Medicare and Medicaid.
6. Examine the impact of various Social Security claiming-age options
Make no mistake about this one. There are plenty of Social Security strategies, many of which can increase optimize your monthly benefit and overall benefit. One bit of advice as you contemplate when to retire and when to take Social Security: Distinguish between the Social Security claiming age and the optimal retirement age, wrote the Tacchinos. The two are not inextricably linked. In other words, the ideal age at which to claim Social Security is a different and separate decision from when to retire, the Tacchinos wrote.
So be sure to examine not just the best age to retire, but also the best age (or ages if you’re married) to claim Social Security.
7. Assess the type of retirement plan and the plan’s features
Some, though not all workers, have lots of employer-sponsored pension plans with different features, different distribution options, and contribution or benefit formulas. Knowing what you have is part of weighing your optimal retirement age.
8. Analyze the financial status of investments
So, here’s the deal with this: If you retire prior or during a down market, you stand a good chance of running out of money. They call this, in some circles, the sequence of return risk. For some, it means reducing the percent of money you might put in risky assets and delaying retirement.
For those who think the stock market might rise in the five to 10-year period around retirement it might be OK to retire.
9. Examine earnings prospects if your remain employed
What do you stand to earn if you keep working vs. the joy you would get from being retired, enjoying a life of leisure? That’s the trade off that must be evaluated. “Significant opportunity cost reduces the probability of retiring,” the authors wrote. If you stand to earn a significant salary and/or receive nonqualified deferred compensation by working, then you are more likely to keep working, wrote the Tacchinos. Of course, working might also increase the desire to retire.
10. Appraise the availability of phased retirement
You might be more likely to select a retirement age if you knew that you could ease into retirement, a phased retirement so to speak. In other words, the authors wrote that retiring isn’t always about leaving the workforce and relying on income from a pension or Social Security.
It could also mean working part time or seasonally, presuming of course there are such job opportunities.
11. Factor in early retirement incentives
If you’re likely enough to get a golden handshake, God bless. “But don’t be blinded by offers that are desirable in the short term, but could leave (you) short of financial resources in the long term,” the authors wrote.
Consider too negotiating sweeteners (maybe retiree health insurance or a bigger severance package) long before your employer offers you a retirement incentive package. “Employers may be eager to release a long-service employee who is relatively higher paid in favor of a young employee who is not,” wrote the Tacchinos.
12. Consider your willingness to compromise financial goals
There’s the lifestyle you want in retirement and the lifestyle you might have to settle for given your resources. If you’re willing to reduce your standard of living, you might be able to retire at your ideal age vs. delaying it. And, for what it’s worth, studies have shown that satisfaction in retirement tends to be high regardless of income assuming you retired on your terms, are in good health, and are married.
13. Assess whether you are and/or will be healthy enough to continue working
If you’re not in good health, you may have to retire involuntarily and it’s unlikely to be your optimal retirement age. And this is something that you might have to factor into your plans or at least your possible scenarios.
14. Examine whether your situation will require caregiving for a loved one
In other cases, it’s not you who’s in bad health, but a spouse or loved one for whom you have to provide caregiving. The authors note that 20% of those who leave the workforce earlier than they planned to did so to care for a loved one.
And even if you don’t leave the workforce, it still might cost you: You might have to hire a caregiver, for instance.
Yes, you might be able to take advantage of the Family and Medical Leave Act, but that’s not a long-term solution. Consider, too, if you don’t have it, buying long-term care insurance to cover this kind of expense or commitment. Having a policy in place could help you identify your optimal retirement age.
15. Are you concerned that perceived future health limitations will interfere with personal retirement goals?
Plenty of folks they should retire while they are still healthy, and can enjoy retirement. But don’t let fears of impending health problems dictate an earlier retirement, the Tacchinos wrote. “Some (people) choose a retirement age based on their perception that they only have so many good years left and they want to enjoy some time with good health in retirement.”
Remember: Research has shown that your perception of your health will typically have a stronger effect on the retirement age decision than the actual, medically determined status of health, the authors wrote.
16. Evaluate whether you will need to retire in order to raise grandchildren
About 6.3% of children under the age of 18 are living with grandparents. Is this in your future? If so, consider how you might have to keep working to afford to raise grandchildren or consider how you might have to retire to care for the grandkids, the Tacchinos wrote.
17. Appraise the likelihood of your job terminating suddenly and prematurely
What are the odds of you being downsized or losing your job for other reasons. Take a look at your employer and consider whether you are at risk of losing your job. By way of background, many older workers either have their position or shift abolished, according to AARP’s Public Policy Institute. In other cases, there’s not enough work, and in still others a plant or company closed down or moved.
18. Assess job satisfaction and potential changes in job satisfaction
Being unhappy with your work is not the best way to determine your ideal retirement age, but it’s certainly a factor. Try to get a handle on whether you are fixing to tell your boss to take his job and shove it or whether your employer is trying to get you to leave.
19. Understand and broaden your expectation of how to determine an appropriate retirement date
“Perhaps the trickiest and most subjective set of considerations to analyze centers around (your) own personal psyche,” the authors wrote. “In essence, (your) mind-set is ultimately responsible for driving the desired retirement age.”
For instance, you might say I plan to retire when I’m 65, the years since your birth. Instead, you might want to examine your retirement age in others ways: years until death (your remaining life expectancy) or your work/retirement ratio (75% work/25% retirement), the authors wrote.
“Why should chronological age be the deciding factor?” the authors asked.
20. Evaluate your ability to adapt to retirement
What’s your self-efficacy? Do you think that you will be able to cope with the changes that come with retirement? If you can predict your level of comfort, if you think that you will be able to adapt, that’s a good thing because this is a major factor in determining your retirement age, the Tacchinos wrote.
“One researcher theorized that some who view themselves as unable to adjust to retirement either recognize their own need to work to feel good about themselves or ascribe to the belief that retirement is a time of dissatisfaction, isolation, and decline,” the authors wrote.
21. Assess the identity, fellowship, and status you receive from working
It’s quite possible that your work defines who you are, that you derive a sense of self-worth from work and that you might find it hard to retire. In other cases, you might want to keep working because you enjoy and want to keep busy.
“Consider that while most (people) value the retirement lifestyle, they may not realize what they are losing by ending the work lifestyle,” the authors wrote. “It is important for (people) to discern exactly what the loss of their main job will do to their sense of self. Unfortunately we often do not realize what we have until we no longer have it.”
22. Determine your willingness to work
If you’re unsatisfied with the day-to-day grind of working, well, that’s going to drive your decision to retire - optimal time or not.
23. Determine your desire for leisure
And if what you want is a life of leisure, this too might drive your decision to retire early, as well. Just remember: “It is important for (you) to imagine the daily routine brought about by a lifestyle of leisure,” the authors wrote. “Filling up free time with meaningful activity requires thought and planning.”
24. Weigh the balance between work satisfaction and retirement satisfaction
According to the Tacchinos, the difference between your current satisfaction with work and your anticipated satisfaction in retirement predict your anticipated retirement age.
25. Examine the potential for joint retirement
And lastly, you are likely not alone in this decision to retire. The balance between work and retirement may be related to your ability to retire with your spouse or not, the authors wrote.
READ MORE
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