May 3, 2012

When Should I Retire?

When should a person retire? Some people would quickly reply that it’s best to retire as early as one possibly can, if one can swing it. How much money will one have to retire on? That depends on several factors, and if you’re in the US, your age at retirement will make a difference with the Social Security Administration. The question of when to claim social security benefits then becomes a complex determination.

The agency offers different benefit amounts for people who retire at different ages. These amounts are calculated on their guess about when you’ll die. There are complicated actuarial tables with average life spans for people in various categories. So if folks in your category usually die at 90, and you retire at 62, they’ve got 28 years in which they’re hoping to pay you roughly what you put into the system. But if you retire at 70, they’re going to pay you the same amount of money in 20 years. That’s why payments are smaller if you retire early, larger if you retire later.

It’s a decision you really need to think about before deciding, as the age at which you first request benefits locks in an amount that you will receive for the rest of your life. If you retire at 62 and are fatally struck by lightening while walking out of the building, Social Security says, “Whoa, we just saved a load of money.”

On the other hand, if you retire at 70 and end up living to 105, they’re pacing back and forth in front of the door to your room in the nursing home, looking at their watches and wiping sweat from their brows. By and large, about as many people do the former as do the latter, so it’s a wash.

In fact, the schedule is a bit more finely graduated than that, a matter which you can check at the page “When to Start Receiving Retirement Benefits”. It was in 1983 that new regulations went into effect, raising the age of “full retirement” in a graduated fashion, from 1965 to 1967. If you were born between 1938 and 1960, full retirement starts somewhere between those two, and you can find the precise age at the agency’s “Retirement Age Calculator”. Given that the sliding scale goes from age 62 to age 70, the issue of the age when your retirement is considered “full” is reduced in importance. One issue, however, is that after full retirement, there is no reduction in benefits if you earn additional income, over and above your benefit.

You have probably heard news from the political media that some politicians are talking about a sharp rise in retirement age, a move that would allegedly save billions. Of course in some countries that step has already been taken, with a predictable outcry of protest from the public. For the time being, the possibility seems to have been held off here.

An annuity works in much the same way: you put in money through your working life, and get it out upon retirement. The company is making an actuarially determined bet on your life span.

One way to plan for all kinds of financial exigencies is to keep an eye on the site Nerd Wallet, a useful tool not only for those planning retirement, but for young people too – It’s endorsed by UCLA, for instance.

Happy planning!

CC Cade Buchanan