Income, Not Age, Should Determine Your Retirement Date

If I could pass on just one key rule for people pondering their retirement date, it would be this:

Don’t think so much about your age. Think, instead, about your income.

Income is what helps give you your independence in retirement. If you’re confident you have enough money coming in to cover the lifestyle you want for as long you live, you have the option to quit your job any time you like. If you aren’t sure, you can’t.

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Focusing on the wrong things

You can’t just stop working at 60, 65 or even 70 without a retirement income plan to pay your bills.

Seems simple enough. Still, very few of the people who come to our office looking for help have a budget prepared or a retirement income plan in place. They’ve spent years focused on growing and saving their money, and they haven’t yet flipped their mindset to how they’ll manage that money when they no longer have a paycheck.

So they choose an age — 62, 65, 66, 70 — because those are milestone years for Social Security and Medicare, and they’re the ages when most people retire.

Look beyond your savings

Now, I’m not suggesting that instead of saying, “I’m retiring at 65,” you should say, “I’m retiring at $1 million.” Choosing a dollar amount without a retirement income plan is almost as random as choosing a retirement age.

You’re going to have to work a little harder than that.

With the help of a wealth manager, you should begin looking at your current fixed-income sources — Social Security, a defined-benefit pension (if you and/or your spouse have one) or an annuity — and how you can help maximize those payments with the proper timing and claiming strategies.

Get budgeting

You also should put together an approximate but realistic retirement budget. Don’t assume you’ll spend less in retirement than you do now — many people actually spend more in the first few years, when every day feels as if you’re on vacation.

Major expense categories include your mortgage and car payments (if you’ll still have those, or if you expect you might have them in the future), food, transportation and health care. And don’t forget the fun stuff: travel, gifts for the grandkids, golf and other hobbies. Keep in mind, too, any services you might need as you age — from yardwork to home repairs to nursing care.

Once you know your fixed income streams and your budget needs, you can determine whether there is a gap. If you have more than enough money to cover your expenses, you may be able to retire earlier than expected. If not, you’ll have to figure out how you’ll draw from your retirement nest egg to fund that gap. Your financial adviser can help you build strategies that cover asset allocation, inflation and tax implications. And he or she can help you update your plan as time passes.

Stay flexible

Ultimately, no income plan, no matter how comprehensive, can predict all the twists you might encounter during a long retirement. But if you start with a solid plan and remain flexible about refining it as you go, you’ll increase the odds that your financial future will be secure.

And the only time you’ll have to mention your age is when you ask for the senior discount.

Kim Franke-Folstad contributed to this article.