One of the biggest issues confounding planners and investors alike is when one will take retirement. The timing affects many aspects of retirement planning including available resources, potential duration of retirement, rates of drawdown on assets, retirement inflows and more.
Many of us have an idea in mind about the expected timing of our retirement but that idea may not have a real connection to our financial situation and may be out the window due to changes in circumstances we do not foresee. We can examine timing by looking at both known and unknown factors as well as what lies within our control and what does not.
For example, known factors outside our control include many items that could affect our decision on retirement timing. Such factors, which may be considered positive or negative, include
- An employer’s policy regarding mandatory retirement ages
- Your full retirement age for purposes of receiving Social Security retirement benefits
- Start age for Medicare at 65 and existence of employer health insurance at or beyond that age
- A current, ongoing (known) need to provide care for a parent, spouse or other family member
These types of factors generally work to encourage one to work until the benefits offered (Social Security retirement, Medicare) are available and financially appealing or nudge one towards setting a retirement date when pressure to retire is significant (required retirement ages, continuing need to devote time and energy to, for example, the care of a loved one). Singly, these types of factors may not be controlling, but they are important to consider.
Next we have unknown factors or events that are outside our control and although not certain to occur and widely varying in type and impact, can push us towards a particular decision on timing. Depending on the nature of the event and our likely response to it, these events may result in causing retirement to be delayed or instead hastened. Some of the actions we might take in response to these events may be seen to lie within our control to some extent but the actual occurrence of such events clearly does not. These include uncertainties like
- An injury or disability that makes it unlikely or even impossible for you to continue working
- That big lottery win, casino jackpot, unexpected inheritance or other windfall
- An unforeseen future need to provide care or financial assistance for a family member
- A stock market crash that requires you to delay retirement while trying to recoup OR a big jump in the market with a corresponding bump to your net worth
- Unexpected liabilities or losses due to natural disasters, fires, theft and other similar events
- Favorable results from the sale of a business or a strong IPO benefitting an executive shareholder
Here, although you may not know what will happen, or when, if it does and you have not yet retired, then the occurrence of one of these events can swing that date away from your original plan. The ability to be flexible with your plan and adjust to meet these changes is critical to your success. Generally, one cannot construct a plan that will work in any and every eventuality but understanding that you can build in flexibility makes the process simpler and allows you to take advantage of the positive events while dealing with the negative.
The easiest group to work with in terms of timing are those factors which are both known and within our control. They really are important to the timing decision as well as the likelihood of success of a retirement plan. However, these items require diligence and effort to make sure they are contributing to the retirement timing you prefer.
- The amount of resources set aside for retirement and how they are invested
- Anticipated savings and additional investments towards retirement from employment or other sources
- Current spending habits, planned spending goals both now and during retirement, understanding the difference between need and want
- Current state of health and approach to maintaining health, including choices of medical care, exercise, diet and the like
Finally, there is what might be the most important factor of all - how willing and able you are to adjust your spending and goals to meet unknown future changes and events. The more flexibility you have, the better you will be able to decide on retirement timing and be able to look back without regrets when things change. Underlying this is your understanding that a lot can go into choosing a retirement date but the choice is easier if you can roll with the punches as well as the gifts. Your advisor can help you understand what might lie ahead and how to plan for it while keeping to a reasonable – for you – retirement age/date.
George Chamberlin & Mentor RIA Consulting © 2018