Should you retire in 2018?
Are you thinking of retiring this year? No wonder, as retirement means having the time and freedom to pursue whatever your heart desires.
But before you decide that 2018 will definitely be the year when you clock out for good, there are a few important things you need to consider.
Do you have enough savings to support you?
Before you even consider retiring, do the math on how long your savings will last. The majority of pre-retirees in America are underfunded for their future and don't have nearly enough savings -- especially given our growing life expectancies.
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To figure out whether you have enough money to retire, you need to estimate how much income your savings will produce and whether that's enough for you to live on. There are a few different methods you can use to figure that out:
- You can shop for annuities. While annuities can sometimes come with high fees, they can also provide guaranteed income during retirement. If you want to make sure you don't run out of cash, see how much an annuity purchased with your current savings -- from a reliable insurer -- would provide you in retirement income. The type of annuity best suited to retirement planners is typically a deferred fixed annuity, which, starting on some future date that you've chosen, will start paying you a fixed amount of money at regular intervals (usually once a month).
- You can use a percentage-based rule. One common method of finding your retirement savings target is the 4% rule, which says you won't run out of money if you withdraw 4% of your savings in the first year of retirement and increase withdrawals for inflation in subsequent years. Unfortunately, this rule doesn't hold up in a low-rate market, and a 2013 study found there's a 57% chance the 4% rule will leave you broke. To make sure this doesn't happen, start with a rate of 2.5% to 3% instead. If that withdrawal rate looks like it would cover your expenses and keep you from going broke, then your nest egg is likely big enough.
- You can use IRS Required Minimum Distribution (RMD) tables. RMD tables specify the amount of money you must withdraw from tax-advantaged retirement accounts each year, starting at age 70 1/2. The IRS withdrawal calculations are based on average life expectancies, and they rise with age. While the IRS tables start at age 70, the Center for Retirement Research used the IRS tables to calculate an appropriate withdrawal rate starting at 65. The CRR recommends this method over the 4% rule because it's more responsive to market fluctuations.
Try each method and choose a conservative withdrawal rate, and then set up a retirement budget to see if you can live on that income. Your budget should account for all of your expenditures, including housing, healthcare, travel, utilities, food, gifts, and other costs. Use your current spending to get an idea of how much you'll spend on fixed and optional expenditures in retirement and make adjustments based on how you plan to change your lifestyle.
Keep in mind that while you may expect to spend less during retirement, around half of all senior households spend more in the first two years of retirement, and for one-third of seniors, spending is still higher six years later. If you aren't sure you can live on your planned retirement budget, try it for a month or two while you're still working.
If your income from all sources, including investment withdrawals, Social Security, and pension income, gives you enough to pay for your costs as determined by your budget, and perhaps a little extra, then 2018 may be your year to retire.
Will you claim Social Security -- and how much will get you get?
Retiring doesn't necessarily mean claiming Social Security benefits right away -- but it often does, since most Americans rely on Social Security as a major source of retirement income.
If you'll need Social Security benefits, determine how claiming in 2018 will affect the benefits you receive. The key question is whether you've reached your full retirement age. Full retirement age (FRA) varies based on your birth year; it's 66 if you were born between 1943 and 1954 and gradually moves up to 67 if you were born in 1960 or later.
If you retire before FRA, your Social Security benefits will be reduced by 5/9 of 1% per month up to 36 months early, and by an additional 5/12 of 1% per month beyond 36 months early. You can claim retirement benefits as early as age 62, but your income will be considerably lower than it would be if you waited until FRA.
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For example, if your FRA is 66 and you file at age 62, then you'll be 48 months ahead of schedule, and thus your monthly checks will be cut by 25%:
(36 months x 5/9 x 1%) + (12 months x 5/12 x 1%) = 25%
By contrast, benefits keep going up until age 70 if you delay claiming after FRA, and recent research suggests you should wait until 70 to max out your benefits, as Social Security is the optimum source of retirement income: It's guaranteed for life, and you get a substantial return for delaying benefits.
If you've not yet reached FRA, calculate how much income you'd be giving up by claiming Social Security early. Decide whether it's worth it or whether waiting a little longer is a better approach.
What will you do about healthcare costs?
If you're retiring at 65 or later, you'll likely be eligible for Medicare. Unfortunately, if you're counting on Medicare to cover all of your costs, you're in for a big, unpleasant surprise.
There are many different kinds of care Medicare doesn't cover, ranging from nursing home costs to vision care to hearing aids. Seniors also face costly premiums and coinsurance expenses. In fact, the Employee Benefit Research Institute recently estimated that a senior couple with Medicare and Medigap might need around $370,000 to have a 90% chance of covering healthcare costs in retirement.
If you don't have a health savings account or other source of healthcare-dedicated savings, you may not be ready to retire until you've figured out a plan.
And if you're under 65, your healthcare situation may be even worse. While you may be able to temporarily stay on your employer's policy under COBRA, the price will likely be much higher once you retire and your employer stops paying premiums.
Subsidized coverage may be available through Obamacare, and you cannot be denied coverage. However, if you don't qualify for income-based subsidies, you may face high premiums -- especially since the repeal of the individual mandate is expected to cause prices to go up.
What will your tax situation look like?
Just because you've left the workforce doesn't mean you're done paying taxes. If you take money out of your retirement accounts, your withdrawals will be taxed as ordinary income, unless your money's in a Roth 401(k) or Roth IRA.
It's important to calculate what your taxes on your retirement income will likely be and how your budget will be affected by your tax liability. This is especially true as tax reform passed at the end of 2017 and likely changed both your tax rate and the tax deductions you're entitled to claim.
You'll also need to determine if your income is high enough that you'll be taxed on Social Security benefits. You could be taxed on anywhere from 50% to 85% of your benefits by the federal government, and your state may charge taxes as well.
If your tax bill reduces your income substantially, will you still be able to live comfortably on the amount you'll earn from retirement accounts and Social Security? If not, 2018 isn't your year to retire.
What will you actually do during retirement?
Finally, you'll need a plan for how you'll spend your time during retirement. Retiring can be detrimental to your health if it causes you to lose social connections, so be sure you have a plan to stay connected with your community.
Is 2018 your year to retire?
So now you've answered the key questions that will help you decide if you should retire in 2018.
If 2018 is your year, congrats! Just be sure to keep making smart money moves in retirement so you can protect your nest egg and not have to worry about running out of money later in your life.
If you've decided 2018 isn't the right time to retire, try out some of these tips to increase your retirement savings or find ways to cut costs in retirement so you'll be able to leave the workforce sooner rather than later.
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