By BECKY GILLETTE
A lot of factors need to be taken into consideration when deciding when to retire. One of the most important decisions for many Americans is when to start taking Social Security benefits. While the government and most financial advisers recommend people wait to take Social Security at least until they reach their full retirement age (which is age 67 from someone born in 1960 or later) to receive the maximum benefits, research by the Center for Retirement Research at Boston College shows 42 percent of men and 48 percent of women opt to start at the earliest age possible, 62.
“We think you should delay Social Security until the last possible moment,” said Julius Ridgway, client adviser, Medley & Brown LLC Financial Advisors, Ridgeland. “Your benefit is going to go up significantly if you wait. To know for sure if that is the right move, you need to know how long you will live. The vast majority of people will live long enough to justify waiting.”
Ridgway said for anyone who is on the fence, if you enjoy working or have any hesitation about your ability to fund retirement, there is a manifold benefit from continuing to work.
“You save more money, you compound your existing capital longer and there is less time you will need your retirement funds,” Ridgway said. “If you think about a portfolio of investments that might double in value every ten years or so, it is the last double that makes the biggest difference in dollars, i.e, $500,000 increases to $1 million. And you have considerably fewer years of retirement to pay for. But everybody’s situation is different. People’s life expectancy is different. If you are able to retire with full benefits and a full pension at 62 and gain no benefit from working until 70, by all means retire. But even under those circumstances, I would counsel people to wait until 70 to draw Social Security.”
Ridgway said what many people miss when looking at life expectancy tables is while the average person lives to be 79, that does not takes into account risk factors for early death such as obesity and smoking.
“Once you get to be 60, your life expectancy is well beyond 79,” Ridgway said. “If you are a reasonably healthy non-smoker with a good diet and exercise regularly, you have to be prepared to live for a very long time. So, ideally, you want to be in financial shape so you are not playing the game of trying to outlive your money. The ideal circumstances is you have enough money saved so don’t dilute the purchasing power of your portfolio. If you earn eight percent per year on average, and withdraw five percent per year, you will never run out of money.”
Ridgway has observed that working seems to keep people young. Most people he knows who are sharp, healthy and active in their 80s didn’t retire at 60. But if people have other passions in life that keep them engaged and active that can substitute for work, that is fine, too.
“A lot of people are having a second career that is more of a retirement career,” he said. “They do a different job less motivated by their responsibilities to care for their family, and more motivated by some calling. If you can find a way to make some money at a second career, you can enjoy life more and put less strain on your retirement resources, as well.”
Clayton Smith, AIF, Retirement Plan Advisor, WealthPartners, Ridgeland, said the decision of when to retire has become increasingly difficult.
“The biggest concern comes down to one simple question, ‘Will my money last?’,” Smith said. “The concern is predicated on the fact that an individual is going from the ‘accumulation phase’ of their working life to the ‘distribution phase’. In short, you have worked your whole life for your money and now it’s time to make your money work for you. In the past, these concerns were mitigated by the fact that most retirees had guaranteed sources of income that they relied on, likely in the form of a company pension. Today, we have seen a shift from retirement savings in pension plans to 401(k)s. Therefore it’s up to the individual to determine how much they can afford to spend while managing unknown variables like market risk.”
When making the decision about retirement, Smith said the most critical element is your own expectations.
“Once we have identified what your retirement looks like to you, we can address the potential risks that must be assessed,’ Smith said. “And finally, we can devise a plan that allows you to put a ‘name’ on all assets which addresses issues such as taxes, health care costs, annual income needs, vacation budget, etc. When it comes right down to it, there is no cookie-cutter retirement age that is appropriate for everyone. Our job is to assist our clients in designing a road map for retirement and to help them to navigate through any potential changes that could occur whether that is related to the market or changes in their personal circumstances. Having a plan in place gives retirees the confidence to retire comfortably and know that all potential risks have been addressed.”
Smith agrees it is usually best to delay drawing on Social Security if you are able to retire comfortable with other assets/income sources. He said market risk should also be considered if you are weighing the option of taking Social Security and reinvesting it.
People are sometimes unrealistic about what it will cost to live in retirement. Smith said for most Americans, a replacement ration of 60-80 percent of pre-retirement income is appropriate.
“Most retirees plan to live on less in retirement than they did in their working years,” Smith said. “Most individuals have less liabilities, dependent expenditures and so on. Therefore, they can afford to spend less. The most unrealistic expectations come in the form of retirees thinking they can achieve a higher risk-free rate of return than is possible. One major risk of outspending your retirement savings is ‘sequence of return risk’. This simply means that if an investor needs a specific annual return throughout retirement and they experience negative market returns at the commencement of their distribution phase, their savings will deteriorate more quickly than if they had experienced the same negative returns closer to the end of retirement. We encourage very conservative expectations when setting your annual return need.”