2 biggest factors in determining your ideal retirement age

There's no one-size-fits-all ideal retirement age

What's the best age to retire? Is it 65, when you first become eligible for Medicare? How about 70, when your Social Security benefit maxes out? Or maybe it's 59 1/2 -- the age when you can tap into your retirement savings without paying a penalty?

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When it comes to retiring, there is no one-size-fits-all answer. You'll need to fully evaluate your circumstances. There are two major financial factors to consider: how much you'll get from Social Security and how much you have in your nest egg.

What will your Social Security benefit be?

Social Security is a major component of most retirees' income. The program is designed to replace about 40% of the average person's pre-retirement income, but this can vary significantly depending on a few factors, including the age at which you decide to claim benefits.

If you haven't done so yet, log into your Social Security account at www.ssa.gov to estimate how much you can expect to get at your full retirement age.

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You can choose to claim Social Security as early as age 62, as late as age 70, or anywhere in between. But if you claim at any age other than your full retirement age (66 to 67, depending on the year you were born), your benefits will be higher or lower. Specifically:

  • If you claim up to 36 months prior to reaching full retirement age, your benefits will be reduced by about 0.56% for each month early (6.67% per year).
  • If you claim more than 36 months early, your benefits will be reduced by 20%, plus 5% per year exceeding this window.
  • If you start your benefits after reaching full retirement age, your benefits will be permanently increased by 8% for each year you choose to wait.

Here's what this means. Let's say that you were born in 1960 or later, which means that your full Social Security retirement age is 67. If your benefit at full retirement age would be $1,800 per month, your actual benefit could be as low as $1,260 if you claim at 62, or as high as $2,232 if you wait until age 70. That's a big range, so Social Security timing should be a factor when determining your ideal retirement age.

Will you have enough savings?

It's not necessarily how much money you have in the bank, but how much income you'll have after you retire that's important.

Retirement income typically comes from one of two sources, assuming you're not planning to work part-time. First are fixed sources like Social Security and any pensions you might have. Then there's your savings, which will have to make up the rest of your needs.

Most retirement planners agree that you should expect to need about 80% of your pre-retirement income to sustain the same standard of living. So, if you and your spouse earn $100,000, you'll need about $80,000 in annual income after you retire. If you're getting $30,000 from Social Security, that leaves $50,000 that will need to come from savings.

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Using the admittedly imperfect "4% rule" of retirement (which can be applied by multiplying your income need by 25), this would mean that you'll need $1.25 million in total retirement savings to sustainably withdraw this much and not worry about running out of money.

Keep in mind that you might not be able to access all of your retirement savings if you retire early. With a 401(k), you can access your money penalty-free after age 55 if you've left your job, and with most other retirement accounts, the standard penalty-free withdrawal age is 59 1/2.

Every situation is different

As a final thought, remember that every situation is different. These aren't the only two factors that you should use to determine your ideal retirement age. For example, if you retire before 65, you may need to figure out where your healthcare is going to come from. And if you plan to pay off your mortgage and car before you retire, you may be able to get by on significantly less than 80% of your pre-retirement income. Thoroughly evaluate all factors before deciding.

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