Introduction
Choosing the right time to start receiving your retirement can significantly reduce the risk of running out of money. Analyzing when to start your retirement income can be quite similar to analyzing when to start your social security benefits. Both retirement and social security provide guaranteed income for life. Retirement typically offers an option that allows for continuous income for a spouse, and social security also provides income for survivors.
Example of Retirement Analysis
David plans to retire at age sixty. His retirement offers several options and different payout amounts, depending on the age he chooses to start his retirement income. Although he will retire at sixty, it may be beneficial to wait until age sixty-five to start receiving retirement income. He has savings and other retirement accounts to provide retirement income from age sixty to age sixty-five if he decides to delay. Here is a summary of two options from David’s retirement choices:
Age 60: $19,536 annually
Age 65: $34,128 annually
Should David start his retirement at age sixty or age sixty-five?
If David waits five years to start his retirement, he will receive an additional $14,592 annually, but he will miss out on $97,680 (5 years × $19,536 annually). To conduct a simple analysis, divide $97,680 by $14,592. He will recover $97,680 in 6.7 years, in the year he turns seventy-one, which can be referred to as the “break-even age.”
However, the simple analysis does not take into account the time value of money. If David has to use $97,680 of his own money from age sixty to age sixty-five, he will not earn any interest on that money. Assuming that David could earn 4% on his money, it moves the break-even age to about seventy-three.
Assuming David waits until age sixty-five to start his retirement, if he lives to age eighty, delaying his retirement start date will put over $120,000 extra in his pocket compared to starting his retirement at sixty, assuming a 4% return on David’s personal savings and investments.
The higher the rate of return that David thinks he can earn on his investments, the less beneficial delaying his retirement start date becomes. For example, if David believes he can earn a 10% return on his savings and investments, the break-even age will move to seventy-six.
Be cautious in assuming that you can achieve a high rate of return, as you must also consider the level of risk required to try to achieve those high returns. Retirement income is guaranteed. Comparing the benefits of retirement with riskier investments is not a fair analysis. It is often difficult, if not impossible, to find a higher rate of return on safe investments.
If David is married, a similar analysis can be conducted to reach the break-even age using retirement options that provide continuous income for the surviving spouse. In this case, the combined life expectancy should be considered.
Note: A financial advisor can help you determine if it makes sense to start your retirement early.
Every Retirement is Different
Every retirement has its own formula that determines the amount you may receive at any age. If you have multiple retirements, it may be best to start one at age sixty and another at age sixty-five.
You should also take taxes into account in the final analysis. Sometimes, delaying the retirement start date and withdrawing money from individual retirement accounts or 401(k) accounts may yield improved tax results when considering the full time span of your retirement.
May
Your internal feeling about when to start retirement benefits may not be correct. A thorough analysis in this area can pay off. Don’t start retirement benefits without taking a look at the expected numbers over the expected total years of retirement.
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Source: https://www.thebalancemoney.com/when-to-start-your-pension-2388767
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