An effective retirement plan has a lot of moving parts, so it’s a good idea to think through the various decisions you need to make before you stop work.
1. The Psychological Impact
Retirement requires a mindset shift: once you stop work, you’ll need to have a plan in place. Separating the decision to retire at age 60 into these four factors can be a useful exercise. First, we are going to examine the psychological impact. Do you really want to retire? Here are a few things to think through:
- Will you miss work?
- What will your social life look like?
- How will you create meaning for yourself?
- Will you launch a new career or undertake part-time work?
The psychological impact of one of your biggest life changes shouldn’t be overlooked. Not only will it safeguard your mental health, but it will also put you in a better position to budget effectively and make the right financial decisions.
2. The Financial Impact
By retiring at age 60, you’ll be sacrificing a few additional years of wealth accumulation. Don’t forget, you may also be sacrificing Social Security retirement benefits. If you don’t know what your Social Security benefits will be, visit https://www.ssa.gov/myaccount/ to find out.
Your next decision is whether or not to claim Social Security as soon as you are eligible or wait for a few more years to allow your monthly benefit to increase. The longer you wait, the higher your monthly benefit becomes. The difference can be non-trivial.
Remember, you do get a cost-of-living adjustment each year for your Social Security benefits.
For Social Security purposes, the earliest you can apply for benefits is age 62. Your “Full Retirement Age” (or FRA) is between age 66 and 67, depending on your birthdate. Finally, age 70 is the latest you can wait; at that point, you’re required to start your benefits.
3. Can You Bridge the Gap with Retirement Savings?
Your decision on Social Security may hinge on whether you’ve accumulated enough IRA and 401(k) savings to see you through. Accessing these savings after you retire at age 60 can have tax implications.
The more you withdraw between age 60 and age 72, the lower your retirement account balances will be when you have to start taking your required minimum distributions (RMDs). Your Social Security benefit will also be higher at that point. However, contrary to popular belief, up to 85% of Social Security benefits are taxable.
4. Health Insurance
We’ve already covered some pretty big moving parts so far, but we’re not done yet. Let’s talk about health insurance.
You don’t become eligible for Medicare until age 65. If you want to retire at age 60, there are still several ways to bridge the gap until then. These include:
- Part-time work that includes coverage,
- Spousal coverage, or
- Purchasing a policy through an exchange.
For many people, depending on their overall health, the availability of affordable healthcare can be the determining factor in deciding to retire early.
If you do decide to retire before Medicare kicks in, purchasing insurance through the Exchange may be the best option. If so, think carefully about what level of care you need. The different tiers of plans allow you to control how much you pay for insurance, with the trade-off being how much the insurance pays towards your care.
If you are generally healthy and don’t need to visit the doctor often, a lower tier of coverage may be the right choice for you. However, if you have existing health conditions or would just feel more comfortable having more flexibility, you may want to purchase a more comprehensive – and expensive – level of coverage.
Setting A Realistic Budget To Retire At Age 60
So, you’ve thought through the decision, you’ve made a plan for Social Security and you’ve got healthcare figured out. What’s next? Budgeting, everybody’s favorite topic. It’s the only way to get to a realistic number for what you can afford to take out of your savings every year – for the next 30 years.
To do this, first, make a list of all your expenses. These should be the things you have to pay every month – housing, heat, utilities, automobile, insurance, food, etc. You know the drill. Then, make a list of the top five things you want your life in retirement to reflect. Travel, philanthropy, indulging an avocation.
Next, we need to make your income meet your needs. Once you’ve arrived at your monthly expenses number, let’s make sure that your income in retirement can meet your needs and wants. You have two approaches available to you:
- The first approach is to pick a static amount that will leave you with enough principal in your retirement accounts over the years. A generally accepted heuristic for sustainable portfolio withdrawals is the venerable 4% Rule. If you withdraw 4% from your investment accounts each year, and in your pension and Social Security income, and it isn’t enough to meet your budget, you‘ll need to pare back.
- The second approach is to create a refined retirement plan. You can set up a detailed plan yourself or work with a financial advisor to create an investment allocation that will throw off the income you need to meet all your expenses. Of course, this is a function of both your risk tolerance and your timeline for spending money in retirement.
If you want to retire at age 60, there are plenty of decisions to make. Thinking through these four considerations in advance will not only help you make a good decision – you’ll be able to create a plan and retire with confidence.
If you’d like help creating a plan to retire at age 60, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.