When Is It Time to Retire?
Key Points – When Is It Time to Retire?
- How to Quickly Tell If You’re Working with a Financial Salesperson and Not a Financial Advisor
- What Do You Want to Do in Retirement?
- Reaching Financial Independence
- Factors to Consider as You Transition into Retirement
- 11 Minutes to Read | 24 Minutes to Watch
When Is It Time to Retire?
“How much do I need to retire?” is probably the most frequent question that our CFP® Professionals are asked. However, “When can I retire?” or “When is it time to retire?” aren’t too far behind. If you work with an advisor who gives you an immediate answer to any of those questions, they’re really a financial advisor in name only. They’re probably more of a financial salesperson. They’ll likely just sell you investments, make a commission, and not put your needs first.
Unfortunately, there are a lot of financial salespeople within our industry. Logan DeGraeve, CFP®, AIF® and Chris Rett, CFP®, AIF® are going to help explain why it’s important to avoid those financial salespeople and what all needs to be done to get an accurate answer to “When is it time to retire?”
Building a Forward-Looking Financial Plan
Even if you’re diligent about saving for retirement, deciding when it is time to retire can’t be done on a whim. It’s critical to start planning for retirement at least five to 10 years before you want to retire. There are so many factors in addition to saving that need to be considered before you know when it is time to retire. All those factors need to be considered within a forward-looking financial plan. That will eventually give you your answer.
Before we review some of those factors, we encourage you to download a copy of our Retirement Plan Checklist. It includes a list of 30 yes-or-no questions that cover a wide variety of topics that impact your retirement readiness. It also includes an age-based timeline of things to consider as you’re approaching and going through retirement. Download your copy below!
Factors That Go into Answering When It Is Time to Retire
1. Outlining Your Current Expenses vs. Expected (and Unexpected) Expenses in Retirement
Configuring your cash flow while you’re working is fairly straightforward. You know how much you’re making net each year, how much you’re contributing to your employer-sponsored 401(k) plan, and how much you’re paying in taxes. And as you’re saving for retirement, hopefully you have a budget in place that prevents you from overspending.
“It starts with having a plan. What do you have saved up? That is an important piece. More importantly, how can that work for you in terms of what are your expenses and what income sources do you have coming in?” – Chris Rett, CFP®, AIF®
In retirement, that salary obviously goes away. You need your money to start working for you. What are your insurance coverages going to look like now that you’re no longer on employer-sponsored plans? There are things like your mortgage that might be paid off by the time you retire. Do you want to remain in your house, buy a summer/winter home, or downsize? The opportunities can be endless and need to be thoroughly thought through.
Planning for the Unexpected
There are also things that no one wants to pay for that need to be incorporated into your retirement budget. What if you need a new car, new roof, or new HVAC system? Those can all be examples of unexpected expenses that suddenly come up, but you still can plan and need to plan for them.
“Over the last 20-30 years of your life, think about how many unexpected expenses can come up? You can’t just say, ‘I have $5,000 a month and everything needs to fit into that.’ You’re not going to set yourself up for success with that.” – Logan DeGraeve, CFP®, AIF®
After having a budget during your working years, there are a lot of people who don’t think they need one in retirement. Having a budget in retirement is still critical, though. Rather than thinking of it as a budget, think of it as a spending plan that keeps track of how much you’re spending each month on the things you need as well as your retirement goals.
“If you have no idea what you’re spending, the easiest way to do this is figure out what hits the bank account, what you net every single month, and then figure out what you’re saving. If you’re not saving anything from your net paycheck, that’s what you’re spending.” – Logan DeGraeve, CFP®, AIF®
The Go-Go, Slow-Go, and No-Go Years
Logan likes to break down a spending plan for retirement into three different stages: your go-go, slow-go, and no-go years. Your go-go years are those first 10-15 years of retirement when you’re hopefully still healthy and have the energy to travel the world and maintain an active lifestyle. It tends to make sense to front-load your spending in retirement to accommodate for the costs of your retirement goals.
The next 10-15 years are usually the slow-go years. You might be in decent health, but you might not be moving around as well and don’t want to travel as much. And therefore, you likely won’t be spending quite as much during this time of retirement.
Then, you get to your no-go years. Hopefully, you’re still in decent health, but you might need to move into an assisted living facility (or if your health does decline, you might require a long-term care stay). Neither is cheap. And, if you’re wanting to leave a legacy, don’t think that you need to leave that money again until after you’re gone. You can always set up gifting to your loved ones and/or charities while you’re still living so that you can see them benefit from your hard-earned money.
“Everybody hates the B-word—budget. You don’t need to have the strictest of budgets and be a penny pincher, but you do need to anticipate what your expenses are going to be on a monthly and annual basis.” – Chris Rett, CFP®, AIF®
2. Defining Your Retirement Goals
Speaking of your retirement goals, those are something you need to start thinking about so you can have a better idea of when it is time to retire. What do you want to do in retirement? Do you want to travel more, spend more time with family, or find new hobbies? Retirement is a time where you and your spouse can dream big.
“Maybe you’ve been married for 30-40 years at this point. Have you ever sat down and asked each other what you want to do in retirement?” – Logan DeGraeve, CFP®, AIF®
Again, your goals need to be incorporated into your spending plan for retirement. If you’re not building a financial plan that’s designed around your goals, you’re not going to get an accurate answer of when it is time to retire. The last thing that most people want to do is go back to work because they didn’t have a spending plan that properly compensated for their needs, wants, and wishes in retirement.
“Financial planning is nothing more than a series of tradeoffs. If you want to spend more, you need to save more.” – Logan DeGraeve, CFP®, AIF®
Believe it or not, but boredom is an emotion that a lot of retirees can experience. And some people do truly like their jobs and can become conflicted in that sense on when to retire. Well, if you love your job, keep working.
Instead of thinking of it as your financial plan is telling you when it is time to retire, think of it as your plan saying that you’re financially independent. You’re working because you want to and not because you need a paycheck. And remember that if you’re financially independent, there’s nothing stopping you from checking off some of your retirement goals while you’re still working.
3. What Are Your Income Sources in Retirement?
This can really be lumped into No. 1 and 2 on our list, but we think it deserves its own point. What does your retirement cashflow look like and what does it need to do to support retirement lifestyle? When you really get serious about figuring out when it is time to retire, there’s a good chance that your largest asset will be your 401(k).
Roth or Traditional?
Most people who are nearing retirement having likely been making contributions to the traditional side of your 401(k) and then your employer matches it. It’s important to understand that traditional 401(k)s and IRAs are a tax-deferred asset, meaning that you won’t pay tax until you take the money out of the account. So, if you have X-amount saved in your traditional 401(k)/IRA, just remember that you don’t actually have that amount because it hasn’t been taxed yet.
“When a lot of people retire, they think their taxes are going to go down a lot. But a lot of people’s taxes stay the same or even go up later in life.” – Logan DeGraeve, CFP®, AIF®
But how could your taxes be higher in retirement than they are today? Well, there are a couple of reasons. Maybe you have a pension, Social Security, and need to take $4,000-$5,000 a month out of your IRA. Well, every IRA distribution is ordinary income. You don’t have FICA or the payroll taxes, but if you want to get $100,000 out net to your bank account out of an IRA, you need to take out a lot more than $100,000. Depending on your tax bracket, you’re probably taking out $130,000-$135,000 or more. That’s something that needs to be well thought out.
Having Tax Diversification
That brings up something else to consider. What accounts should you be taking from? Hopefully, you’ve done a good job of saving to the different tax buckets. We already talked about the traditional IRAs/401(k)s. That’s your tax-deferred bucket. Then, your Roth 401(k)s/IRAs make up the tax-free bucket and things like your checking/savings accounts and brokerage accounts make up your taxable bucket.
Where do you spend from first? How do you sequence these withdrawals to make sure that your taxes are in a good spot? There are also tax planning strategies that can be very impactful as you try to build tax diversification. Take Roth conversions for example. You must pay the tax on the conversion from a traditional IRA to a Roth IRA, but the growth from that point on and the distribution is tax-free.
Utilizing Tax Planning Strategies
Roth conversions are just one tax planning strategy to keep in mind, especially if you’re looking to retire in the next few years. That’s because in 2026, the Tax Cuts and Jobs Act will sunset and tax rates will revert to the higher rates from 2017. In many cases, it can make more sense to pay tax at today’s lower rates via a Roth conversion than when you take a distribution from your traditional IRA after 2025.
When you’re figuring out how to sequence your returns, it’s critical to coordinate it with a CFP® Professional and a CPA. The CPA will not only look at your investment plan and asset location, but your distribution plan from a tax perspective.
“CFP® Professionals know enough about taxes to be dangerous, but the reality is that it’s not what we do on an everyday basis. We need to wear a lot of different hats. So, why would I try to learn everything about the tax system when I can talk to Corey Hulstein, CPA, who is our director of tax?” – Logan DeGraeve, CFP®, AIF®
When to Claim Social Security?
There is so much to consider when saving to Roth or traditional. It’s important to work with a tax professional rather than making knee-jerk decision about Roth vs. traditional or any decision with tax implications. Social Security is also an income source that many retirees rely on heavily. There’s an unfortunate misconception that some people have about claiming Social Security being synonymous with when it is time to retire.
That is technically an option, but it isn’t one that’s advisable. Everyone is eligible to start claiming Social Security at 62, but the longer you wait to claim it, the bigger your benefit will be. It’s important to play the long game when claiming Social Security, but the goal is to maximize Social Security income for you and your spouse.
Yes, it’s critical to consider your spouse when claiming Social Security as well. If you or your spouse were to pass away unexpectedly, the surviving spouse will only get to keep the larger one of the couple’s benefits. Also, keep in mind that up to 85% of your Social Security benefit can be taxable. The difference between the best and worse Social Security claiming strategies can equate to a substantial amount of retirement income, so make sure you’re making this key decision alongside your spouse and CFP® Professional.
“A lot of people say they’re going to get on Social Security at 62, 63, or 64 because they paid into it, which is true. It is your benefit. But the reality is you’re being self-centered in that decision. You need think about your spouse, especially if there’s an age gap.” – Logan DeGraeve, CFP®, AIF®
4. Should You Wait Until Medicare Age (65) to Retire?
Sixty-five is also another popular age that people pick for when it is time for them to retire. And the main reason for it is because that’s when you can become eligible for Medicare. There is a misconception that Medicare is free, but it most definitely is not. Along with taxes, health care is the biggest wealth-eroding factor in retirement. Part of that is because health care expenses inflate at an even higher rate than the basket of goods you get at the grocery store.
Health insurance is a critical retirement consideration, but is being Medicare eligible the only reason you’re waiting to retire? We can’t stress enough that time is your most valuable commodity. So, if your plan tells you that you can go to the marketplace for health insurance and retire before 65, what’s stopping you?
“What are your options? ACA as an option. I’m not advocating for it or against it, but it is a tool that we have in our toolbox. The marketplace and COBRA are other examples.” – Chris Rett, CFP®, AIF®
The time you spend working rather than doing the things you love with the people you love is time you can’t get back. Like we mentioned earlier, there’s nothing wrong with continuing to work if it’s something you enjoy. But once you’ve decided that you don’t want to work anymore, you don’t have to if you’re financially independent. And you’ll never know you’re financially independent if you don’t have a financial plan.
5. Your Health Is Your Wealth
This point on our list also ties in with a few of the other points, but your health is your wealth isn’t just some catchy saying. There’s a ton of truth to it. There are actually four different types of wealth. Of course, there’s financial wealth. We addressed that with the retirement income sources we mentioned earlier. We also just address time wealth and social wealth. The time you spend doing the things you love with the people you love is what retirement should be all about.
Well, in order to maximize your time wealth and social wealth, you need to make sure you’re remaining in good wealth. That’s your health wealth. Not having good health can obviously lead to more medical expenses in retirement. We say all the time that taxes and health care are the top two wealth eroding factors. They need to be top of mind when you’re thinking about when it is time to retire.
In addition to thinking about your own health, keep your family’s longevity history in mind while thinking about when it is time to retire. If your elders have lived long lives, take that into account and consider planning for a longer retirement. Running out of money in retirement is a very legitimate fear and risk. Hence why we emphasized trying to play the long game with claiming Social Security so that you’re maximizing your retirement cashflow.
6. Thinking About Your Loved Ones
Just because your time on Earth will eventually come to an end doesn’t mean that your impact on Earth needs to end. If you’re passionate about wanting to leave a long-lasting legacy—whether it’s to your heirs or to charity—it’s important to keep estate planning in mind when it is time to retire.
And as with all aspects of your financial plan, you can’t just set it and forget it with an estate plan. When you have major life events, make sure that you update your beneficiary forms and other estate planning documents. Having a current estate plan can bring peace of mind to your whole family.
Although talking about end-of-life situations isn’t exactly uplifting, there are ways in which you can make it more enjoyable. Dean Barber and his family review their family’s estate planning documents annually as part of their family vacations. It’s important to the Barber family that everyone has clarity about each family member’s estate so there are no surprises when one of them passes on.
So, When Is It Time to Retire?
Hopefully this article helps to illustrate why a financial salesperson won’t be able to give you a quick, accurate answer to when it is time to retire. There are so many things to consider prior to retirement, and it takes years to plan for.
Planning for retirement can be a daunting task to do on your own. At Modern Wealth, we have a team of professionals that works for you to build and consistently review your goals-based financial plan. The only way you can get a concrete answer to when it is time to retire is by going through the financial planning process.
If you have questions about what the financial planning process could look like for you or any of the retirement considerations we’ve discussed, start a conversation with us by clicking here. We always welcome the challenge of building someone a personalized financial plan that can give them more confidence, freedom, and time in retirement.
When Is It Time to Retire? | Watch Guide
00:00 – Introduction
01:30 – Why Getting the Right Help Matters
03:45 – Understanding the Cost of Your Lifestyle
08:21 – Defining Your Goals for Retirement
10:43 – What Resources Do You Have?
14:02 – What Accounts to Take from and When?
15:44 – Tax Planning is Key
18:12 – What If You’re Under 65? Health Insurance
21:13 – What We Learned Today
- How Much Do I Need to Retire?
- Starting the Retirement Planning Process
- Components of a Complete Financial Plan with Logan DeGraeve
- Mortgage Tips for Different Phases of Life with Tim Kay
- Setting Up a Spending Plan for Retirement
- Rising Long-Term Care Costs
- Family Financial Planning with Matt Kasper
- Finding Financial Independence
- Optimizing Your 401(k) for Retirement with Drew Jones
- Taxes on Retirement Income
- What Are the Tax Buckets?
- Maximizing Social Security Benefits
- What Are Tax Brackets?
- What Is Tax Diversification?
- Tax Planning Strategies with Marty James
- Roth Conversion Decisions for 2023
- Tax Rates Sunset in 2026 and Why That Matters
- The CFP® Professional and CPA Relationship with Logan DeGraeve, CFP® and Corey Hulstein, CPA
- Revisiting Roth vs. Traditional with Bud Kasper and Corey Hulstein, CPA
- Claiming Your Social Security
- Social Security Benefits for a Surviving Spouse
- Avoiding Costly Mistakes When Claiming Social Security with Ken Sokol
- ABCs of Medicare
- How to Mitigate Inflation on Health Care Costs
- Health Insurance Options for Retirees Under 65
- How to Be the CEO of Your Retirement
- Why You Need a Financial Planning Team
- Retirement Savings by Age
- Retirement Cash Flow: What You Need to Know
- Don’t Retire without Doing These Things First
- Unexpected Expenses and How to Plan for Them
- Your Retirement Timeline
- Your Retirement Lifestyle: What Do You Want Your Retirement to Look Like?
- What Is Wealth? 4 Types of Wealth
- Couples Retirement Planning: What You Need to Know
- Thinking About Unretiring? Why Retirees Are Rejoining the Workforce
- Pension Plans: Defined Benefit Plans vs. Defined Contribution Plans
- Converting to a Roth IRA: What Are the Pros and Cons?
- How Does a Roth IRA Grow?
- Retirement Rules of Thumb: Let’s Bust Them
- Retiring Before 62: What You Need to Consider
- Retiring Before 65: What You Need to Consider
- Longevity Risk in Retirement and How to Plan for It
- 5 Key Estate Planning Items to Address
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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.