The best age to retire to never run out of money

If you are like me, retirement might be one of the scariest thoughts that cross your mind. Finding the best age to retire is not easy. By retiring early, you will risk running out of money during retirment. On the other hand, if you delay your retirement, you will risk missing out on other life goals such as travel, spending quality time with your loved ones, or starting a new career. This is why you should choose your retirement age very carefully.

If you can afford to do so, the best age to retire is when you have enough income from investments that can cover all your expenses and sustain your lifestyle without liquidating your investments. But, this is not always the case for millions of people in this country.

So, what is the best age to retire? In this article, I will discuss with you the right age to retire and avoid running out of money during retirement.

Table of Contents show

Early retirement vs. delaying retirement

The average retirement age is 65 to 66 depending on your birthplace and when you were born. Most people elect the official industry retirement age because of higher social security benefits and pension plan requirements. Late retirement age also helps people to take advantage of compound interest and grow their nest eggs even further. This strategy minimizes the risk of outliving their savings.

But, if you have financial means, you probably don’t need to work until you die. If you have the financial means, you can retire at any age. For example, you can retire at 40 if you want. Retiring this early, however, requires a lot of savings or income from investments to take care of your expenses due to not reaching the proper age to withdraw money from retirement accounts such as IRAs and 401(k) plans.

Retirement also does not mean stopping working. It simply means walking away from your 9 to 5 job without the risk of financial stress. You can still work not because you have to, but because you choose to do it.

When choosing the best age to retire, pay attention to the following two important factors

The kind of retirement lifestyle you desire, and

The financial means to sustain that lifestyle

By default, it is safe to retire only when you can live off your income from investments without touching the principal. This formula comes in handy, especially for early retirees.

For example, if your expenses are $4,000/month, make sure your passive income from investments is more than $4,000 a month. As long as your return on investment(ROI) is higher than your current and projected future expenses, you will continue to live off your earnings without touching the principal. The day you have these numbers figured out will be the best age to retire.

To achieve this financial state, you will need to rely on several different sources. For example, if you decide to retire early, you will need to have enough assets, investments, and savings to cover your expenses before you qualify for distributions from your retirement accounts. Typically, most retirement plans require that you turn 59½ before withdrawing money. Additionally, the earliest you can start taking social security benefits is at the age of 62. Many pension plans require an official retirement age of 65 or 66.

Once you have reached the proper age, savings from your retirement accounts such as 401(k) plans, IRAs, pension plans, and social security benefits, will give you extra financial support.

Things to consider when choosing the best age to retire

Your retirement lifestyle. Your retirement lifestyle is the main factor that will influence the age at which you retire and how much money you need to save for retirement.

The financial requirements to sustain that lifestyle. Choosing a simple lifestyle is a clever way to use your retirement savings and avoid outliving your money. That is why must have a retirement budget and follow it by the book. Since you will not be working during retirement, a major financial setback can wipe out a large chunk of your retirement savings. For this reason, you need to plan for unexpected large expenses by having an emergency fund.

Your current and projected passive income. Having income-generating assets is a smart way to plan for retirement. If you have assets, know how much they generate and use them when choosing the right age to retire.

Expected income from retirement savings accounts. Know expected incomes from retirement accounts such as 401(k) plans, taxable brokerage accounts, social security, pension plans, insurance policies, Individual retirement accounts(IRAs), etc.

Your current retirement savings. The amount you have saved already will help you determine how much more you need to save before you retire.

Your projected healthcare expenses. Some people experience higher expenses during retirement than in their active lives. For example, due to unexpected illnesses, your medical expenses can increase your expenses even if your living costs such as rent and food go lower.

Where you are planning to live. Living costs vary by location and knowing where you will retire is essential in the retirement planning process.

What is the best age to retire?

The best age to retire will differ from one person to another. Your financial situation and retirement goals will directly affect the age at which you retire. Due to these factors, you will either retire early, delay your retirement, or retire at 65 or 66 which are the official retirement ages.

Here is what to expect in any of these scenarios.

Retire at the official retirement date

Just like millions of people out there, you can choose to retire at the official retirement age of 65 to 66. This allows you to save more money, grow your investment accounts, and avoid early withdrawals on your retirement savings accounts. Additionally, it will lower the number of years you will rely on your savings alone to sustain you during retirement.

The downside of waiting that long before you can retire is that you might not have enough time to chase your dreams, change your career, enjoy the money, or achieve your travel goals.

Delay your retirement

Even if the official retirement age is around 65 to 66 depending on when you were born, it does not mean you must retire once you hit this age. You can continue to work if you can afford to do so. By delaying your retirement, you will have the maximum social security benefits(when you retire at 70 or later).

In addition, you will reduce the risk of outliving your money since you will have less number of years to live off your retirement savings. The trade-off of spending most of your active years at your 9-5 job is the inability to do other things you wanted to do on the side. You will give up all the things that matter in your life for the sake of financial security.

Retire early

Yes, you can retire early if you have the means to do so. How early you can retire depends on the money you have saved, your investments, and your assets that pay income to cover all your expenses. A financially stable person can easily afford to retire at the age of 35, for example.

Some people wait a little longer and retire in their late 50s which is close enough to when they can take withdrawals from their 401(k)s and IRAs. As long as the math adds up and you generate enough passive income to cover current and projected expenses, you can retire at any age.

Know when you can start withdrawing money from your retirement accounts

Before you submit a retirement letter to your boss, you first need to know how you are going to finance your expenses. You also need to know at what age you can safely start taking withdrawals from your retirement accounts. The following are important dates to remember when deciding the best age to retire.

Employer-sponsored plans such as pre-tax 401(k), Roth 401(k ), 403(b), etc. You must be at least 59½ before you take distributions from these accounts. Early withdrawals will trigger a 10% penalty and additional taxes unless you meet the IRS exceptions.

Individual retirement accounts(IRAs). To avoid a 10% penalty, you must be 59½ before taking distributions from these accounts. The Roth IRA lets you take out your contribution to the account at any time without tax or a penalty since your contributions are already taxed.

Social security benefits. The earliest you can take out social security benefits is the age of 62. The longer you delay taking your social security benefits, the more benefits you receive. You get the maximum social security benefits when you retire at the age of 70 or later.

Health Savings Account(HSA). Your HSA money is designed for qualified health-related expenses. To qualify for HSA, you must be enrolled in a High Deductible Health Plan(HDHP). Although an HSA is not an official retirement account and is not meant for retirement; the account can serve the same purpose. If you keep the money in the account and invest it in approved investments, you can easily withdraw it and use it however you want when you reach 65. You will still pay tax but the 25% penalty will be waived.

Pension plans. Many pension plans require that you reach the age of 65 before you can start taking withdrawals from the plan. Others, however, might allow early retirement benefits as early as 55.

Benefits of delaying your retirement age

One of the most important things to consider when it comes to retirement is your social security benefits. Although you can start taking your social security benefits as early as 62, you get more money when you delay your retirement. By delaying your retirement, you will get the largest social security benefit when you retire at the age of 70.

Delaying your retirement also prevents you from spending money in other accounts such as 401(k), Individual retirement accounts (IRAs), and pension plans. The longer you keep the money in your retirement accounts, the more your savings will grow.

Delaying your retirement also reduces the number of years your retirement savings will support you. For example, if you retire at 62 and die at 90, you will live off your retirement money for 30 years. What if you elect to retire at 75 instead? In this case, you will need retirement money for 15 years which lowers the risk of outliving your savings.

Disadvantages of delaying your retirement

One of the biggest drawbacks of delaying your retirement is missing your post-retirement goals. Even if you are working at a job you enjoy, you don’t want to work until you die. There are other retirement goals you can focus on such as travel, spending time with your loved ones, etc. Only great memories matter the most during retirement. You can’t build great memories if you are working yourself to death.

Delaying retirement robs you of the chance to do what you want. For example, if you want to start a new career, you may not achieve this goal due to late retirement. Choosing the best age to retire could also be hard for you if you can’t walk away. You might end up like those people who work and die at the job.

Benefits of early retirement

Early retirement comes with a lot of free time which can be utilized to fulfill your retirement goals. For example, you can use your time to start a new hobby or career. You can also take a chance to travel the world or spend quality time with your loved ones.

Most people spend their entire lives working on jobs they don’t like, dealing with boring co-workers, and begging for days off. By retiring early, you get to report to no one or request permission from anybody. Early retirement gives you the freedom to do whatever you want as long as your financial situations permit it.

Drawbacks of early retirement

The biggest drawback of early retirement is outliving your retirement savings. Even if you have done your homework, retiring at 30 or 40 might not be the best retirement age for you. The earlier you retire, the higher the chances of running out of money. Since you will live many years without working, your retirement savings and income must be enough to sustain your lifestyle.

For example, if you retire at 40 and die at 90, you will need enough money to support you for 50 years. Unless you have serious investments that generate strong returns, it might be hard to live for 50 years without working.

Retiring early also disqualifies you from getting retirement benefits from your retirement accounts. For example, the earliest you can take your social security benefits is at the age of 62, and that comes with the least social security benefits. Most retirement accounts also require that you turn 59½ before you can start taking distributions. Early withdrawals result in a penalty and applicable taxes.

Finally, early retirement comes with higher financial risks unless you have strong retirement savings and assets. For example, an unexpected financial setback such as an expensive medical bill can easily wipe out most of your savings.

How early should you retire?

The thing about retirement is that you can retire at any age as long as you have the financial means to sustain your lifestyle. If you have enough passive income to cover your expenses, you can retire even at age 20. The key here is that your expenses can never exceed your income at any point in your life.

A smart way to choose the best age to retire is to evaluate the balance between your income and expenses. If you don’t want to not work during retirement, you must have enough retirement income to cover your expenses. Since most retirement benefits come at later ages, you will live off your savings before retirement benefits kick in.

For example, if you choose to retire at 44, you won’t be able to take distributions from most of your retirement plans until you turn 59½ and 62 for Social Security. For this reason, you must have enough passive income and savings to sustain until you have reached at least 59½.

If you think you can safely achieve this goal at 40, then, 40 will be the best age to retire. Even if you are much younger such as 20, you can still retire at 20. It all depends on your lifestyle and financial means to sustain that lifestyle for as long as it takes.

Retiring at normal retirement age such as 65 or 66 might be the best age to retire in your case. For example, if you like your job and want to maximize your retirement savings, you can wait until you have reached the official retirement age. This way, you will maximize your social security benefits(if you retire at 70 or later) and take full advantage of compound interest on your retirement plans.

Tips to never run out of money during retirement

One of the greatest fears among retirees is the fear of running out of money. This fear is real and by the time you finish reading this article, someone somewhere just went broke during retirement. Regardless of the age at which you choose to retire, there are important measures you can take to avoid outliving your retirement savings.

The following are tips to lower the risk of running out of money during retirement.

Choose a good age to retire. Before you stop working, choose your retirement age very carefully. Make sure that all dots align and do not leave anything to chance. You don’t want to retire today and find yourself 15 years later hunting for a job or working at Walmart.

Know your retirment income. You may have some retirement income such as dividends, interest from bonds, rental property income, etc. Make sure that this income is also counted when planning for retirement.

Know exactly when you can start taking distributions from your retirement accounts. Different accounts and plans come with different dates to take distributions. So, decide how you will finance your lifestyle before you qualify for retirement benefits.

Create a budget. Since you will no longer work during retirement, you need a budget for everything. A retirement budget’s benefit is ensuring that every penny you spend and everything you buy is accounted for.

Know your monthly withdrawals. Your budget will help you establish a monthly withdrawal to stretch your retirement nest egg for as long as you live.

Live below your means. Being in retirement means you can no longer afford to make financial mistakes. Once you run out of money, you will be done. You can’t just go back to work. Your mental and physical strengths deteriorate as you age. In other words, you cannot afford to mess up or spend more than necessary.

Delay your retirement age. By delaying your retirement age, you automatically reduce the number of years you will rely on your savings. Hence, reducing the chances of running out of money.

Diversify your investments and work with a financial planner. Financial setbacks come in many forms and unannounced. Diversification might be the only way to save yourself from financial uncertainties. If one investment goes wrong, others will thrive. A financial planner can also help you build a retirement plan to stretch your income for as long as you live.

The bottom line

Your retirement age will depend on your desired retirement lifestyle and the financial means to support that lifestyle. You can choose to retire at official retirement dates(65,66, or 67) to take advantage of your social security benefits and grow your retirement savings accounts. You can also delay your retirement and stay with your job for as long as you can if that is what you want to do.

If you are like me, you might need to walk away from your job and retire early as soon as your finances are figured out. If your savings can take care of your expenses and have enough passive income to cover your lifestyle, I don’t see why you cannot retire early. Whether you want to retire early or at a normal retirement age, you need to make sure you have minimized the risk of running out of money. A financial planner can easily help you establish a retirement plan that prevents you from running out of money.

The best time to retire is the age at which you can safely live off your investment returns without touching your principal. It will also make sense to retire if all investments, retirement accounts, savings, and other retirement benefits can sustain your retirement lifestyle for as long as you live.