Saving for retirement is more than putting the money into your retirment savings accounts. It is a matter of predicting what your retirement lifestyle will look like and understanding the financial requirements to sustain that lifestyle. If you have been saving for retirement for a while, however, you might be wondering when it is the best time to stop saving for retirement.
So, when is it a good time to stop saving for retirement and start spending your retirement savings?
A quick answer to this question is to evaluate how much expenses you will have compared to your retirement income. It would be best if you stopped saving for retirement when income/earnings from your investments, retirement savings accounts, pension plans, etc. can cover all your monthly expenses and you have no debts.
Key takeaways
- Before you stop saving for retirement make sure your income from investments and all retirement accounts such as 401(k) plans, IRAs, pension plans, social security, etc. can cover all your expenses.
- It is a good idea to pay off all your debts before you stop saving for retirement
- Some retirement accounts require that you reach a specific age before taking distributions. For example, 401(k) plans and IRAs require that you turn 59½ before you withdraw money to avoid a 10% early withdrawal penalty.
- If you delay taking distributions, some pre-tax plans such as 401(k) and IRAs will require you to start taking required minimum distributions (RMDs) when you turn 73.
At what age should you retire? Most people plan to work until they have achieved the official retirement age which is 67 years. However, if you are financially stable and all your retirement savings can cover all your expenses, you don’t need to wait until you have reached retirement age.
Here is everything you need to know about retirement savings and when it is a good time to stop saving for retirement.
When is a good time to stop saving for retirement?
To answer this question, it is best to understand your current and projected retirement expenses and how much you have saved for retirement. This is because the best way to top saving for retirement is to stop only when incomes from all your money sources can cover your expenses. In addition, make sure that all your debts are fully paid off. Debt can make it difficult to have a healthy retirement lifestyle.
The following are retirement plans and sources of income that most people have.
- 401(k) plans
- Individual retirement plans (Roth IRA and Traditional IRAs)
- Health Savings Account (HSA)
- Taxable brokerage accounts
- Pension plans
- Income from other businesses and investments
- Social security
- A full-time or part-time job(if you are still working)
All these accounts will give you some form of income. The sum of all these incomes should easily cover your total expenses before you start thinking about retirement.
A common trend among retirees is to save a particular amount and evaluate how much they can withdraw to avoid outliving their savings.
Although this is a good strategy, you should base your retirement savings on return on investments(ROIs) rather than a particular dollar amount saved. Without relying upon this strategy, a financial setback such as a costly medical bill can wipe out a large chunk of your savings. When this happens, you will be forced to readjust your retirment budget or return to work.
As long as your earnings are higher than your monthly expenses, you will never have to worry about outliving your retirement savings.
What is the official retirement age?
Although you can retire at any age, there are retirement ages you should know when you want to take advantage of most of your retirement accounts such as social security benefits, 401(k) plans, and IRAs.
According to the Social Security Administration (SSA), the full retirement age is 67 years if you want to take advantage of retirement benefits. This age applies to people born in 1960 or later. Those who were born between 1943 and 1954, can retire at 66 to take advantage of retirment benefits. Anyone born between 1955 and 1960 will have a retirement age that increases gradually from 66.
Even if you have not reached the official retirement age, however, you can still take your social security benefits as early as 62. Tapping into social security benefits this early, however, results in a lower percentage.
Besides social security benefits, you can take distributions from some retirement plans at a much earlier age. For example, most retirement savings plans such as 401(k) plans, IRAs, etc. require that you reach 59½ before you start taking distributions.
When should you start spending the money you saved for retirement?
Most people save for retirement but struggle with taking the money out. If you feel comfortable with your retirement savings, it might be time to retire and start enjoying your savings. When should you start spending the money you have saved for retirement?
The best time to start spending the money in your retirement accounts is when incomes from all your retirement accounts can cover all your expenses. At this level, you will be spending earnings from your account without touching the principal amount. You can even retire at 30 or 40 without worrying about running out of money when this condition is met. Your current financial situation, lifestyle, and whether you have saved enough to live off will all affect the time you retire.
One thing to keep in mind is that some accounts require that you turn a certain age before you can take distributions. If you are thinking about taking the money from your pre-tax 401(k) or IRAs, for example, you must be at least 59½ to avoid a 10% penalty. You can get away with this penalty if you meet the exceptions set by the Internal Revenue Service (IRS).
If you choose to delay spending the money in your retirement accounts, you might be hit by requirement minimum distributions(RMDs).
All tax-deferred retirement plans such as 401(k) plans, IRAs-based plans, 403(b), 457(b), SIMPLE IRA, etc. require that you start taking RMDs when you turn 73 years old. Even if you don’t want to spend your retirment nest egg, you will still be forced to take RMDs. Failure to take RMDs might result in a 25% tax on the money you did to distribute on time. The IRS notes that if the RMD is corrected within 2 years, the penalty will be reduced to 10%.
According to the IRS, Non-IRA Roth accounts will no longer require RMDs starting from 2024. These accounts include designated Roth accounts in 401(k) and 403(b).
The fear of running out of money
It can be intimidating when deciding the best age to retire due to the fear of running out of money. There are too many questions you must figure out answers for.
- Where will you live?
- Who will you hang out with?
- The type of house you will live in
- What is your diet going to look like?
- What if I run out of money
- What will my occupation look like and what will I do?
The biggest question that dominates them all is the fear of running out of money. What if you run out of money?
Is it possible that you can run out of money during retirement? Yes, you can indeed run out of money during retirement millions of people find themselves in this situation. Once you stop saving for retirement, nothing extra comes in except return on investments(ROI). If your ROI is not enough to cover your expenses, you end up spending your contributions and eventually run out of money. When this happens, you are out of luck. You can’t just go back to work. You don’t have the health and physical capacity to do so.
The fear of outliving retirement savings prevents many people from spending their retirment savings. They live on bread and butter to preserve their retirment savings. This affects their health and causes irreversible damage. To avoid outliving your retirement savings and have peace of mind, work with a financial advisor to help plan for your retirement. An advisor will guide you through the whole process and ensure that you are on the right track. The advisor can also help you pick the right time and age to retire based on your lifestyle and retirement savings.
Related: How much do I need to retire: Save for retirement
What are the things you must do before you retire?
If you approach retirement with a plan, you’ll never have to worry about outliving your savings. The following are things to do before you stop saving for retirement or retire.
- Have enough money saved for retirement
- Establish a retirement budget
- Make sure you have an emergency fund
- Know how much you are planning to withdraw from your savings
- Know your social security benefits
- Prepare a will
- Know where you will live
- Have some assets to generate more passive income
- Hire a financial advisor in the process
Read more: 10 important things to do before you retire
The bottom line
The best time to stop saving for retirement and start spending your retirement nest egg is when your retirement earnings can cover your expenses. In addition, make sure that you have paid off all your debts and have established an emergency fund. Debt can make it difficult for you to fulfill your lifestyle.
Some retirement accounts require that you reach a particular age before you start taking distributions. Always understand the distribution rules associated with your retirement accounts. To make sure that everything goes smoothly, have a retirement budget and use a financial planner/advisor to help plan for retirement.
