Your money, not your age, signals when it's time to retire

By Michelle Singletary
Sunday, July 18, 2010; G01

My husband and I are hoping to retire -- or at least reduce our work schedules -- when our youngest child, who is now 9, graduates from college.

We decided to wait until that benchmark is met to make sure we're still in our peak earning years to pay for all the children's education without incurring debt. Before we retire, we also want to have enough saved to replace a certain percentage of our pre-retirement salaries.

Most importantly, we decided not to take a mortgage into retirement the way some people take overstuffed luggage on a long vacation. We want to be rid of that financial baggage as we coast into our sunset years.

That's our plan.

So, let me ask you, what benchmarks are you using to determine whether you can live comfortably in retirement?

I ask because I've run into far too many folks whose only benchmark is their age. They have no plan, no checklists.

"I'm out of here at 55," one woman told me.

"Can you afford to retire at 55?" I asked.

She didn't know.

"When you are in retirement and you're on a fixed income and that fixed income is all you have forever, you better have a plan," says Darsi Ringer, vice president and financial consultant for Charles Schwab.

Ringer advocates considering the following to determine whether you are ready to retire:

-- Will your mortgage be paid off?

-- Could you cut your spending by 20 percent in retirement during hard times?

-- Can you wait past age 62 to start collecting Social Security?

-- Can you replace at least 40 percent of your pre-retirement income? (Ringer advises having at least two years of retirement expenses in cash, for years like we've had of late.)

-- Do you have enough savings to reasonably last you to age 95 (barring a catastrophic illness or financial calamity)?

Let's begin with the house, which is most people's biggest expense. With no mortgage, you've immediately reduced your retirement expenses by at least 30 to 40 percent. You'll still have expenses to maintain the home and pay property taxes, but eliminating the mortgage will provide you with much more financial freedom, Ringer said.

Only 48 percent of retirees in a 2009 survey had paid off their mortgage, compared with 76 percent surveyed in 2007, according to a report released this spring by the Society of Actuaries.

It used to be that many financial experts would tell people to keep their mortgage because the cash they would use to pay it down could earn more in the stock market. Try telling that to anybody these days.

In a Consumer Reports survey, 74 percent of retirees who didn't have any major debt said they were highly satisfied with their retirement.

I like Ringer's 20 percent benchmark. This forces you not only to budget but also to consider what could be cut when financial difficulties arise. If you know your money is going to be tight from Day One of retirement, with little room to eliminate expenses, then perhaps it's not yet time for you to stop working.

Knowing when to take your Social Security benefits is a tough decision, because it involves guessing how long you are going to live. You have three options. You can elect to start collecting early, even though your benefits are reduced a fraction of a percent for each month before your full retirement age. You can wait until your normal retirement age, which can be as late as 67, or keep working until 70 and collect more money every month. Check your annual Social Security statement, which lists your projected benefits at these three stages.

To arrive at your Social Security benefit, your lifetime earnings are adjusted to account for changes in average wages. Social Security then takes the 35 years you earned the most and applies a formula to determine the monthly benefit you'll get at your full retirement age.

The longer you work during your top earning years, which is typically the years just before retirement, the higher your Social Security benefit.

"People don't consider that, because they don't know the nuances of how Social Security works," Ringer said.

The final two benchmarks can be difficult, because they involve inflation estimates and hoping your investments meet projected returns. Still, it's worth working out the numbers.

Fun stuff, right?

Okay, maybe not so much. But fail to come up with a pre-retirement plan, and you're planning to fail during a time when you have less chance for correction.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions might be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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