Deciding when to retire, and perhaps more importantly, deciding when to begin withdrawing funds from our retirement accounts is a major financial decision. Unfortunately for some people with retirement assets the only “rule” in place is a tax penalty for withdrawing funds before age 55. There is even an exception to that rule that can enable a person penalty free to begin withdrawals at age 50.
That being said, before we consider the cost of withdrawing funds too early, let us acknowledge there is no way to know for sure when to begin withdrawals because we are in the area of trying to predict:
- How long we will live.
- Investment earnings: What will we earn in our retirement accounts?
- Investment choices: Will we make the right investment decisions?
- Investment help: Will we choose the right advisor, and will they understand us well enough to help us make good choices?
- Inflation rates
Retirement Unknowns
There are many unknowns in determining when to retire and more importantly determining when and how much to withdraw from our retirement accounts each month. These unknowns include:
- The rate of inflation
- What our accounts will earn
- What our health care costs will be
- What unknown financial costs might impact our lives in the future:
- Helping other relatives
- Significant repairs at home
- Cost of long-term health care assistance
- …and many other things
Figuring Out When to Begin Retirement Withdrawals
Planning for when to begin retirement withdrawals and planning how much to withdraw is where mathematics, investing, our own discipline with finances, and our morbidity intersect. Unfortunately, there is a huge cost to not waiting to begin retirement withdrawals. In fact, the easiest way to increase your own retirement check by 60% or more is to simply delay your beginning withdrawals by about seven years. Here is the example that proves that statement:
A person who defers retirement withdrawals until age 68 versus a person who begins retirement withdrawals at age 61 has two significant factors, both working to their advantage:
Factor 1
If an individual averages roughly 4% annual pension earnings at the end of year seven, at age 68, their retirement assets will have grown by approximately 30% with compounding.
Factor 2
If the same individual has an estimated date of death projected to be 82 years of age, that individual, by waiting seven years to begin retirement withdrawals, has twenty-one years of withdrawals (that is, the difference between age 82 and age 61). On the other hand, if that individual waits to begin withdrawals to age 68, the individual has only 14 years of withdrawals (that is, the difference between age 82 and age 68). In other words: Their retirement withdrawals can increase by 33% (without earnings from 61 to 68). So, by waiting seven years to begin retirement withdrawals there is a significant double benefit for deferring the start date.
For this reason, one could reasonably expect their monthly retirement withdrawals to be 63% higher at age 68 than at age 61; 30% in earnings and 33% in the remaining years to fund our lifetime needs. Of course, if this individual were to live until age 86, or age 90, or age 92, then the second portion of the advantage declines.
Of course a longer life span is another reason to delay the beginning of your retirement withdrawals.
The Bottom Line
To recap: The cost of not waiting to begin retirement withdrawals could be a retirement check of $4000 per month versus a retirement check of $6520 per month!
A retirement planning professional I know loves to say “don’t live like a king and die like a rat”… not a good picture!