For years, my friend Paul has been looking forward to retiring, eager to linger with his family at the lake and tackle long-deferred writing projects.
Now, he and others on the cusp of retirement are grappling to answer the big question: "Can I still afford to retire—or should I wait?"
Let's face it: Even when the stock market's strong, the idea of never getting a paycheck again can feel unsettling. So if you're among those nearing retirement who have taken a sudden, substantial hit to your net worth, it's time to take a hard look at your financial plan. Here are three things to consider:
1. How will you replace your paycheck?
In retirement, income typically comes from three places:
- Social Security, the federal government’s inflation-adjusted retirement program
- Employer pensions and annuities providing guaranteed lifetime income in retirement
- Investments in stocks and bonds
The goal right now is to give battered investments time to recover, rather than selling them and locking in losses. If you can generate enough income from Social Security and pensions or annuities to cover your basic living expenses, you're probably in good enough shape to stick to your timetable. After all, it's not even possible at the moment to splurge on a cruise, or even a party for that matter, to celebrate your next phase.
2. Can you hold off on Social Security?
But before you file for Social Security benefits, consider this: Most people could benefit by waiting (though it depends on your individual situation). You can take early benefits when you turn 62, but your monthly payments would be reduced permanently. And that's a big deal, since Social Security gets a cost-of-living adjustment every year, unlike most privately funded pensions. So it’s generally better to wait to collect until your "full retirement age" of 66 or 67, determined by your birthdate. And if you hold off till age 70, you can maximize your monthly payments.
Realistically, do you have enough pension or annuity income to wait a little longer to start collecting Social Security? Alternatively, do you have savings in cash, or in bonds that generate interest payments, that can tide you over till your 67th birthday? It’s one of the top considerations as you think about your timing.
3. Is there a way to reward yourself for working a little longer?
If your retirement savings are heavily weighted in stock investments, you may want to consider working longer rather than selling off your holdings at a loss—or having to collect Social Security early and lowering your payments for good.
Rather than thinking of it as a dream deferred, consider a few ways you could treat yourself now for boosting your future Social Security payments and giving your investments a break. If you decide to keep working another year or two, you could spend a small part of what you normally save on an experience you were looking forward to in retirement. Go ahead and buy that new bike, for example. Or start researching the big trip you want to take when it's safe to travel again.
Back to Paul. He and his wife, who already retired, have devoted their lives to service at nonprofit organizations and were not optimistic about how much retirement income their workplace plans might provide. But when they consulted a financial advisor, they learned that their retirement income post-market turmoil could be better than they guessed. Here's why: The annuities in their plans can provide more guaranteed monthly income than they realized. Their other investments have suffered, but their so-called non-essential spending has dropped as well.
So they have decided to take the leap. They can leave the door open for interim work assignments if the market recovery is stalled. They did decide to postpone planning travel overseas to reconnect with far-flung family, but they are fine with it. They are healthy, can cover their living expenses, and keep their little place on the lake.
And that's enough for now.