Retirement Planning

One factor that distinguishes retirement planning from other aspects of financial planning (such as risk management) is that the timing can be, in most cases, anticipated. While some individuals experience early retirements due to health reasons, the majority of Americans have some measure of control over retirement age. This provides an advantage for planning purposes, since a specific horizon is known for asset allocation. Further, it allows one to anticipate what other resources may be available. In fact, the timing of retirement is often related to the timing or availability of Social Security or any defined benefit pensions.

Social Security retirement benefits have gone through some changes, one of which is that the age of eligibility for full retirement benefits is scheduled to increase for most recent birth cohorts. As of 2001, an individual can elect to take a reduced benefit as early as age sixty-two. Thus, it is no surprise that the average retirement age is just over sixty-two. For anyone that retires prior to age sixty-two, there will be some period during which there is no Social Security benefit. This is certainly an issue that should be considered when choosing a retirement age.

Eligibility benefits from other defined benefit pensions adds an additional element to the timing issue, since these plans may lessen the financial impact of retiring prior to age sixty-two. Since eligibility is (as well as benefits from) typically based on years of service, an individual who was first covered by this type of plan in his or her twenties could be eligible for benefits at some point after age fifty. Some people might retire earlier as a result, while others might retire from their current careers but still work elsewhere.