Written by Robb Engen
Updated Sep 03 | 6 minute read
Robb Engen, an advice-only financial planner, offers his two cents on making the call on whether to retire or work another five years.
It's crucial for Americans who are approaching retirement to take an honest look at their current financial situation and future goals to determine whether they're well equipped to retire comfortably. Ideally, this financial planning assessment can take place early enough to give you enough runway to make changes, if needed—think three to five years before retirement.
Consider, too, that for many people, their career is more than a paycheck. Work forms part of their identity and fulfills their sense of purpose. Going from 100% work mode to 100% leisure mode can be a struggle. Finding your new sense of purpose is paramount in retirement.
The definition of retirement can even be flipped on its head when you consider that nearly 25% of men and 15% of women aged 65 and older are still in the workforce in some capacity.1 Meaningful part-time or entrepreneurial work can enhance your lifestyle and potentially add extra spending money to your coffers.
If you're debating retirement in the next five years—versus the next year—here's how to evaluate your retirement plan so far to see if you're ready.
First, take a realistic look at how much money you'll need to live a comfortable lifestyle in retirement.
In my experience working with hundreds of retirees as a fee-only financial planner, most would like to have the same standard of living in retirement that they enjoyed in their final working years—and perhaps even enhance it with additional funds for travel, hobbies and spoiling their grandchildren.
That's why tracking your spending and determining how much it costs to live your life is important, particularly if you've never implemented or stuck with a budget before. You need to know where your money is going and what your lifestyle costs.
From there, a financial planner can also help you determine your comfortable spending floor as well as your safe spending ceiling (i.e., the most you can spend without running out of money in your old age). That spending range can give you realistic guardrails to stick with throughout your retirement.
Of course, a lifestyle of spending $100,000 per year will look much different than a lifestyle of spending $50,000 per year. Be honest with your capacity to maintain a certain lifestyle—which leads to the next question to ask yourself.
READ MORE: How IRAs Can Make Saving for Retirement Easier
Once you estimate how much money you'll need, add up anticipated income streams—including Social Security benefits, pension payments, 401(k)s, 403(b)s, IRAs and any other savings and investments.
Although eligible for Social Security at age 62, you may receive a 30% reduction in funds for taking early benefits. But if you delay taking your benefits from your full retirement age to age 70, your benefit amount will increase. For example, waiting past the full retirement age of 66 until age 70 can result in as much as 8% more in retirement benefits each year you wait.2 If your savings and income streams don't match your goals, it's clearly not time to think about retirement just yet.
Another consideration: Age may come with medical expenses you didn't have before, and Medicare retirement benefits could assist in paying for those bills.
Life doesn't simply move in a straight line. In addition to their regular annual spending, retirees will certainly incur one-time expenses throughout their lifetime.
In my experience, these can be lumped into five categories:
READ MORE: 6 Important Costs to Consider When Planning for Retirement
Homeownership can be expensive, and if you bought or upgraded your home later in your career, you may still be carrying a mortgage payment into your retirement years.
While a paid-off home is often the foundation of a solid retirement plan, it may be perfectly sensible to continue paying a reasonable fixed-rate mortgage in retirement if you have the income to support those payments.
But if you're assessing your retirement readiness five to 10 years away from retirement, you ideally want to align your mortgage freedom date with your retirement date for peace of mind.
Also, consider the possibility of downsizing or selling your home and renting in retirement to unlock untapped home equity that can enhance your lifestyle.
READ MORE: Personal Finance 301: Reverse Mortgages
Your final working years are a great time to boost your retirement savings. Major financial burdens, such as paying down the mortgage and raising children, should be behind you and those savings can be redirected into your retirement nest egg. Procrastinators also have a final chance to break any bad spending habits and set their finances straight.
While not a desirable solution, postponing retirement for five years does offer considerable benefits for soon-to-be retirees who need a savings boost:
Remember that your 401(k) is just one retirement account. If your personal finance plan includes multiple retirement accounts and savings accounts, mutual funds, certificates of deposit (CDs) and investment portfolios, your final retirement savings could be even larger if you work as long as possible.
READ MORE: Compare your savings to how much the average person has saved at your age.
The government offers catch-up contribution options for most retirement accounts for those approaching retirement age. At age 50 you will typically qualify to put more money away into tax-deferred accounts.3
If you're thinking about retiring this year, you may want to consider how working five more years could lead to tax benefits. For instance, you could max out your 401(k) and rake in company matching funds. If you don't have an IRA, open one and contribute the max allowed.
Retirement readiness is about more than just crunching the numbers. It's about what you're retiring to, not just what you're retiring from.
Some research has suggested that retirement could lead people to feel aimless and lost. However, retirement may actually provide an opportunity to experience a renewed sense of purpose, especially for those retiring from dissatisfying jobs.4
After taking stock of your financial situation, make sure you know exactly how you plan to spend your retirement years so you can maintain joy and a sense of purpose.
READ MORE: Weighing the Pros and Cons of a Retirement Community
Robb Engen is a leading personal finance expert in Canada and the founder of Boomer & Echo, an award-winning personal finance blog. He is a fee-only financial advisor who helps clients at different ages and stages get their finances on track and prepare for retirement. He's also regularly quoted or featured in top financial media, such as The Globe and Mail, MoneySense, Financial Post, CBC and Global News. Robb lives in Lethbridge, Alberta, and is the married father of two young girls who keep him very busy.
1. Mather, Mark and Scommegna, Paola. Fact Sheet: Aging in the United States. PRB. January 9, 2024.
2. Delayed Retirement. Social Security Administration. Accessed July 17, 2024.
3. Retirement topics: Catch-up contributions. IRS. March 20, 2024.
4. Yemiscigil, Ayse et al. The Effects of Retirement on Sense of Purpose in Life: Crisis or Opportunity? Psychological Science. October 29, 2021.