Deciding when to retire is often viewed as a balance between the benefits of working versus not working, but life events both before and after retirement can upset that balance, according to a Brookings Institute report.
One approach to picking a retirement date, it said, is to “weigh the benefit from additional months or years of income if they keep working against the loss of free time they could spend with family and friends as a retiree. Retirement becomes more attractive as people age, mainly because their retirement assets are rising and life span un-certainty is shortening—reducing the chance they will be older and with a low income.”
Under that approach, “people retire when the benefits of working (higher income and more saving) exactly equal the costs of working more (forgone time in retirement).”
However, life events should also be taken into account because they can change the underlying financial assumptions and thus throw off that date, it said, such as unexpected bad health or other reasons for leaving a job earlier than expected—especially given the difficulty of achieving the same level of earnings if changing jobs late in a career.
Further, events after retirement can change whether the decision point was a good one, including incorrect assumptions about earnings potential in retirement to supplement retirement income; economic conditions that erode the value of investments and other assets; and lower than projected rates of return on investments.