What’s the right time to retire? That depends on you

The right time to retire is a deeply personal decision. There is no magic number for the level of wealth that you need, and multiple factors need to be taken into consideration – from the level of your resources to your ambitions and health. It is a complex decision and one that requires sound financial planning in advance.

There are a few basic principles when accumulating wealth for retirement. The first – and perhaps the most important – is that the longer you can wait for retirement, the wealthier you will be. Postponing retirement allows you to build up a larger stock of resources to see you through the years when you are no longer working, as well as reducing the amount of time you need to draw on those resources. All other things being equal, where possible, it is better to wait.

However, certain elements of your retirement assets are likely to be time-sensitive. For a start, you can usually only take your state pension at a certain age – 65 in Luxembourg. The social security system allows you to defer taking the pension, but the ability to receive it earlier is limited to exceptional circumstances. There are also rules around when you can take private pensions; in Luxembourg the lower limit is usually 60.

A central consideration is that retirement can be long – 20 or even 30 years for many people. That means your income from a pension and other assets will need to keep pace with increasing prices over a long period of time. Inflation can be a significant threat, as many people have discovered in the past few years.

Just a couple of years of high inflation such as that of 2022 and 2023 can quickly erode the purchasing power of your retirement income.

Just a couple of years of high inflation such as that of 2022 and 2023 can quickly erode the purchasing power of your retirement income. With that in mind, keeping some form of inflation protection in a portfolio is advisable – either through stock market investment, inflation-linked bonds or assets such as infrastructure whose return is likely to increase over time.

The nature of retirement

The first decision on the right time to retire will depend on whether you can afford it. To understand this, you will need to have a clear idea of the amount of money you need once retired. Retirement can look very different from person to person. While pension providers often recommend two-thirds of final salary, this will be more than enough for some people, but not nearly enough for others.

It is important to judge whether you can expect to receive any additional income in retirement. Many people will have had enough of corporate life by the time they reach their mid-sixties and are ready for a clean break with the working world. However, others may wish to continue with some form of professional activity – which could be consultancy work, involvement in one or more private business ventures or directorships. This will also influence the amount you need to save during your working life.

You will also need to think about the lifestyle you want. For some people, retirement is a moment to retreat to the garden for quiet reflection; others want to travel the world and work on their bucket lists of destinations and experiences, or to visit children and grandchildren scattered around the globe. The income needs for the latter will be far higher than for the former.

It may also be that people’s income needs will vary over the course of their retirement – high in the early years of a more active lifestyle, lower later on when health issues may impose constraints. Cash flow modelling can be a useful tool in assessing what your lifestyle will cost you over an extended period of time.

Cash flow modelling can be a useful tool in assessing what your lifestyle will cost you over an extended period of time.

The cost of health issues also needs to be taken into account. While it is difficult to predict care needs later in life, it is worth factoring in that, as people live longer, the likelihood grows that their capacity to look after themselves may diminish. This can also be an important factor in inheritance tax planning. While it might be tempting to give away your wealth to help your heirs minimise the tax they will have to pay, you need to ensure that you leave yourself with options should you or your spouse need care in later years.

Managing resources

If one side of the equation is your income needs, the other is your resources. Any decision on when to retire should come with an honest appraisal of the capital you have at your disposal and how that may translate into an income to support you in retirement. This should involve looking at all your wealth, including pensions, property assets, liquid savings and potential inheritance.

Ideally, this process should start a decade before you plan to retire. You may need to dispose of certain assets and acquire others to create an income, or to protect against unforeseen events such as a stock market crash. It is better not to do this in a hurry, or you risk having to buy and sell at a disadvantageous time in the market. Moving assets across gradually from one investment strategy to another as part of a co-ordinated and planned process is likely to be a safer option.

In addition, starting this process ahead of time will give you an idea about how much you need to save to pay for the retirement you want. While starting early is always better, life often gets in the way, and many people find themselves with relatively little time to make up any shortfall in their savings or other resources. The earlier you recognise this potential issue and start to address it, the more compounding will work in your favour.

It is also true that not everyone gets the choice when to retire. Companies can lay off older workers, and ill health can force a change in lifestyle. However, the process of appraising your income needs and resources will not look too different even when the timing is forced upon you.

The answer to the question as to when is the right time to retire is that it depends on you: whether you enjoy your job, the resources you have built up over time, and your expected needs in later life. Only you can decide the right time to retire, but you can influence it and give yourself a wider range of options with sound financial planning.

Retirement can look very different from person to person. Pension providers often recommend two-thirds of final salary, which may be plenty for some but not nearly enough for others