If retiring at 65 beats retiring at 66, maybe retiring at 64 beats retiring at 65. How should you analyze this option?

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We all have to decide when to call it quits. But it’s a very tricky decision. So let me give you a way to make it easy, via the following illustration.

Let’s suppose you hate your job and are thinking of retiring at 65, rather than at 66 as originally planned. Your mind wanders to sleeping late and improving your golf game.

But then doubt sets in. Missing out on one year’s earnings will hurt. On the other hand, there’s taxes. So maybe it won’t hurt that much. But your earnings have never been higher. That extra year of work could mean higher Social Security benefits for decades. Then again, at 65 you can go on Medicare. But, hold on, you’ll need to pay Medicare Part B premiums plus buy a major medical policy. And so on.

Can economics consider all these factors? And can it also help you decide whether to retire early? Yes.

As mentioned in previous columns, my company (from which I derive no income) has a free software tool called ESPlannerBASIC. (ESPlanner stands for Economic Security Planner.) You can go to www.esplanner.com/basic, click Begin Planning, enter your data and tell the program you’re going to work until you’re 66.

It will calculate how much your household can spend each year on an ongoing basis after meeting all your off-the-top housing and other expenses as well as paying your taxes and Medicare Part B premiums. This is your annual discretionary spending budget.

Once you see the results, run the tool again — but now specify you’ll work until 65 and check what happens to your annual discretionary spending. Suppose it’s 2 percent lower — that’s the cost of retiring a year early.

Now ask yourself how much of a drop in your living standard you’d be willing to bear to obtain that extra year of leisure. Suppose the answer is 7 percent — that’s the benefit. And since the benefit exceeds the cost, retiring early is worth it. But if retiring at 65 beats retiring at 66, maybe retiring at 64 beats retiring at 65. How should you analyze this option?

Simple: Run your numbers again, this time retiring at 64. (When you do, make sure to include the cost of a private health-insurance plan, since you can’t get Medicare until you’re 65.) Also, decide how much of a spending hit you’re willing to take to retire at 64 instead of 65.

If the reduction in spending from retiring early is, say, 2.5 percent, and you’d only be willing to sacrifice 2 percent of your spending for yet another year of leisure, retiring at age 65 is your sweet spot. If retiring at 64 beats retiring at 65, compare 63 with 64. Continue in this manner until the benefit from another year of retirement is less than the cost.

What if you’re married? Now you must make a joint retirement decision. To zero in on the right joint choice, make a table of your annual spending for each combination of retirement ages of you and your spouse. Put your retirement age along the rows and your spouse’s along the columns. In each cell, enter your annual spending amount.

Now, each cell entails a fixed number of remaining working years for you and your spouse as well as a joint living standard. The table will thus show you the living standard trade-off from working fewer versus more years.

It may surprise you. If your spouse earns much less than you, there may be little payoff of having your spouse work as long as you, in terms of a higher joint living standard.

What about cash flow? If you are holding off until, say, 70 to take Social Security and retirement-account withdrawals, retiring early may require dropping your spending until then. The program will show you ways to lower your spending as needed before 70.

If your cash flow is tight, you’ll see it from the program’s spending path, and it may influence your optimal retirement age. Or you may decide to tap into your retirement account earlier than planned.

The bottom line is that retiring early will affect the level and — if money is tight — the pattern of your spending over time. But by considering how much you’ll get to spend and when you’ll get to spend it for different retirement dates, you’ll be able to find your bliss point without guessing at the impact of retiring at different ages.