Retiring Early?

This is a stressful time in many ways for many people. The nature of work may be changing, and a lot of folks don’t have a clear idea on what the future will look like. A job may have been lost or might be at risk. It could be a coronavirus-induced temporary lay-off that winds up being permanent. Or maybe it’s simply that the current environment is making it harder to think about going back to the grind.

While we shouldn’t make major decisions out of fear, all this uncertainty can be difficult to bear. The Wall Street Journal recently reported that about 80% of Americans feel like the country is spinning out of control, so it’s natural to feel uncertain about retirement as well.

Research shows that almost half of folks retire earlier than planned, often because they’re forced into the decision by getting downsized, or health problems make it too challenging to work as they did before. If you’re thinking about (or being forced into) retiring early, here are some financial planning considerations:

Look at your income sources.

You can start drawing Social Security anytime between age 62 and 70, so that’s an obvious first place to look for income. About 1/3rd of retirees claim their benefits at 62 and roughly 60% start taking benefits prior to their full retirement age (FRA, currently somewhere between 66 to 67 for most folks).

The problem with starting before FRA is that your benefits get reduced for life, perhaps by as much as 32% (an 8% hit per year). And if you’re married the reduction isn’t just for your life, but your surviving spouse’s life as well. Ideally, you’d wait at least until FRA, but longer is better because under current law your benefit grows by 8% per year up until age 70.

Instead, the best place to look for income early in retirement is probably your investment portfolio. You’ve been saving money in your 401(k), IRA, and brokerage accounts for decades, so it cuts against the grain to start drawing it before Social Security. As counterintuitive as this sounds your investments, at least on average, aren’t likely to outperform the 8% reduction/bump from Social Security. They might have in the past, but our best guess is that they won’t in the future. Maybe it’s more like 5-6% for a balanced portfolio. Essentially, we want to try to maintain the 8%-earning asset (Social Security) as long as possible, ideally until age 70.  

What are you currently spending?

If you haven’t been tracking your spending now is the time to start. Lots of folks retire without understanding their current cash flow and find themselves coming up short. You’ll want to take a sober look at your spending and decide what can be cut if necessary. Maybe you can shave off a chunk each month to help fund your early retirement. Maybe nothing can be cut. Either way it’s critical planning information that you really don’t want to guess at.

There are apps to help with this of course, but I favor pouring over bank and credit card statements. I feel closer to the information that way. Six months of statements is a good start. Just be sure to look at enough so that you feel it represents reality.

What about healthcare?

Assuming you’re retiring before enrolling in Medicare at age 65, you’ll likely need to pay for your own health insurance until then. You’ve probably already guessed that it’s expensive, but you’ll want to find out how expensive.

Your soon-to-be former employer will likely allow you to stay on their health plan if you pay full price. This lasts at least 18 months and is part of the government’s COBRA legislation from years ago. COBRA might not be your best option, however. You might qualify for government subsidies or simply choose to enroll in a more modest plan. Either way, you’ll want to do so within 30 days (or 60 in some cases) to avoid a lapse in coverage.

Once you determine your options, you’ll want to give this information to your humble financial planner for inclusion in your plan. Then you’ll mark your calendar for age 65 and Medicare enrollment, an event that almost always offers a sizeable savings.

Ponder how long you’ll be out of work.

While obviously tough to know for sure, it’s important to ask yourself how long this retirement phase could last. Will it mean no more work forever? Or, maybe you plan to go back to work part-time after taking a breather? Planning on absolutely zero income for the rest of your life is much more expensive than planning to have income at some future point. People often go back to work in some capacity and doing so later in life can help “pay” for retiring earlier than planned. Don’t limit your options by thinking you’ll never earn money again.

Stress-test your retirement plan.

All the above and more gets added to your plan and then the whole thing gets stress-tested multiple ways. Then we tweak it some more and test it again. Doing so let’s us understand how likely your new plan is to be successful. It also helps answer questions regarding when to start Social Security, the importance of going back to work at some point and what you need to earn, how well your investments need to perform, and so forth. It takes work but it’s doable.

The bottom line is that even with all the uncertainty we’re experiencing, you may have more flexibility than you realize if you plan well.

Have questions? Ask me. I can help.

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