Being Prepared for Early Retirement
By Winnie Sun
What do you think of when people say “Retirement”? If you’re like many of my clients, your image includes pictures of a paid off house, you and your significant someone at John Wayne airport for a jet to the tropical beaches with a glass of wine in hand, and better yet, enjoying this with your giggling grandchildren and financially savvy children. Every person’s definition of a comfortable retirement differs. What will your retirement look like?
Early retirement is a phrase many of us wish they could turn into a reality. While retiring in your 50s or early 60s sounds enticing, it typically requires years of planning to make sure you’ve accumulated enough assets to last for 20 or 30 years or more. We are currently using a life expectancy of 80-90s in our financial plans. It’s important to factor in how an early retirement could affect your Social Security benefits, options for health insurance, and the nest egg you plan to rely on for ongoing living expenses.
To take Social Security early or later is another big one. Those who collect Social Security at age 62, the earliest age when most retirees are eligible, face a permanent reduction in benefits. For example, if your full retirement age is 66, collecting benefits at age 62 will result in a 25% reduction in the monthly benefit you would have received by retiring at 66.1
That’s not all. If you’re younger, born in 1960 or later will experience a permanent 30% benefit cut if they choose to begin collecting benefits at age 62 instead of their full retirement age of 67. In contrast, delaying benefits past full retirement age results in a higher benefit, with a maximum delayed retirement credit of 8% annually for those who were born in 1943 or later and wait until age 70 to retire. Age 70 is a big year. It’s also at 70 ½ that you have to take Required Minimum Distributions (RMD) from many retirement plans or face possible penalties from the IRS.
Regardless of your age when you retire, we know that Social Security is not likely to pay all of your living expenses. Social Security currently comprises 35% of the aggregate income of Americans aged 65 and older, with remaining income coming from employer-sponsored retirement plans, wages, and other sources.2
Another important budgeting expense is insurance. Finding health insurance is really important if you plan to retire early. Eligibility for Medicare begins at age 65, and those who retire earlier typically must obtain health insurance on their own or through a former employer (Cobra), which can cost thousands of dollars annually in premiums. It’s best to consult an insurance specialist to explore your options.
Being able to retire early is truly a luxury. Early retirement typically requires a larger nest egg to finance living expenses over a longer period of time. Contributing as much as you can afford to qualified retirement accounts, such as an IRA or an employer-sponsored retirement plan, can help you build this nest egg.
Most importantly, retiring early requires advance planning to make the situation work to your advantage. Make an appointment with a financial advisor and if you have the financial resources to do it, start the process at your earliest opportunity.
1Source: Social Security Administration.
2Source: Social Security Adminstration, Fast Facts & Figures About Social Security, September 2014.