When it comes to planning one’s retirement, everything is relative. To say someone is retiring “early,” requires some sort of explanation or baseline for what “early” is. In the world of finance, some sort of consequence or penalty for accessing financial resources too soon often defines “early”:
• Social Security defines early retirement as age 62, the “earliest” one can begin collecting benefits. By collecting at age 62, a recipient is taking a significant reduction in benefits.
• The IRS penalizes Individual Retirement Account withdrawals by 10%, if the recipient isn’t over the age of 59.5, making retirement before attaining this age, “early.”
• Pension benefits are often lifetime payouts that are calculated based on some form of life expectancy. So taking benefits at an “earlier” age often means the payout will be reduced to account for payments needing to be made for a longer period of time. Tack on that most do not provide any cost of living benefits and this reduction could be viewed as some sort of penalty.
So if you’re considering an “early” retirement, either by IRS, Social Security or employer standards, or simply want to assess when the right time to retire might be, consider these questions:
1. What savings can you rely on, penalty free? Do you have non-retirement savings that you can access like local bank accounts, savings bonds, etc.? Have you checked the withdrawal rules on your company savings plans for provisions that might help you? How about cash value in an old insurance contract? If you’re considering early retirement, it’s best assessing your resources and build up your non-retirement accounts so you have something easy to access.
2. Are you planning on working in some other capacity? Early retirement from one employer does not have to mean complete loss of paychecks. I’ve had clients do consulting work, pick up hours at local retailers, work odd jobs for friends and family or even start their own businesses. The key is to let savings continue to accumulate and delay other benefits like Social Security or pension income.
3. Are there other assets you could liquidate? Is there real estate you inherited? Rental properties you’d consider selling? A second car you’d be willing to part with? All could provide for an immediate lump sum influx of cash to support you. I also have clients who plan to downsize when they retire. If that’s the case, is there equity in your home that might provide you with extra savings for those first couple years of retirement?
“Early” retirement is an exciting thing! But statistics show the first couple years of retirement can make or break long-term results. A good planner can help make an income plan that projects to work for the long-haul, and helps build confidence that an early retirement won’t mean an early shortfall. As always, we’re happy to help.