Retiring early is a dream for a lot of people.
But it takes some planning to retire with enough money to last 30 or 40 years. One reader preparing to leave the workforce wondered whether she had all of her bases covered.
“I’ll be retiring at the end of June at 55,” she wrote. “I just refinanced my house to shorten the term to 10 years at $1,700 a month. I will up the payments to pay the mortgage off even sooner. No credit card debt. My monthly pension income will be about $4,650 after taxes and health insurance. I have $100,000 in a six-month certificate of deposit and about $80,000 in 403(b) and 457 accounts. Beyond what I will do when retired, what financial questions should I be thinking about?”
I asked two financial experts what an early retiree should consider.
Eric Bronnenkant, head of tax at online financial adviser Betterment, discussed ways this soon-to-be retiree could access retirement accounts without incurring an early-withdrawal penalty. Normally, if you withdraw money from your workplace retirement plan before you reach 59½, you pay regular income tax, plus a 10 percent penalty.
However, there are exceptions to that 10 percent penalty, Bronnenkant said. One exception is taking a distribution from an employer’s retirement plan such as a 401(k) or a 403(b). The rule applies if you leave or lose your job in the year you turn 55 (or later). It does not apply to an IRA or funds in an old plan.
Bronnenkant said to ask yourself: Are my investments properly diversified to take advantage of growth and keep pace with and/or exceed inflation?
One of the biggest threats to your retirement savings is inflation.
“While many people are rightfully aware of investment risk, inflation risk is a commonly overlooked issue,” he said. “The cost of goods and services, especially medical in retirement, will likely exceed the growth of conservative investments. It is important to find a portfolio risk level to be comfortable with that balances these risks.”
Then there is the question of when to take Social Security if you are eligible. Bronnenkant asked: Do you plan on starting a reduced benefit at 62, having a normal retirement at 67 or waiting until 70?
“Starting the benefit early with a reduction may make sense if you believe you can invest the money better than the U.S. government and believe you may not live an average life expectancy,” he said. “However, it may make more sense to defer until 70 and receive a higher benefit if you are more concerned about outliving the average life expectancy.”
Certified financial planner Carolyn McClanahan, formerly a physician, who founded the fee-only Life Planning Partners in Jacksonville, Fla., said to consider the stability of any pension you are entitled to receive.
“Quitting work at 55 is awfully young, and if there is not an inflation component, her savings can be quickly consumed. If it is a corporate pension, there is always a chance they could go out of business and she’ll have to rely on the Pension Benefit Guaranty Corporation.”
McClanahan said to consider all of your expenses in retirement.
“Most people think about the daily expenses, but forget the ‘pop ups,’ such as setting money aside for home and car repairs, a new car purchase and unexpected health expenses, especially dental and hearing costs. These can quickly erode a safety net.”
What about the costs of long-term care?
“If she has no need to leave a legacy, her pension and Social Security may be enough, but she needs to get an idea of the potential costs of long-term care in her area to be certain,” McClanahan said.
Finally, think about what you’ll do after you stop working.
“I cannot overstate the importance of her making certain she has meaningful engagement in her life after she quits work,” McClanahan said. “Retirement was invented in the 1930s with Social Security. Until then, people pretty much worked until they were no longer able. However, the average life expectancy back then for someone at 65 was only 72, so people did not live in retirement very long. By engaging in enjoyable work at least part time, she can keep her mind and body active, stay socially engaged and increase her financial security just in case things don’t work out as planned.”
If you retired early, what advice would you give to someone considering leaving behind a regular paycheck? Send your comments to email@example.com. Please include your name, city and state. In the subject line, put “Early Retirement.”
Retirement Rants and Raves
I’m interested in your experiences or concerns about retirement or aging. What do you like about retirement? What came as a surprise?
If you haven’t retired yet, what concerns you financially?
You can rant or rave. This space is yours. It’s a chance for you to express what’s on your mind. Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
Considering some recent news about the growth of 401(k) millionaires, I heard from retirees who joined the club.
“It was certainly not that hard to get into the millionaire’s Club for many baby boomers,” wrote B. F. from Maryland. “The stock market had such a fantastic long upswing in the 1980 to 2000 run, and then a lot more growth after that. By religiously investing enough to get my employer’s generous match (6 percent), I was saving 12 percent, as was my wife, until she stayed home to raise the children. And we both contributed the maximum allowed by law into our IRAs and later Roths. We eventually figured out that we could also contribute to a Roth 401(k). As a result, we are in the millionaire club. The best news is that all our children understand the miracle of compound returns.”
John R. of Bradenton, Fla., and his wife, both 64, are millionaires, too. “We subscribed to not having debt except for a mortgage our entire life. While we both had average-paying jobs until our more senior years, we maxed out the matching contributions. My wife and I lived and worked overseas for four years, helping us save dramatically. My wife stopped working in 2010 and began taking Social Security at 62. I retired at the end of 2016 and have not looked back. She began taking her pension at 62, and I just started my pension at 63½. I will begin taking my Social Security at full retirement age. Time was clearly on our side. We’ve been riding the markets up and down and never panicking AND never selling.”
“It was a proud moment a year or two ago when my 403(b) accounts slipped over the $1 million mark,” wrote 62-year-old Judy from Boston. “But I’m afraid that hitting that milestone hasn’t made me breathe much easier. Sure, it’s impressive in some ways, but I am worried that I won’t have enough money to live beyond 85 or so, and that’s with a modest withdrawal plan starting at 66 and 4 months, when I can more comfortably take Social Security. I worry a lot about running out of money when I’m too old to work. I am single, no kids and currently not working.”
The workplace plans of David W. of Los Angeles have grown to a little over $1.1 million. Like so many others, time and consistent investing got him into the millionaire’s club. “I have worked in higher education administration off and on since 1985. I am now 56 and considering retirement in a couple of years. I have been putting away 15 percent of my income since the beginning of my adult employment history. I was never afraid of taking risks and I often invested more money when markets were down, anticipating they would rise. My adviser keeps me grounded, though, steering me away from trends. I look forward to an early retirement if I can pull it off. I’m meeting with my adviser to discuss a two-year plan with my son in middle school so I can enjoy more time with him before he leaves the nest. My only worry is health.”
Michele of the District wrote, “When I hit over $1 million, I placed my assets in more conservative funds.”
Others shared their retirement experiences.
“Leaving the work world of earning money is kind of scary when your retirement expenses are covered by hypothetical rates of return based on past performance,” wrote Mike Jones from St. Paul, Minn. “That ties in with my fears of the models possibly overstating our future income because of stocks underperforming and low rates of returns on bond mutual funds.”
Bill Lee of Daniels, W.Va., had advice for young adults. “With pensions being phased out and Social Security under threat, it is imperative that young people understand what is coming. They simply must do everything they can, as early as they are able, to fund their retirements. We learned about the ‘three-legged stool’ for retirement. It’s now down to one or two legs.”
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