March 12, 2019
Early Retirement Considerations
By Sylvia Salguero, Financial Advisor
Have you decided to retire early? Say at 62, when you’re able to start collecting benefits from Social Security? Your investment accounts have done well for a period of time, so they should continue to perform as well to perpetuity, and last for at least as long as you live, right? Not really. You can speak with people who thought their rosy scenario would last a lifetime, retired early without a careful plan, only to find out that they need to go back to work in their late sixties to make ends meet. Retirement can be replete with hazards, most of them outside of one’s direct control.
Nowadays very few employees are entitled to a pension; statistically the figure is 15%. Most of us will rely on a combination of Social Security and investments. The only way to prevent the anxiety and the shortfalls that unfortunately accompany retirement for many is to begin preparing far in advance of actually stopping work.
I’ve heard some refer to Retirement as “the second childhood without parental supervision.” With this attitude many embark on large expenses immediately after leaving work, such as taking costly trips, purchasing recreation vehicles, starting expensive hobbies, spending too much on entertainment, etc. Clearly this is not the time for another “childhood”; unless you won the lottery or received a massive inheritance, such that you never have to worry about finances again. Most of us need to adjust our lifestyle in order to have enough reserves to last as long as we do.
Besides having enough assets for retirement, have you considered what you will do with your time when you have it? Will your activities require additional funds that have not been considered when drawing up a retirement budget?
Underestimating the future cost of living, or sticking one’s head in the sand (the ostrich method) also seems to characterize those who dream of retiring early without a realistic retirement budget that can adapt to changing circumstances. Maybe you need several plans for multiple scenarios, such as remaining in your home or selling you house and relocating, for example. The circumstances are quite different from each other and so are the projected expenses for each scenario.
Start planning long before your desired retirement age. It is a good idea to plan a retirement budget that is at least 30-40% lower that your current expenses. Develop several plans as mentioned above. Collecting Social Security benefits at age 62 sounds appealing but have you actually considered all your options? How much money would you actually leave on the table if you do not wait until at least Full Retirement Age?
Have you allowed for unexpected medical costs that are sure to come at older age? Although it is not possible to anticipate or plan for future illness, the general estimate is that expenses in excess of Medicare coverage average $200,000 over the retirement life span.
All this is difficult to consider if you hate your job or retirement is imposed on you: What if you worked another 5-10 years and saved the maximum possible? Avail yourself of all resources available to you such as online retirement calculators, advice from your financial advisor, etc. Above all understand and be prepared to adapt to unexpected changes should you need to do so.
There is no perfect way to retire, but that doesn’t mean you should jump ship without considering all the safeguards you are able to put in place. Reexamine your options and decide if you can stand another few years on the job.
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This information may not be relied on for the purpose of determining your social security benefits or eligibility or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal professional.