Early Retirement: How Your Coworker Did It With 2 Kids and a Home
Retirement is typically seen as an event that takes place well into the future. Our institutions support this image. Pensions, Social Security, and other social programs only became available to individuals over a certain age, usually when someone is well into their 60s.
But, what if you decide to retire earlier than prescribed by tradition? Is it possible? Although the concept of early retirement isn’t new, it has become more common in recent history, especially following the pandemic. In 2020, more people found themselves forced into retirement or moving up their retirement date because of an unexpected layoff.
Even if you’re not actively contemplating an early retirement, it’s important to know the ramifications of ending your work life sooner rather than later. At Linscomb & Williams, we can help clients navigate this situation. There is a lot to consider before leaving your working life behind you.
Does Your Financial Plan Account for a Long Retirement?
Though life is short, retirement for many people is relatively long. According to life expectancy data, individuals who retire around 65 years old experience an 18-year retirement, on average. In a reasonable percentage of cases, this number can stretch to nearly 30 years, depending on one’s longevity. Retiring sooner than age 65 makes this period even longer. Can your financial plan sustain 30-plus years of spending?
Several years ago, one of our clients in his early 50s received an unexpected inheritance. He had generally based all his planning on retirement around age 65. The inheritance caused him to re-think his options and consider an age 51 retirement. Our task was essentially to help him determine if the inherited dollars were significant enough to fill the gap of all those extra years of spending without a paycheck.
A longer retirement naturally presents more risk, as it invites more possibilities of something going wrong. What’s more, our spending habits change as we age. Individuals over 70 years old spend about $40,000 per year on average, but this number jumps for folks between age 45 and 55, who spend $64,000 per year on average. Bucking the trend and retiring early can potentially cause a significant increase in your spending. Your financial plan should account for this, as well as the additional years your money will need to last. And these numbers we cite are broad averages. Obviously, spending is highly personal and it is important to prepare careful analysis using numbers that are pertinent to you and your family and lifestyle.
Important Social Security Considerations
Social Security income is directly affected by your work-life, and your benefits can be reduced by an early retirement. The earliest you can take Social Security is age 62, but the longer you wait to take Social Security, the more you’ll potentially receive.
Doing the opposite and taking Social Security as soon it becomes available at age 62 can result in a 30 percent reduction to your monthly benefits. You will still receive Social Security income, but at a much lower amount since you’re taking it earlier, and receiving it for longer.
Your work history is another variable when calculating your benefit. The Social Security Administration compiles your highest-earning 35 years of covered wages (wages subject to Social Security tax) and creates an average. Zero is added to your average for every year without earnings, which means people who haven’t worked more than 35 years may receive reduced benefits.
Social Security is a major staple for nearly all retirees, but an early retirement can significantly undercut your benefits. It’s important to keep this in mind.
(For other age-based decisions to consider, read our recent blog post: Perks to Getting Older: Important Age-Based Financial Planning Milestones to Remember.)
Healthcare (Especially if You’re Not Eligible for Medicare)
Like Social Security, healthcare is a major piece of your retirement picture. It can be one of your biggest expenses during your retirement years. Your ability to efficiently cover these costs greatly impacts the quality of your financial life.
The age of eligibility to qualify for Medicare is 65. If you retire before you’re eligible, you will need to find an alternative solution for healthcare coverage. The private insurance market is known to be more expensive than employer- or government-covered insurance. Before you delve into the private markets for insurance, explore your less-expensive options first.
Though uncommon, some employers offer retiree medical benefits. If you are or were covered under an employer plan, double-check your options to see if retiree coverage is available. Furthermore, in the event that your spouse plans to continue working while you retire early, see if you qualify for spousal healthcare coverage. This option can make a big difference in your retirement.
If you aren’t eligible for Medicare, retiree, or spousal benefits, then you may need to bite the bullet and pay for private insurance. While healthcare premiums typically increase as you get older, you can budget and plan beforehand just like any other expense. Talk to a fiduciary financial advisor to come up with a realistic cost.
Is Working Part-Time an Option?
If the cost of healthcare will severely affect your income in early retirement, see if there are part-time jobs available, particularly those with healthcare benefits. Continuing to work may be the last thing a potential early retiree wants to do, but a part-time job doing something you enjoy rather than something you have to do that offers healthcare benefits can eliminate a large chunk of healthcare costs, provide a small financial cushion, and add to your Social Security benefit. It could also be a great way to transition into early retirement, instead of having a hard stop. The economic impact of doing part-time work is often underestimated.
Continuing to Work Can Affect Your Retirement
Working longer affects your retirement in more ways than one. In addition to putting extra money in your pocket and possibly extending employer-sponsored healthcare, it can also give you access to employer-sponsored benefits like tax-advantaged retirement accounts.
Beyond finances, working can also contribute to a higher quality of life for some retirees. Many retirees find they have much more free time than they anticipated in retirement, and either get bored or lonely after just one year.
This is not to talk you out of an early retirement; it’s only a reminder of some of the benefits you may receive if you decide to keep working longer.
Get Help from a Financial Advisor
A relationship with a financial advisor can be a huge benefit for retirees at any age. But for folks who are planning to retire early, working with an advisor should be a priority. An early retirement has unique risks and special circumstances that you may not have considered.
At Linscomb & Williams, our financial advisors in Atlanta, the Houston area and Alabama, can help you formulate a financial plan from end to end. Before you retire, it’s important that your portfolio is positioned to grow, while staying within the bounds of your risk tolerance. Eventually, this portfolio must work to generate enough income to cover your expenses and sustain your spending and quality of life for the decades to come. On top of that, the other important parts of your financial life need to be accounted for as well, including estate and legacy planning, tax management, and any other special needs you have.
There is no silver bullet for a "perfect" retirement. Whether you decide to retire at age 50 or age 80, it’s important to plan ahead and address the repercussions of your decisions.
If you’re planning for, hoping for, or currently in the process of an early retirement and have a question that is not addressed here, contact us. It’s never too early to think about your future.