Even if you love your job, there are times when you'd rather
be alphabetizing the spice shelf than riding a packed train alongside hundreds
of sniffling fellow commuters. And as you sway in the car next to a man who has
biked four hours to the station, you might be thinking about early retirement.
Unfortunately, early retirement isn't for everyone. In fact,
it isn't for most people. Just 11 percent of today's workers plan to retire
before age 60, according to an Employee Benefit Research Institute (EBRI)
survey. For many of those who do take the plunge, the reality of early
retirement can turn out to be far different than the fantasy. Here are a few
things to consider before you decide to retire early.
1. Health care is expensive
Medicare, the federal program that provides health coverage
for more than 61 million older Americans, doesn't start until age 65. Until
then, you'll need an alternative — and it won't come cheap.
"Private health insurance before Medicare kicks in
costs an arm and a leg,” says Brian Schmehil, director of wealth management for
the Mather Group in Chicago. Current law says your insurance costs can't be
more than 8.3 percent of your household income. For a person with a household
income of $50,000, for example, a mid-level silver plan would be $346 a month,
or $4,150 per year.
2. Tapping your nest egg early can be costly
If you retire before 59 1/2, you'll usually pay a 10 percent
early withdrawal penalty from most tax-deferred accounts, such as traditional
IRAs and 401(k) plans. “There are some options for getting IRA money before 59
1/2, but it's tricky and can cause major penalties if done incorrectly,” says
Matt Stephens, founder of AdvicePoint in Wilmington, North Carolina.
And unless you have a Roth IRA, which is funded with
after-tax contributions, you'll owe income taxes on the amount you withdraw
from traditional accounts funded with pretax contributions. If, for example,
you withdraw $20,000 from an IRA before age 59 1/2 and are in the 15 percent
federal tax bracket, you'll pay $5,000 in taxes and penalties, leaving you with
$15,000.
3. You sacrifice the power of compounding interest
Time is your friend when you are saving for retirement, but
not when you are spending. If you sock away $250 a month — $3,000 a year — from
age 25 to age 55, you'll have about $237,000 when you retire, assuming you make
no withdrawals and earn an average 6 percent annually on your investments.
Seemingly not a bad return on your $90,000 in contributions.
But let's say you work 10 more years and retire at 65. In
that scenario, you'll have about $464,000, nearly double. Why? The extra
decade's worth of contributions helps, but that only adds up to $30,000. The
real growth comes from another 10 years’ worth of interest earned not only on
all the principal you contributed but also the interest earned on the interest
that has compounded for four decades.
4. You may have a long, long life ahead of you
A woman who retires at 55 will have to make her savings last
for 28.6 years, on average, compared to 20.4 years if she retires at 65. A man
who retires at 55 will have to stretch his savings for 25.1 years, rather than
17.8. And for couples who make it to 65, there's a 25 percent change that the
surviving spouse lives to 98, according to the Society of Actuaries.
"With improved health care, many people are living
longer than the national averages,” says Angela Dorsey, a certified financial
planner in Torrance, California.
5. You'll spend more money than you think
A typical rule of thumb is that you'll spend about 80
percent as much in retirement as you do when you work. After all, you won't be
shoveling money into your retirement account, commuting every day and, for that
matter, paying Social Security payroll tax, assuming you have no more earned
income. But at least in the early years of retirement, when you're younger,
healthier and newly freed from the constraints of work, you could very well
spend as much as or more than you did before retirement. A J.P. Morgan Asset
Management study found that there tends to be a “spending surge” by new
retirees on travel, home renovations or relocation, and other
retirement-related lifestyle changes that levels off after two or three years.
"Every day is Saturday,” says Sean Pearson, a certified
financial planner in Conshohocken, Pennsylvania. “Once you don't work, you wake
up and look for things to do — basically, how we all feel on Saturday. Some
things might be fun and social. Some things might be work around the house.
Most things cost some money, which is why Saturday is often the most expensive
day of your week."
6. Housing expenses don't retire when you do
Retiring without a mortgage is a common goal for would-be
retirees, but it's a goal that many fail to meet. According to an American
Financing survey, 44 percent of retired homeowners between ages 60 and 70 still
carry a mortgage.
Even if you have paid off your mortgage, other expenses
don't go away. “Home maintenance and increasing property taxes can take up a
large chunk of your budget,” says Dorsey, the California financial planner.
MarketWatch reports that the average homeowner paid $3,719 in property taxes in
2020, up 4.4 percent from 2019. As a rule of thumb, homeowners should set aside
1 percent of a home's purchase price annually to cover repairs and replacement.
That's $3,500 per year on a $350,000 house.
7. Extra income can be hard to come by
Working in retirement might not be as simple as you think.
While 74 percent of workers plan to work for pay in retirement, according to
the EBRI study, just 27 percent of actual retirees reported working for pay.
Even part-time work can be a challenge. “One thing early retirees don’t seem to
realize is that if they are planning on doing traditional part-time work while
retired, those jobs require a commitment to a schedule that sometimes is not
very flexible,” says Leslie Beck, a certified financial planner in Rutherford,
New Jersey. “This can cut into other retirement goals such as travel or
visiting with family. I have had retirees surprised by the inflexibility of
part-time work.”
If you figure you’ll instead fill the income void with
Social Security, remember the earliest you can usually claim retirement
benefits is age 62. Even then, you’ll only receive partial benefits. For anyone
born in 1960 or later, the full retirement age, when you are entitled to 100
percent of your monthly benefit, is 67. By claiming early at 62, the benefit
amount is reduced by 30 percent.
5 questions to ask (and answer) before retiring early
Can I really afford to stop working?
Do I need to get a part-time job to make ends meet?
How will I get health insurance?
What will I do to occupy my time?
Are my plans in sync with my spouse/partner's?
8. There's a lot of time to kill
When you retire, you have a 40-hour gap in your week that
you need to fill. “Are you sure you have enough activities to keep your body,
mind and spirituality occupied for the many years you have ahead of you?” asks
Catherine Valega, a certified financial planner in Winchester, Massachusetts.
How much time do you realistically see yourself spending
going on long walks, lounging poolside or curling up on the couch with a good
book, especially after the novelty wears off? Think hard and think long term
before you retire. Do you want to volunteer? Go back to school? Pick up a new
hobby or resume an old one? Come up with a plan in advance of retirement.
9. You may need to make new friends
If you retire in your 50s, you may find that your current
friends aren't around much — because they still have full-time jobs. While you
have the luxury of catching a matinee or playing a round of golf midweek, those
in your social circle who are working nine-to-five don't.
If you find new friends, they are likely to be older, says
Dennis Nolte, a certified financial planner in Oviedo, Florida: “Many of my
pre-60-year-old retirees, especially those who are active, lament that their
new peer group is significantly older than they are — and thus have a different
set of expectations about diet, sleep schedule, even cultural references."
10. Retirement can be tough on couples
"Retirement is a major life transition, and you have to
be patient with yourself and your spouse,” says Patti Black, a certified
financial planner in Birmingham, Alabama. “Most retired couples do not look
like those pictured in ads and commercials.” You'll have to decide how work
around the house will change. Will you really share cooking, cleaning and yard
work? And do you honestly want to be together 24-7, particularly if you
downsize to a smaller home?
These decisions can have serious consequences for a
marriage. “Gray divorce, or divorce after age 50, has doubled since 1990 while
declining across all other age groups,” Black warns. “And it is most often the
wife who asks for divorce after age 50."
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