Last year I wrote a column about the idea of working longer than necessary. This month, I’d like to explore the opposite idea — leaving the workforce too early.
There are a few things we all should consider as part of our financial planning.
Spending and income
This is universally the biggest concern for clients. Typically, we hear two goals: “I don’t want to run out of money” and “I don’t want my standard of living to drop.” Of course, retiring early means your savings will need to last longer. This is where good financial planning helps.
Riskier investments, such as stocks, historically provide higher returns over time and can cause your nest egg to increase in value during retirement. However, riskier investments also increase the probability you’ll regularly experience short-term losses, sometimes substantially. Implement a strategy to provide necessary growth (unique to each family) while accounting for the inevitable ups and downs of the stock market.
Try this with your financial adviser — stress-test your portfolio now, before the next big market decline occurs. Measure how much your portfolio is likely to drop in different market conditions and make sure you’re comfortable with the results. If not, make changes today rather than waiting until the next crisis.
Also, a word of caution regarding annuities. I see a lot of companies pitching products that guarantee “no losses and guaranteed lifetime income.” Consider the old country maxim, “For every ‘gimme,’ there’s a ‘gotcha.’” Make sure you fully understand what you’re buying before investing any money. These products often sound too good to be true and many contain long surrender penalties and high fees and significantly limit growth.
Finally, remember to factor inflation into your retirement plan. Many Americans retire with income that covers expenses today only to find after a few years that they can’t maintain their desired lifestyle. Make sure your retirement plan accounts for after-tax, inflation-adjusted income.
Most of us aren’t eligible for Medicare until age 65, and fewer and fewer employers provide medical insurance to retirees. There are a few coverage options for early retirees, however, and they’re expensive (employers on average subsidize about 80% of the cost of your medical coverage).
Private health insurance is an option. Unfortunately, policies available in the market have decreased significantly since 2008, and the cost of coverage increased substantially. Some people consider taking part-time work or low-key full-time work after “retiring” primarily to obtain employer health insurance.
Make sure you thoroughly research the medical insurance options before considering an early retirement date. Know where you will obtain coverage and how much it will cost. Once you turn 64, begin researching your Medicare options and be sure to sign up for Medicare by age 65.
Social Security retirement benefits typically start as early as age 62. That doesn’t mean it’s a good idea to begin claiming benefits just because you’re eligible.
Think long-term. Social Security benefits increase each year that you delay receiving them through age 70. Your lifetime benefits, and your spouse’s survivor benefits, might be much higher if you wait before claiming benefits.
Work and career provide more than just money. Remember, you’re retiring to something, not just from something. Think about how you’ll spend your time, including regular social interactions, hobbies, and friendships. There is a clear connection between good health and staying active socially, physically, and spiritually.
What is your margin of error?
Finally, your retirement is likely to last 20 years or longer. An early retirement may last even longer. Build a flexible retirement plan so you can make it through tough times when they inevitably come. Having a good plan in place not only increases your likelihood of a successful retirement but also your peace of mind as you enjoy it!
Robert DeHollander, a certified financial planner, is a managing partner and co-founder of the DeHollander & Janse Financial Group in Greenville. Find out more: www.djfinancial.com.