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Early Retirement Are you considering retiring early? You’re not alone. Retiring early—these days that generally means before age 65 or 66—has become as American as apple pie. Even so, it presents a greater financial challenge than retiring at a later age: You have more retirement years to pay for while having fewer years to accumulate the necessary funds. Here are some issues you’ll need to keep in mind. Ticker Tape Not all retirement income sources are adjusted to keep up with inflation. The earlier you retire, the more years inflation has to diminish the buying power of a fixed income. Is it worth taking a permanent cut in benefits? In theory, if you live exactly the life expectancy calculated by the SSA, it won’t make any difference. You will collect smaller payments, but for a longer period of time; they should equal the total payments you would have received if you’d retired at your normal retirement age. People in poor health who may not reach average life expectancy probably should start collecting early, say experts. But half of retirees live longer than the average life expectancy, and they usually will collect more in lifetime benefits by waiting to claim full benefits. Retirees may start collecting benefits early because they need the money, but consider the following carefully before doing so. First, if you live longer than expected, you’ll probably wish you had those larger payments in your later years. Second, even if you don’t live longer than average, your spouse may, and his or her survivor benefits will be smaller because your permanent payments are smaller. Frankly, if retiring early necessitates collecting Social Security early, you probably should delay it. Early retirees also may be tempted to tap into their retirement accounts sooner than normal. This siphons off money that would have had a longer time to grow tax-deferred. If the quality of your overall retirement will rest primarily on your nest egg—which most likely has been hit by the bear market— you may need to look at additional funding such as working part-time or even delaying retirement. More significantly, if you plan on retiring before age 591/2, you’re liable for a 10 percent penalty on your retirement account withdrawals—on top of your ordinary income taxes. You can avoid the penalty, but not the income tax, by using a strategy called substantially equal periodic payments. This, in essence, turns your IRA or retirement account into an annuity. Once you start this stream of payments, however, you must take out payments for at least five years, or until age 591/2, whichever is longer. (Be aware, though: Not all employers allow employees to use this for their retirement accounts.) Another major financial issue of early retirement is debt and expenses. Early retirees are more likely to still be carrying mortgages or college debt. That puts a strain on budgets that already may be strained by a retirement lifestyle that includes activities such as extensive travel. Early retirement can be wonderful, but it creates a host of challenging financial issues—let alone psychological issues such as, “What am I going to do all those years I’m not working?” Unless you address these concerns up front, you could end up with a long stretch of less-than-idyllic retirement years. |
