4 Things To Consider If You’re Thinking Of Retiring Early

Sept 22, 2020 | Lena Rizkallah, JD, CRPC®

Many people dream of retiring early.  My neighbor has worked for the railroad since he was 23 years old, and at 53, he is now eligible to retire in December with full health benefits and a pension.  Most of us don’t have the luxury of retiring early and with full benefits.  Especially in this Covid-19 era during which many people have been furloughed or laid off, some who are close to retirement age are considering early retirement because they believe it will be very difficult to find a new job once the economy gets back on its feet.  Here are four key considerations before retiring early:

1. Life expectancy is increasing, so retirement may last longer than you expect

While the average life expectancy for a 60 year-old is about 83 (https://www.ssa.gov/oact/STATS/table4c6.html), it’s important to remember that this is the average.  Individuals should consider their health, family history, income and education level to determine life expectancy. A comprehensive life expectancy calculator can be found at https://www.livingto100.com which takes into account numerous factors, like how much alcohol you drink per day, weekly bacon consumption (easy on the hot dogs too!), stress level and marital status, and provides a personalized life expectancy. 

Remember too that life expectancy increases as you age, or as Kanye once tweeted, ‘the longer you live, the longer you live.’ (Or maybe that wasn’t him?) Remember that life expectancy at birth or in our early years will be much lower than life expectancy in later years.  In other words, if you make it to age 60, you did such a great job of staying alive, there is a higher probability that you’ll continue to live to later years!

2. A long retirement needs to be well-funded

The retirement experience has changed.  A generation ago, many people entered retirement with an understanding that costs must be cut and frugality rules the day.  This generation made ‘early bird specials’ popular, clipped coupons, remained in their home and outdated car because both were paid off. 

Nowadays, people expect more in retirement; not only do we want to make sure our lifestyle remains well funded, many of us also have a ‘bucket list’ we plan to fulfill.  We want to do in retirement what we had to put off during our working years: travel, pursue hobbies, be closer to grandchildren and volunteer. 

But how much do we need to fund a long retirement? The rule of thumb for income replacement is to replace about 75-80% of your pre-retirement income.  The higher your pre-retirement income, the lower the replacement ratio; the lower your pre-retirement income, the more income you have to replace post-retirement. 

That is because while we are working, we use some of our income to pay taxes, save and maintain our lifestyle.  The more you make, the more you save, more taxes you pay and the bigger your lifestyle, but a lot of this is reduced or goes away entirely when you retire so you don’t need to replace that portion of income.  It’s important to note too that Social Security will make up some of that needed income.  However, if you had high earnings pre-retirement, your Social Security benefit will not be enough and personal savings and employer contributions will be needed for income replacement (JP Morgan Asset Management research).

3. Medicare doesn’t kick in until age 65

For most of us, employer-sponsored health care ends when we leave our company.  Most companies provide COBRA coverage for a limited period of time after workers leave, but that tends to be expensive and often more costly than individual plans.

Most people may sign up for and begin to receive Medicare benefits at age 65.  Even if you are still working, it’s best to sign up for Medicare Part A in order to avoid a late penalty.  But if you decide to retire sooner than 65, you will have to secure health care on your own.  This means choosing COBRA coverage, or shopping around on the state health care exchanges and paying the high costs of health care for yourself and possibly your family.

Health care costs vary drastically depending on where you live. This interactive map provides a state-by-state comparison of ACA health care insurance in 2019. https://www.consumerreports.org/health-insurance/aca-health-insurance-cost/  This link will get you connected to ACA healthcare in your area. 

4. It’s important to ‘practice retirement’ so you can retire well

What isn’t included in most retirement plans is what we expect to be doing every day.  While people plan for retirement, most assume the day-to-day will take care of itself.  But once in retirement, the reality may be shocking.  Some recent retirees feel bored, anxious or depressed; having worked every day for the past 40 years, some people don’t know how to handle their free time.  Others plan to take up a hobby like golf and pottery only to realize that they actually don’t enjoy it.  Many retirees choose to go back to part-time work, if only to cure boredom or grab a few hours away from their spouse. 

The people who do retirement right actually enter retirement with a plan for how to spend their days, doing the things they already know they enjoy. That’s why many financial advisors encourage their clients to ‘practice retirement’ before they actually enter it.  In other words, if you plan to travel in retirement, start taking small trips during your working years to make sure you actually enjoy travelling and that you and your spouse/partner travel well together.  If you plan to start a business, volunteer, take language classes, become an artist, consider setting time aside to pursue these activities during your working years, so that once in retirement, you can keep doing what you know you love to do.

Factoring in a potential retirement spanning 30 years or longer means that we must save more, make the right decision about when to claim Social Security benefits, be prepared to pay for health care before Medicare kicks in and have a clear picture of what we’ll be doing in our spare time. Retiring early may be more rewarding if you’re prepared.