Retirement - When, Why and How?

What's it like to retire early? This significant life change that can bring both excitement and challenges. It's a dream for many, offering the possibility of more free time, pursuing hobbies, and spending time with loved ones. However, it requires careful planning, especially when it comes to finances and finding a sense of purpose. 

According to SmartAsset .com, picking the right time to retire is one of the most important parts of the equation, second only to building the right savings plan. Leave work too early, and you could outrun your savings; wait too long, and you could outwork your good health. Part of this decision is what “early” means to you. Can you retire at age 55? That is a question that is answered based upon your net worth, income and any retirement savings you may currently anticipate having at that age. Unless you inherit a chunk of cash from a relative, win the lottery, or otherwise strike it rich somehow, the option at age 55 to retire is going to be financially challenging as you age beyond it. https://smartasset.com/retirement/can-i-retire-at-55

Yet, will you retire at 62, 55 or 50? Will you take Social Security at retirement or wait? Are you just retiring from your career, or will you stop working altogether? Your answers to these questions will define if, and how, you can plan an early retirement. While retiring early can have its considerations, here are 10 reasons you may want to consider it: https://smartasset.com/retirement/10-reasons-to-retire-early.

Here's a glimpse into what early retirement can be like:

The Upsides:

• More Free Time: The most obvious benefit is having control over your schedule and time, allowing you to pursue passions, travel, and simply relax without the constraints of a traditional job.

  
  

• Improved Health: Some retirees find that leaving a stressful job can improve their mental and physical health. They have more time for healthy habits like exercise, outdoor activities, and cooking.

  
  

• Opportunity for New Ventures: Early retirement can be a stepping stone to pursuing a second career or starting a business you've always dreamed of, or it can be the best time to pursue your hobbies.

  
  

• Spending Time with Loved Ones: With more free time, you can prioritize spending time with family and friends, building stronger relationships. 

  
  

The Downsides:

• Financial Strain: Early retirement often means relying on savings for a longer period, potentially stretching your funds. You may need to adjust your lifestyle and spending habits to make your money last. You'll need to have some income streams that kick in when you plan to retire, which can come from various investment options and other financial vehicles designed to pay you beginning at a certain age.

  
  

• Reduced Social Security Benefits: Claiming Social Security before your full retirement age can result in a lower monthly benefit for life. For example, retiring at 62 and collecting your benefits results in a 40% pay cut from full retirement payments. If you were born in 1960 or later, you'll need to wait til age 67 to receive 100% of what you can collect. You can also stretch it out to age 70, with an 8% annual increase each year until then. However, waiting that long is not really advisable unless your situation is unique. Some advisors say wait; others say take it when you can.

  
  

• Health Insurance Costs: You'll need to secure your own health insurance until you are eligible for Medicare at age 65, which can be expensive. However, if one spouse decides to continue to work, you can be covered under that employer insurance until you both are ready to retire. Find more rules at www.medicare.gov .

  
  

• Loss of Routine and Purpose: Transitioning from a structured work environment to a completely free schedule can be challenging. Some people struggle with boredom, a lack of purpose, and feeling disconnected from their former work colleagues.

  
  

• Social Isolation: Your friends and family may still be working, making it difficult to find activities and social connections during the day. It's best to have a group of friends that meet on a regular basis for coffee, lunch, golf, Bible study, or some other type of interaction that keeps you connected.

  
  

• Mental Health Challenges: The sudden shift to retirement can lead to feelings of self-doubt, anxiety, and even depression for some individuals. Men especially have difficulty transitioning from work to retirement if they don't have an active social network or other interests to stay busy. Early retirees are often hit with negative psychological effects they hadn’t anticipated—such as feelings of uselessness or a lack of purpose. In fact, it’s estimated that life after work summons a sense of isolation and a loss of direction for about 25% of all retirees. Preparing yourself to successfully navigate the broad spectrum of emotions you may face in retirement — the good, the bad, and the unexpected — can help you thrive in the decades to come with a renewed sense of purpose.

Things to Consider Before Retiring Early:

• Financial Planning: Evaluate your savings, investments, and potential income sources to ensure you have enough to cover your expenses for a longer period. Consider consulting a financial advisor to create a personalized retirement plan. You'll also need to know how and when to withdraw from each type of retirement account (e.g., taxable, tax-deferred, and tax-free), as doing so can help minimize taxes you’ll pay in a given year and over your lifetime.

  
  

  Consider this: depending on your situation, you can take proportional distributions from each of your retirement savings accounts each year as a more tax-efficient and potentially beneficial strategy. This approach is perhaps more advantageous than the traditional method of first withdrawing from taxable accounts, then tax-deferred accounts, and then (once depleted) Roth accounts.

  
  

• Eliminate unnecessary investment risks: Typically, you should invest in a more conservative fashion as you get older—because those who are too aggressive in this respect run the risk of an inability to recover should a prolonged bear market hit, putting themselves in danger of draining their retirement savings funds too quickly. While the actual number varies by individual, a general rule of thumb is to subtract your age from 100 to know which percentage of your portfolio to keep in stocks—with the remainder comprising safe assets such as bonds and CDs. Due to longer lifespans, however, some experts have modified this "rule" and now recommend replacing 100 with 110 (or an even higher number!) to ensure you don't run low on funds.

  
  

  Despite this widely shared knowledge, a recent Fidelity report claims investors — precisely 37.6% of baby boomers — are exposing their retirement accounts to unnecessary risk by investing too much in the equity market or volatile stocks. To better prepare for inevitable market volatility and enjoy some reassurance, enlist the help of a financial advisor who can recommend strategies and tactics to help ensure you won't outlive your retirement savings.

  
  

• Get familiar with IRA and 401(k)/403(b)/457 withdrawal rules: With post-tax Roth IRAs, you can withdraw sums equivalent to your contributions — whenever you want — on a penalty and tax-free basis as you've already paid income taxes on that money. If you’re over age 59½ and wish to withdraw from the earnings portion of the account, you can do so tax-free—provided you’ve owned it for at least five years (known as the “five-year rule”). If you withdraw from the earnings portion prior to age 59½ or have owned the account for less than five years, however, you may be subject to income taxes and a 10% early withdrawal penalty. Pre-tax traditional IRAs, however, have an early withdrawal penalty that is generally assessed on those who remove money from their IRA before age 59½: 10% of the funds withdrawn, with the amount taxed as income. As with Roth IRAs, some exceptions exist.

  
  

  As well, if you wish to take money out from your other qualified pre-tax accounts prior to that same age, you are going to suffer a 10% early withdrawal penalty from the IRS and be required to pay taxes on that amount. Upon reaching this age, however, you can withdraw money from your 401(k) in the absence of this penalty—though the amount is considered income and taxed accordingly. Also keep in mind the Rule of 55, an exception to the 401(k) early withdrawal fee and a provision that allows workers who leave a job to withdraw funds from an employer-sponsored retirement account penalty-free (while still paying income taxes).

  
  

  It dictates beneficiaries must fall between the ages of 55 and 59½ and can only access funds from a current (or most recent) employer’s retirement plan. Qualified public safety workers (e.g., law enforcement officers, EMTs, and firefighters) can take advantage of this rule a little earlier, beginning at age 50. Finally, even if you don’t need to withdraw money from these accounts initially, know that 401(k)s and traditional IRAs feature required minimum distributions (RMDs): the minimum amount of money one must withdraw from specific tax-deferred retirement accounts beginning at age 73 and climbing to age 75 starting in 2033.

  
  

• Unexpected Home Expenses: Even if you’ve paid off your mortgage, you’re still unlikely to avoid home repairs and/or renovations during your golden years. For example, remember that most houses aren’t designed with old age in mind; if you’ll require wheelchair accessibility or need to expand a bathroom or convert existing space so key areas are all on one level, expenses can quickly pile up. Even a brand-new home isn’t immune to accidents and weather-related damage homeowners insurance may not cover. The point here is to budget for such changes so they don’t significantly alter your retirement lifestyle.

  
  

• Healthcare Coverage: This issue is incredibly important, as you don't want to be without coverage due to the incredible costs now associated with healthcare. Just a brief trip to a hospital ER can run into the thousands of dollars. Determine how you will pay for health insurance before becoming eligible for Medicare. Look at options with the assistance of a trusted insurance agent who can help you select coverage best suited for your needs. Here are some options: COBRA, a federal law that gives workers and family members set to lose their health benefits the right to choose continued group benefits, is one option for those who qualify. However, coverage is temporary as COBRA is limited in length (typically up to 18 months).

  
  

  Another option is to purchase a policy from the ACA health insurance marketplace; just know this won’t come cheap. According to financial website Value Penguin, the average monthly cost of a Silver (mid-tier) health plan is $1,240 for a 60 year old. Other alternatives include health share plans, which actually aren’t health insurance plans but instead comprise a group of people who pool their money to share costs. While these are sometimes easier on your wallet with respect to premiums, they lack reimbursement regulations should the organization offering the plan go bankrupt and often come with restrictions on applicants who have preexisting conditions. Finding part-time work that offers benefits is another alternative, allowing you to perhaps establish a health savings account (HSA) to help cover high copays and other out-of-pocket healthcare costs.

  
  

  If you haven't already, also consider long-term care: policies that typically cover out-of-pocket expenses associated with home care, assisted living, and nursing homes, benefits not covered by Medicare and other public programs. By planning early, you can take control of your future healthcare needs—which is important, as the U.S. Department of Health and Human Services reports an almost 70% chance someone turning 65 is going to need some form of long term care (LTC) services in his or her remaining years. Long term care is expensive and can quickly drain financial reserves. LTC insurance is not that expensive considering what it saves you if you need it.

  
  

• Purpose and Activities: Plan how you will spend your time in retirement. Identify hobbies, volunteer opportunities, or other activities that will provide you with a sense of purpose and fulfillment.

  
  

• Lifestyle Changes: Be prepared to make adjustments to your spending habits and lifestyle to support your early retirement. Don't be caught by surprise when unexpected expenses or health situations may develop. Set aside an emergency fund to accommodate those unknowns.

  
  

"An easy rule of thumb to estimate your retire-ability is to multiply your expected draw on investment portfolios that will supplement Social Security and other sources by 25," says Stephen J. Taddie, co-founder and managing partner of Stellar Capital Management, LLC located in Phoenix, Arizona. "If you have that amount of money in your combined accounts, you're ready to put a pencil to it. If you're 'close,' think twice."

And don't assume that living will be less expensive, either.

"One common myth is that your expenses decline in retirement," says Jennifer E. Myers, CFP®, president of SageVest Wealth Management located in McLean, Virginia. Myers adds the following: "We seldom find that to be the case for three primary reasons. First, you simply have more time on your hands to enjoy, partake, and spend. Second, as individuals grow older, they tend to outsource more, layering on new expenses. Third, your healthcare expenses logically tend to increase as you age. It's important to make sure your assets can sustain potential, and perhaps inevitable, growth in spending over your lifetime."

If you don't want to retire too early for fear you'll regret the decision, but also don't want to wait so long that you miss out on the pleasures of retirement, there are ways to have the best of both worlds. One example: You might try to negotiate a reduced work schedule with your employer and enjoy the life of a retiree on your days off, an arrangement that's often referred to as "phased retirement." Or, if circumstances allow, see if you can work from home part of the week—that'll give you a sense of how isolation and a more fluid schedule suits you. Finally, take some of those vacation days all at once. Make sure that you use up your PTO and any other accrued time off including sick days as they typically disappear once you declare retirement. Your employment contract may or may not include those days in your final payment.

In conclusion, early retirement can be a rewarding experience if you are prepared both financially and emotionally. It's crucial to have a clear understanding of your goals, a solid financial plan, and a strategy for staying engaged and connected. Many individuals continue to dream of early retirement. A survey by the reverse mortgage company American Advisors Group found that 52% of Americans plan to exit full-time employment before age 65, with 23% before age 60. You need to seriously evaluate the pros and cons of voluntarily ending your working life before you pull the trigger to retire.

Let's talk strategy. As a certified retirement specialist who has helped many individuals understand their needs and help put together a retirement program for better financial security, it would be my pleasure to meet with you (virtually) and talk about what options work best for you and your family. Contact me to begin the conversation and to build a better financial future.