Plan to Retire Early? Lining up the Moving Parts

Brian Hughes |
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It isn’t hard to find information on various things COVID-19 has impacted in our society. You shouldn’t be surprised to learn that even the timing of retirement saw impacts. A recent study found that one impact of COVID-19 is a growing wave of early retirements, as people who weren’t planning on retiring for some years yet are rethinking that decision.  Whether that is because of lay-offs, buyouts, or folks just realizing they don’t want to go back to work, that study is in-line with what we anecdotally see as Financial Advisors here in Jacksonville. 

An effective retirement plan has a lot of moving parts to it. It’s a good idea to think through the various decisions you need to be comfortable with before making the final leap to early retirement.  Here are a few factors you should consider. 

Making the Decision – the Psychological Impact

Retirement is a major financial decision, but the psychological impact should not be overlooked.  Right or wrong, a lot of people seem to derive their sense of purpose from their workplace.  Not having a place to go, people to see or tasks to complete sound like a dream to some but may sound like a nightmare to others.  Think through these questions:

  1. Will I miss work?
  2. How will my social life look?
  3. How will I create meaning for myself?
  4. Will I launch a new career, undertake part-time work, or volunteer?

I have worked with many clients who, after retiring, express something along the line of “I’m so busy in retirement, I don’t know how I ever had time to work.”  I have also worked with clients who end up bored pretty quickly and look for new things to do.  I believe thinking through questions like these helps understand how you will stay mentally healthy as you are thinking about the next step.  The psychological impact of retirement is deeply personal and different for each person.   Nonetheless, it is an important consideration in the early retirement decision making process. 

The Financial Impact of Early Retirement

Even if you are psychologically ready to retire, you must consider if you are financially able to retire?   Shifting from wealth accumulation to wealth distribution is no small decision.  One of our biggest risk factors is running out of money in retirement before you pass away.  Intuitively, putting the pieces together seem like it should be a simple process.  In practice though, it is not This is the part of the equation you may want to work with a financial planner on.  Regardless if you talk to an advisor or not, it always should start with the budget. 

Setting a Realistic Budget

I think everyone universally hates budgeting.  It tallies up things we’d rather keep hidden from ourselves, like the sometimes-wasteful spending.  That’s exactly the point, though. A realistic retirement budget does two incredibly important things.  First, it defines how much you will spend in retirement.  It’s the only way to get a realistic number for what you plan to spend every year.  Second, it’s a way to stay accountable to your goals.   

  1. Add up all of your “have-to have” expenses. These should be the things you have to pay every month – housing, heat, utilities, automobile, insurance, food, etc. (don’t forget about healthcare and insurance expenses)
  2. Add up your “want-to have” items for your life in retirement- travel, philanthropy, hobbies, etc.

That, plus some extra for a safety net, is your target annual number.  The next step, figure out if you can hit that target. 

Social Security

Social Security is a major source of retirement income to help hit your retirement spending target.  In fact, for roughly 40% of people, social security is the only source of retirement income.  If you don’t know what your social security benefits will be, I highly encourage you to download your estimates here:  https://www.ssa.gov/myaccount/ 

Remember, these numbers from the Social Security Administration are just estimates.  How much you will actually receive will still be impacted by factors such as by how much longer you work and your earned income going forward.  The estimates will give you a rough idea of how much you can expect to receive at different start dates. 

The longer you wait, the higher the benefit.  For example, in 2020, the maximum monthly benefits for Social Security at different start dates are as follows:

The longer you wait, the higher the benefit.  For example, in 2020, the maximum monthly benefits for Social Security at different start dates are as follows:

What other sources of income will you have?

The number of people out there who have pensions available to them is dwindling, but they still exist.  Our military, teachers, firefighters, police, amongst others, still usually have these plans available.  If you happen to be one of the few, contact your plan administrator and ask for estimates of what you can expect to receive in retirement. 

Also, tally up any other retirement income sources you may have, such as part-time work, rental income, annuity payouts, etc. 

Can You Bridge the Gap with Retirement Savings?

You have figured out your target spending, you have also estimated your fixed retirement income.  The gap between spending and income is where the years of retirement savings come in.  Just how much can you take from your retirement accounts?

That’s not a straightforward answer.  A popular and easy, though somewhat flawed, starting point is the 4% rule.  It basically says that if you are in your mid-sixties and have a reasonably, balanced portfolio, you can draw 4% of your starting account balance, adjusting the distribution annually for inflation, and have a fairly low risk of running out of money during your lifetime.  Remember, because Uncle Sam wants his money, a portion of that 4% withdrawal goes to the IRS instead of helping meet your expenses. 

A quick Google search of the “4% rule” will show you all sorts of research in favor of it as well as problems with it, such as the sequence of returns risk (risk of a large downturn early in the withdrawal phase), longevity risk (risk of living a very long time), return risk (risk of earning lower returns going forward then markets have in the past). That said, I still believe it is a good starting point with estimating how much you can afford. 

Is it enough to cover the gap?  If not, don’t lose hope just yet.  Think about what adjustments you need to make it work.  Can you find ways to reduce your spending, such as cutting some of your “want-to” spending goals?  Can you increase your income in any way, such as by working part-time?  Are those adjustments even worth it, or is it better to keep working for additional years? 

The Bottom Line

As you can see, there is truly a lot of moving parts when considering an early retirement.  Psychologically, thinking about how we will stay mentally healthy with the ability to have meaning and purpose is important.  Financially, making sure you have the income and savings to meet both your have-to-have and want-to-have type of expenses.  By organizing your financial picture and creating a realistic plan, you can set into motion the next phase of your life, whether that happens now, or it needs to wait a little longer. 

We love to work with people through this process.  If you feeling overwhelmed, you are not alone.  Retirement planning can be confusing.  We are here to help. 

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

  1. Coibion, Olivier and Gorodnichenko, Yuriy and Weber, Michael, Labor Markets During the Covid-19 Crisis: A Preliminary View (2020).