MoneySmart

Calling It Quits

Retiring early is not always as easy as it sounds.

We’ve all heard stories about people who invested well or received a financial windfall that allowed them to retire early. While early retirement may sound like a dream come true, it could turn into a nightmare if you don’t have a strategy to account for the increasing costs of goods, services, and taxes over time—particularly if you will be out of the workforce for several decades.

It is estimated that one in six retirees considers returning to work just four years after leaving their job—even if they had a substantial nest egg built up. With that in mind, it is essential to plan ahead and make sure that you have a financial cushion available to cover costly emergencies that impact your savings.

Will You Be Forced to “Unretire”?

When you retire, your money can face the same risks that it did when you were working. These risks include stock-market volatility and fluctuations in interest rates. But once you start drawing income from your portfolio, other risks—like inflation, sequence of returns, and longevity—can also play a key role in impacting its value, especially if you’ve retired “early.” That is because your assets will face these risks for a longer period of time.

This could cause your portfolio to run out of money earlier than expected, and in turn force you to reduce your expenses or return to the workforce to fill in the gap between your income and expenses.

Take the case of Sam, for instance. With a $3 million net worth, he retired at age 34 with a passive income stream of $80,000 per year. But just 10 years later, Sam may be forced to become “unretired” as inflation erodes his purchasing power. In addition, Sam estimates that the college tuition cost alone for his children could top $1 million!

Sam may also face other blows to his portfolio in the future if he isn’t properly prepared. For example, high (and rising) healthcare and long-term care costs could quickly deplete even the healthiest of portfolios.

As an example, a study found that a 65-year-old couple who retired in 2022 could face approximately $315,000 in out-of-pocket healthcare expenses—even if they have Medicare or other insurance coverage. This figure doesn’t include the potential cost of a long-term care need, which can add an additional five- or even six-figure outlay per year.

Therefore, having a proactive care plan in place can help you to transfer some—or possibly most—of the cost of future care services, either at home or in a facility. Many of today’s plans offer a combination of benefits such as life insurance and long-term care coverage, so that regardless of whether you ever need extended care, you or a loved one can receive a benefit.

Even if your finances are firmly locked into place for the long haul, you could still be unprepared for retirement if you don’t have a purpose or plan for occupying your time. Believe it or not, sitting on the beach or playing a daily round of golf can eventually get mundane, and it is estimated that almost half of early retirees get back into the workforce because they are bored.

Before You Retire Early…

While you may feel financially ready to retire early, there are some important items to consider before you move forward with trading your work shoes for flip-flops. Certainly, your current anticipated income and expenses are key, along with the cost of possible emergencies and healthcare needs.

It is possible that you could have several sources of guaranteed lifetime income, such as Social Security or an employer-sponsored pension. But you must also include the impact of inflation over time. Using an average inflation rate of just 3.2 percent, your income would need to double over 20 years in order to just keep pace with your current lifestyle. So, if you’re generating $4,000 per month now from Social Security and other retirement income sources, 20 years from now you would need to bring in $8,000 each month to maintain your present lifestyle.

Will your current retirement income plan do that?  If not, you’ll likely have to make some adjustments.

In addition, depending on how early you retire, you may or may not even be eligible for Social Security retirement-income benefits right away. You can access this income source once you have reached your “full retirement age,” which is between 65 and 67, based on the year you were born.

Alternatively, you could start Social Security as early as age 62. However, the dollar amount of your benefit will be lower than if you wait until your full retirement age—and it will remain reduced for the rest of your life.

Given that, it is important that you work with a qualified financial professional who can help you to maximize your benefits. Doing so can make a big difference, as Social Security will continue to pay you a monthly income stream with cost-of-living adjustments for life.

Further, according to Wade Pfau, a professor of retirement income at the American College of Financial Services in King of Prussia, Pennsylvania, it is also important to consider your retirement income style, which can help you to stay the course and avoid making mistakes that are based on fear or other emotions.

In this case, it is critical that you understand how you deal with financial uncertainty, because this could dictate how likely you are to either stick with a plan or abandon it when the financial tides turn.

Moshe Milevsky, a finance professor at York University, adds that you should have a retirement-income plan in place that doesn’t require you to make crucial financial decisions as you age. There are strategies and investment vehicles that can be set up to generate an income stream that will continue paying out for the rest of your life, regardless of how long that may be.

But because there is no single “right answer” that will address everyone’s retirement-income needs, goals, and challenges, it is essential that you discuss your specific objectives with a financial-planning professional who is well-versed in income planning and asset protection.

Those in the LGBTQ community may have to keep some other criteria in mind, too, as they can face additional income-related challenges in retirement. For instance, future healthcare and long-term care costs may be higher for LGBTQ individuals, as they are less likely to have a spouse who could provide at least some care at home. Because of that, these expenses may be higher.

Also, because LGBTQ workers are more likely to be caregivers for their own parents and other loved ones, they may generate less income during their time in the workforce. That equates to less money saved, along with a reduced monthly income check from Social Security.

Preparing for Early Retirement

Retiring early requires a great deal of discipline, as well as the ability to weather many types of finance-related “storms” over time. Given that, it is vital that you have a financial professional on your side who can help you put a plan in place. Such a professional can allow you to look at—and plan for—the whole picture as you consider taking early retirement and enjoying all that this time in your life has to offer.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.
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