Q: I’m in my mid 50s and think I may be able to retire relatively soon. What issues should I be considering to help me determine whether or not I can make this work?
A: I think it’s wise that you’re looking ahead and trying to cover all of your bases before you make the big decision to retire. Here are a few things you should consider to make sure you’ll sustain your desired lifestyle for many years to come. Best of luck!
According to a recent Gallup poll, the average American retires at age 62.1 That’s at least four years away from collecting full Social Security retirement benefits, not to mention pensions, which typically begin at age 65, when available. Collectively, these programs can account for a significant share of retirement resources. According to the Social Security Administration, Social Security and public and private pensions make up 53 percent of an average retiree’s income.2 What’s more, Medicare coverage does not begin until age 65, leaving early retirees with potentially hefty monthly premiums until Medicare kicks in.
Anyone contemplating an early retirement will want to plan carefully and ask several important questions.
How will you fund health-care costs?
One of the biggest obstacles to early retirement is health insurance. If you are working for a company that pays all or most of your health insurance, you could face a significant added monthly expense if you retire before age 65. What’s more, most companies no longer offer retiree health benefits.
A 2012 survey by the Employee Benefit Research Institute (EBRI) indicated that health-care costs account for 10 percent of total spending for individuals between ages 50-64.3 In addition to health-insurance premiums, there are also co-pays, annual out-of-pocket deductibles, uncovered procedures or out-of-network costs to consider — not to mention dental and vision costs.
On the positive side, the Affordable Care Act (ACA) works to the advantage of early retirees. It prohibits insurance companies from discriminating based on preexisting illnesses and limits how much they can charge based on age. For those with lower incomes, government subsidies may be available.
When should you begin collecting Social Security?
You can begin collecting Social Security retirement benefits as early as age 62. But you will face a significant reduction if you start before your normal retirement age: 66 or 67, depending upon when you were born. Those choosing to collect before that age face a reduction in monthly payments by as much as 30 percent. There is also a stiff penalty for anyone who collects early and earns wages in excess of an annual-earnings limit ($17,040 in 2018).4
The best retirement age for you will ultimately depend upon your financial situation and your anticipated life expectancy. For most people, waiting until normal retirement age is worthwhile. But you may want to consider taking your benefits earlier if:
• You are in poor health.
• You are no longer working and need the benefit to help make ends meet.
• You earn less than your spouse and your spouse has decided to continue working to help earn a better benefit.
If you think you may qualify for a health-care subsidy under the ACA, you may want to delay collecting Social Security until at least age 65 (when Medicare kicks in) since Social Security benefits are fully counted as income in determining your eligibility for subsidies.
What will early retirement mean for your investing and withdrawal strategies?
Perhaps the most significant concern for early retirees — and one that is often overlooked — is how retiring early will impact investing and withdrawal strategies. Retiring early generally means taking larger distributions from your retirement savings in the early years, until Social Security and pension payments begin. This can have a significant impact on how long your savings last — potentially much more than if larger distributions are taken later in retirement. Consider the following:
• Delay withdrawals from tax-deferred retirement accounts, such as IRAs or 401(k) plans. The longer such money can remain tax deferred (or potentially tax free for Roth accounts), the greater the potential for any tax savings to boost returns. You may want to consider tapping into taxable accounts first. Although in some cases, doing the exact opposite may provide better taxation, so it’s important to explore multiple income strategies.
• Adjust your withdrawal rate to ensure that your savings last throughout a lengthened retirement. Financial planners frequently recommend a 4-5-percent annual withdrawal rate of principal at retirement. You will need to determine whether the withdrawal rate you choose will be sufficient to last through a longer retirement.
The first place to start early retirement planning is with a detailed plan that includes estimated income and expenses. Consider working with a financial advisor to help you decide.
Jeremy R. Gussick is a CERTIFIED FINANCIAL PLANNER™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBT community and was recently named a 2017 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected].
Jeremy Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
1Source: Gallup News, Average U.S. Retirement Age Rises to 62, April 28, 2014.
2Source: Social Security Administration, Fast Facts and Figures About Social Security, 2017.
3Source: Employee Benefit Research Institute, Expenditure Patterns of Older Americans, 2001-2009, February 2012.
4Source: Social Security Administration, http://www.ssa.gov/oact/cola/rtea.html.
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