Retirement Planning

Have you ever reviewed your pay stub or thought about your boss or your workload and entertained thoughts of an early retirement? Who hasn’t? Suppose you are age 55 and could take home 60% of your pay if you retire now. If you earn a high income, 60% may seem like enough for you to retire in reasonable comfort. However, before setting the date for your retirement party, weigh all of the facts carefully to be sure an early retirement makes financial sense for you.

Here are eight rules you should consider if you’re thinking about taking an early retirement:

1. Weigh the differences between the benefits of retiring now and in the future.
   Retiring at age 55 with, hypothetically, 60% of your income may seem like a good deal at first. But, if you wait until age 65 to retire, you will have gathered another ten years of savings, along with earnings increases from promotions, merit raises, and inflation. Waiting longer will almost certainly provide you with more money for retirement, and ultimately, boost your Social Security and pension benefits. Also, if you consider the difference in the percentages you will receive now and in ten years—for example, 60% if you leave now, versus 80% if you retire in ten years—leaving now may not sound so good after all.
2. Remember to factor inflation into your decision. 
   If you still think you can manage on a fixed 60% of your current income, remember that inflation will eat into your lifestyle. Consider this: If you retire today and receive a pension income of $1,600 per month for life, in 20 years at a 4% rate of inflation you will have only the equivalent of $707 in today’s dollars.
3. Prepare for longevity. 
   The longer you live, the more money you’ll need for your retirement. As life spans lengthen, an early retirement plan should consider the potential financial burdens of spending more years in retirement.
4. Evaluate other retirement income resources. 
   If you already have a sizable retirement nest egg, or if you expect to collect a pension from a previous employer, the size of the pension you could receive from your current employer may not be critical. If so, perhaps you could leave the work world behind, since you will have other funds on which to rely. 
   
   However, don’t make the mistake of expecting Social Security to provide most of your retirement income. The future of Social Security is uncertain, and cutbacks in other government programs, such as Medicaid and Medicare, may require you to provide even more of your own funds.
5. Part-time work may make early retirement feasible. 
   If you decide to leave your present company, are you banking on securing employment elsewhere to supplement your pension? The prospect of ongoing income may make it possible to consider an early retirement option even if it doesn’t pay a high percentage of your earnings. However, keep in mind that it may be difficult to find another equally high-paying position. Be certain of the earnings and longevity you can expect from your next job before depending on it for income until you permanently retire. 
6. Be aware of the effects early retirement may have on Social Security. 
   If you are under age 65, and continue working after you begin collecting Social Security benefits, you may have to “give back” a portion of your benefits. In other words, your Social Security benefits may be reduced once your earnings exceed a certain income cap. 
   
   You should also know that if you continue working after you begin collecting Social Security, or if you have substantial income from other sources, a portion of your Social Security benefits might be taxed. The calculation to determine how much of your benefits will be included in your gross taxable income is somewhat complicated. For more information, contact the Social Security Administration.
7. Taking an early retirement may make sense if the specter of corporate downsizing looms. 
   Is there a chance your company will let you go if you do not elect to leave on your own? Many companies now lay off high earners as part of their cost-cutting measures. If your company is experiencing financial difficulties and “downsizing” appears imminent, you may get a better deal through early retirement than through the company’s severance package.
8. Understand the potential tax consequences of early retirement. 
   If you opt for early retirement, in some cases you may incur a 10% federal income tax penalty for early withdrawals from a qualified plan. Keep in mind that withdrawals taken from an Individual Retirement Account (IRA) before age 59½ may also be subject to a penalty. 
   Early retirement may be a long-held dream and financially possible. But, before calling it quits, analyze your situation carefully. You will have to live with the effects of your decision for the rest of your life. Take the time now to make sure it will still be a smart decision in the long run.

Retirement should be a time to relax, free from financial worry. Many people dream of retirement as a time to travel, or a time to pursue hobbies or special interests, a break from a 40- hour work week. But without careful retirement planning, you may actually face the prospect of working harder and longer during your so-called retirement years than you ever imagined. With this in mind, it may be safe to say that the best-laid plans begin well before the age of 65.

Know Your Resources
How many times have you said “I’ll do that when I retire,” expecting to have more time to pursue other interests when you no longer have to report to the office everyday. But have you considered what the costs of these interests may be? A general rule of thumb is that you will need 60% – 80% of your pre-retirement income to maintain your lifestyle during retirement. Careful planning can help offer security and comfort in retirement, along with the resources to pursue these new interests.

For many, Social Security, employer-sponsored retirement plans, and personal savings are the primary sources of retirement income. Although Social Security may contribute a certain percentage, the Social Security Administration estimates (SSA, 2011) that for the average worker, benefits replace only 40% of pre-retirement income. However, for many, an employer-sponsored retirement plan can also contribute substantially. But both of these sources may need to be supplemented with personal savings to help provide enough income to maintain the lifestyle to which you may have become accustomed, and/or even provide the extras you look forward to in your retirement years.

Put Time on Your Side
Early retirement planning, puts time on your side. It is never too early to begin saving and never too late to start. In fact, an advantage to early retirement planning is that the longer you have before retirement, the greater your opportunity to increase your savings through potential growth.

An equally important consideration for retirement planning is the ever-present reality of inflation, which can quickly shrink even a substantial savings total. For example, a modest 4% inflation rate, maintained over 15 years will reduce the purchasing power of $250,000 to $138,816. Starting early may help your savings outpace inflation.

Although it can be difficult to imagine a time when you will not have to be at the office, or job site in the morning, the day will be upon you sooner than you think. With this in mind, planning for retirement now, even if it seems premature,  may help ensure a secure financial future for you and your family.