August 22, 2019. By Olga Okaty:

Every day roughly 10,000 people retire in the United States, and this number is steadily increasing year after year. Average census projections predict that by 2030 this number will increase to around 12,000 people daily, as the boomer generation reaches retirement. According to U.S. News, a Gallop poll determined that the average American worker expects to retire around age 66, but actually retires in some capacity around age 61.[ The anomaly between expected and actual retirement age can arise from situations like unexpected health issues, taking care of a loved one, or changes in one’s industry like closing or downsizing.

The thought of working full-time until full retirement age while facing these types of risks has led many individuals to retire early and seek either part-time employment or draw off their savings to cover daily expenses. This has led to movements like the FIRE movement (Financial Independence, Retire Early) where people follow extreme savings practices in their early careers and retire younger than 50.  Retiring early seems promising, but it requires careful consideration of the pros, cons, and associated risks before taking the final leap.

The average American worker expects to retire around age 66, but actually retires in some capacity around age 61

It is important to understand what exactly early retirement entails. When most people think of retirement, they likely imagine the dictionary definition: the action or fact of leaving one’s job and ceasing to work.  While this is technically correct, the actual retirement experience involves many more moving parts, and varies greatly from person to person. Retirement (especially early) for some people might mean semi-retirement such as leaving a traditional 9-5 job to cut back on hours, switching industries to trying another career, taking a part-time dream job, launching a new business, or taking on a board role. Through these outlets retiring early can add a new level of self-fulfillment to your life, but it should only be undertaken if it truly suits your lifestyle and financial needs.

The first step in the early retirement decision process is planning ahead. At first glance it may seem simple to project what your expenses will be in the near future, but it takes much more digging to determine whether you’ll be able to afford expenses 20, 30, or even 40 years down the line.

Some things to consider include:

  • What is the impact of reduced or no income on long-term finances and savings?
  • How long do you plan to stay semi-retired?
  • How will that impact your budget now and in the future?
  • Are you willing to adjust spending down as income and markets fluctuate? Is your spouse on-board with your plan to reduce income?
  • What if your new arrangement doesn’t work out? What is your backup plan?
  • Do you have any financial buffer (non-retirement assets you can draw on without penalty)?
  • Will you be able to go back to work full-time if you change your mind?

These are just a few of the many important questions that should be considered.

Other than general budgeting for everyday living expenses, one of the biggest considerations in your planning process should be understanding the cost of healthcare.  It’s important to research different health care options because in most circumstances you won’t be able to receive Medicare coverage until age 65.  If you retire early, at age 48 for example, you’ll have to realize the cost of healthcare for 17 years, which can seriously affect your budget. Furthermore, even when you’re covered by Medicare after age 65 you will still have out-of-pocket costs for Medicare premiums. Since premiums do not cover all healthcare expenses, a supplemental plan will be needed as well as resources for dental, vision, hearing aids, long term care needs, etc.  Properly planning for future healthcare needs is especially prudent while healthcare costs are projected to inflate regularly, as is the cost of insurance.    

Along with healthcare costs, it’s also important to understand how Social Security benefits will be impacted by retiring early. You can start collecting Social Security benefits at age 62, but you won’t receive full benefits until 67 if you were born in 1960 or later. Social Security benefits are calculated based on your highest 35 years of earnings throughout your career. Therefore, if you start working at 22 and retire early at 52 (30 years), your Social Security benefit will be reduced. Also, if you plan on working part-time while collecting Social Security before full retirement age, your benefit could be reduced by $1 for every $2 you earn over the annual limit ($17,640 in 2019.)

Besides calculating the costs of early or semi-retirement, it’s crucially important to do a qualitative assessment as well and begin to implement some changes now to see if the decision will suit you. While you are in your working years you can test out lifestyle changes that may be needed in semi-retirement, such as streamlining finances, trimming spending on underutilized discretionary items, paying off large bills and expenses (car, house, credit cards), downsizing to a smaller home, and generally getting used to spending less.  Making these lifestyle changes now will build resilience and will ultimately provide more flexibility for you in early and semi-retirement, along with an ability to weather challenging market environments and trim spending when needed.  Furthermore, these changes will allow you to boost savings now if your spending is significantly reduced while still working full-time. As part of your preparations, track your spending for a full year before semi-retiring to ensure that you can truly stay on budget and implement the lifestyle changes necessary to make it affordable and sustainable.  This experiment will prove whether your budget truly aligns with your semi-retirement lifestyle and income expectations. 

Lastly, each of us ultimately strives for a sense of self-fulfillment and purpose in life, much of which is derived from our work and the impact our professional contributions make on the world.  Think about all the intangible benefits of your career – the sense of structure, purpose, challenge, drive, and community it provides – and how these attributes and experiences will be sourced in semi-retirement.  Consider how you will keep your mind and body sharp, how you will keep growing, learning, and staying engaged in the world. Contemplating these questions in depth to gain confidence in your semi-retirement plan is crucial in the decision-making process, as personal fulfillment reaches far beyond financial security and comfort.   

If you are thinking about early or semi-retirement, we are always available to guide you through the important conversations and proper planning to help you prepare for this transition and journey.