By Steve Tepper, CFP®, MBA
Whether by choice or not, Americans are retiring at a record pace. The already high rate of retirement that we’ve seen for about 10 years—since the oldest of the baby boomers started turning 65 in 2011—has been accelerated by the tens of millions of layoffs that occurred last year during the height of the pandemic shutdowns.
While, fortunately, most of those layoffs proved to be short-term, many Americans, particularly older ones, found themselves jobless or even company-less, with few prospects for returning to work in their field at the same wage.
The decision to simply retire rather than continue to pound away at an indifferent job market can be difficult under any circumstances. If you or someone you know is facing that dilemma, here are some important points to ponder:
What are my Social Security benefits? Retirement benefits are available to most Americans starting at age 62. If your original plan was to retire at 65, then beginning benefits three years early will mean your monthly amount will be 24% less for the rest of your life. On the other hand, you’ll get a check for the next three years that you would not have gotten if you waited until age 65.
What are my company retirement benefits? Did you contribute to a retirement plan like a 401(k) while you were with your last employer? Or any other employer? That’s money available to you for retirement, although you will have to pay income tax on money you withdraw, plus a 10% penalty if you are under age 59½. It may be a good idea to roll that money into an IRA account that you can have professionally managed by a financial advisor.
How about pensions? While old-fashioned pension plans are not common in private companies any longer, you may have accrued some benefits while working for an employer years ago or if you’ve worked for government employers like public schools or firefighters. You can contact that employer and get a statement of what your benefits will be if you begin taking them now or whether a lump sum is available that will give you your entire lifetime of payments up front, a payout that could be rolled into an IRA.
Is there an early retirement option? If you are still working and your employer is looking to cut their workforce, they may focus their efforts on older, higher-paid workers. They might do this by “sweetening the pot” and offering an incentive if you voluntarily separate, like adding years of service to calculate your retirement benefits. If you were considering retiring in the short term anyway, such an offer can be a windfall, one you should discuss with your financial advisor right away.
What about health insurance? While some retirement benefits are available at age 62 or 59½, Medicare is not available to most people until age 65. As almost all of us get our health insurance through our employers, the retirement decision is greatly complicated for people under the age of 65 by the high cost of private insurance. When you leave an employer, you will usually have the option to remain on their health care plan (at your cost) for up to 18 months, but after that, you’re at the mercy of the private insurance marketplace.
No plan is complete until you’ve explored other options. The two best alternatives to early retirement are:
Partial retirement. Most of your retirement benefits are available even if you don’t retire! You may find that by beginning to take benefits, you can lower your job-related income needs so that you can work part-time or in a lower-paying job if that is all that is available.
Cost cutting. Your household finances are a simple matter of income and expenses. If you’re upside down (expenses are higher than income), you’ve got only two options to right yourself: increase income or lower expenses. If the income option is not readily available, then it’s time to look at expenses. If you’re within a few years of retirement, you’re probably an empty nester and may live in more house than you need. Downsizing can accomplish two goals: reduce housing expenses and free up equity that can be added to your retirement portfolio. If cheaper housing options are not available in your area, relocation may be worth considering, but first read our article “Want to Move Out of the State of Florida? Here’s What to Consider” in our September newsletter or on our online blog.[1]
Note that most of this article is focused on answering the question “Can I afford to retire?” But retirement is more than just a money question. When health issues or structural job market changes are factored in, you may also ponder the question “Do I need to retire?” And dollars and cents aside, many of us tie our jobs and income to our psychological well-being, prompting the question “Do I want to retire?”
All of those questions are part of a holistic retirement decision and lifelong plan to retire comfortably and stay comfortably retired. And we’re here to help you answer them.
[1] https://www.northstarplanners.com/new-blog/want-to-move-out-of-florida-heres-what-to-consider.