When is the Best Time for You to Retire (or, Should I take that Early Retirement Offer)?
by: Michael Snowdon, CFP®, CRPC®
Health, job-related stress, desire to travel or just relax, the need to support parents or other dependents with your time – each of these can be a contributing factor in answering this question. Plus, it can be a little unnerving to face several decades without a professional identity and the social interactions that are part of a career.
Additionally, the financial risks associated with retirement are significant. Concerns you may have as you contemplate retirement include:
Worried about running out of money (longevity)
Need to work full-time or part-time to live comfortably in retirement years
Increasingly expensive health care costs as you age
Long-term care decisions and expenses
Finding ways to stay productive
These, and other, concerns can be part of any individual’s retirement decisions. This may be even more true for those who have been offered an early retirement package. Should you accept? What are the potential dangers? Can you overcome the pitfalls?
Perhaps the first consideration should be, can you afford to leave your full-time job? Do you have enough money to fund extra years without a regular income? Other questions to consider include:
Can you afford self-paid health insurance premiums between the time you leave the workforce and when you can file for Medicare coverage?
If you have received an early retirement offer, how many of these questions does the offer answer?
In addition to any up-front payments will the offer include extended healthcare coverage and any increases to your long-term retirement benefits? Remember, the fewer years you work, the more years you have to self-finance during retirement. Can you afford those extra years?
Social Security and pension benefits
Social Security benefits are another potential concern. If you stop earning a regular income, you also stop contributing to your Social Security retirement benefit account. This may mean lower lifetime payments. You can check the Social Security website (ssa.gov) to determine your potential retirement income benefit now, if you retire early, or if you wait. How much of a difference to your ongoing income stream will retiring early make?
The same consideration exists for pension plan benefits. Most defined benefit pension plans base retirement benefits on a formula that includes years of service. Fewer years means less money. Does your early retirement offer include compensation for lost years in the benefit formula?
Health care before Medicare
Regarding healthcare benefits, can you qualify for non-employer provided coverage, and if so, what will be the monthly premiums? It’s not unusual for older individuals to pay monthly health insurance premiums in the $1,000 range (maybe a little less or a little more). If you have any significant health-related issues, the cost can be much higher. You probably will be able to continue your employment-based insurance coverage under COBRA, or similar state benefits, for 18 months. The cost will be 102% of the cost while you were employed, and remember, there will be no employer offset. You will pay the full premium. After COBRA, how much of a gap will there be between then and when you reach age 65 and can file for Medicare benefits? Be sure you can qualify for any required coverage and determine the drain on your budget.
Drawing down retirement savings
If you plan to access IRA or qualified plan benefits and are younger than 59 ½, you may be facing a 10% tax penalty on amounts you withdraw. Remember, too, whatever you withdraw will be taxable. With the penalty, that may mean you will have an effective tax rate of 30% or more on any withdrawals. That should be part of the consideration.
Maintaining social connection
Finally, how much will you miss your workmates and the interaction you share? Most people do not maintain connections with coworkers after leaving the job. Do you have a support network to help you through the adjustment?
Consider, too, what you will do with your newly free time. How will you spend your days? Do you have a plan to remain active? Many people plan to work part-time to help provide money and fill some of the extra time during “retirement” days. Doing this also may help provide beneficial social engagement. Be careful that you will be able to find employment before you make decisions counting on having it. Seniors can sometimes find it difficult to be employed doing something they enjoy.
As you consider these things, how does it make you feel about early retirement? If you were able to provide positive answers to most of the questions you may be ready to make the jump into early retirement. If your answers were not so positive, it may mean delaying retirement for a time if you are able. Sometimes, even a little more time in the workforce can make a big difference in the outcome.