Archives for May 17, 2019

Retiring early may seem like a great plan, but it’s not necessarily all it’s cracked up to be. Leaving the workforce prior to your mid-60s can come with huge financial and mental challenges that can derail your entire retirement if you’re not prepared for them.

So, before you get all excited about handing in your notice early, make sure you consider these five major downsides of early retirement.

1. You may not be able to access all your retirement funds

When saving for retirement, it typically makes sense to put money into a workplace 401(k) or an IRA because you can get tax breaks for investing in these accounts. If you’re planning to retire really early, you could run into a problem: You typically can’t take your money out of tax-advantaged retirement accounts until you’re at least 59 1/2 without incurring a 10% penalty for early withdrawal.

While there are some exceptions — such as if you take substantially equal periodic payments — accessing your invested cash is a lot more complicated. This can mean you either have to jump through hoops or invest in traditional brokerage accounts that don’t provide tax breaks, which makes investing for retirement more expensive. If you don’t want to deal with the hassle or lose the help the government provides with retirement savings, you may decide just to commit to work until at least 59 1/2. 

2. Healthcare may become a big challenge

Healthcare in retirement is really expensive, because there’s a lot Medicare doesn’t cover. But if you retire before you become eligible for Medicare at age 65, you’re likely to incur even more expenses than the typical retiree. That’s because you’ve got to figure out how to stay covered from the time you retire until you hit your 65th birthday. There are a few ways to do that, but all of them have a high price tag.

You could potentially keep coverage with your employer through COBRA for up to 18 months, but you would have to pay all the premiums for the policy without any subsidies from your former company. You may be able to get coverage on a spouse’s plan if your spouse continues to work — but many companies charge more to insure dependents than to just get coverage for an employee. Signing up for a policy on the Obamacare exchange is another option, but these policies often come with high deductibles and sometimes very high premiums if you aren’t eligible for subsidies.

You can’t go without health insurance because this could lead to financial disaster, so have a plan for affordable coverage — and enough saved to cover care costs later in retirement that you’ll likely be responsible for. In other words, don’t burn through your health savings account by keeping your costs paid from age 62 to 65 and end up with nothing to cover care costs when you’re in your 80s.

3. Your savings will have to last a lot longer

If you retire at 55 instead of 65, you have fewer years to save money for retirement — and more years when you’ll be drawing from your savings to support you. The sooner you start making withdrawals from your investment accounts, the sooner you’ll deplete your money, and the more likely it is you’ll run out of cash too early.

This can be an especially big problem because spending tends to be the highest during the early years of retirement and at the end of retirement. If you spend too much money having fun when you retire early, you may have too little left when serious health issues arise and you have to pay high prices for medical care or long-term care. 

4. Your Social Security benefits could be reduced 

If you plan to retire early, chances are favorable you’re also going to claim Social Security benefits as early as you can so you don’t have to rely on savings alone.

While you can start claiming Social Security at 62, you’ll see a big reduction in benefits if you retire before full retirement age (FRA). In fact, if your FRA is 67, as it is for people born in 1960 or later, you’re going to end up seeing a 30% reduction in the benefits you’ll get at 62 compared with if you’d waited. Social Security benefits that start lower never catch up, as your cost-of-living adjustments (periodic raises) are based on a percentage of the current benefits you’re receiving. Survivors benefits will also be lower, so you’d better hope your spouse wasn’t going to rely on them to maintain his or her standard of living if you pass away first. 

5. You’ve got a much better chance of being bored

Finally, early retirement could leave you with a lot of time on your hands — and if you don’t have a plan to fill this time, you could end up bored.

Boredom can lead you to spend more money to occupy your time, which exacerbates the risk of running out of money. It could also lead to depression, especially if you lose many of your social connections when you leave the workforce. To make sure you don’t end up regretting your early exit, have a clear plan in place for how you’ll spend your days before you hand in your notice.

Is early retirement a good idea?

As you can see, there are lots of reasons not to retire too early. If you stick it out in the workforce a little longer, you could have much more money to enjoy your retirement years — and way fewer worries.

Waiting may be worth it, but if you do decide to go ahead with early retirement, be sure to do so with both eyes open and a plan for dealing with some of the big downsides discussed here. By making a plan, you can mitigate or avoid some of these negatives so you’ll be able to enjoy not just your extra years out of the workforce, but also your entire retirement. 

Cleo Parker had a simple plan before retiring: She would work well into her 60s as a marketing analyst in the automotive business. But recently, she has been searching for a Plan B.

In 2006, just as she was about to turn 50, Ms. Parker’s longtime marketing job with a Detroit-area advertising agency was eliminated. For the next decade, she worked a series of short-term-contract and full-time positions — many in the volatile auto industry, which has reduced employment levels drastically since the 2008 financial crisis. Ms. Parker’s last full-time job, as a marketing analyst for a pet supply retail chain, evaporated in 2018.

Ms. Parker has since interviewed for more than 30 positions. At age 62, she often finds herself chasing jobs for which she is overqualified and that pay far less than what she had been earning.

“First, you have to deal with persuading people you are O.K. with a salary level at or below your last position,” she said. Age discrimination also has been a barrier, she suspects: “I feel they often have a vision of an eager person younger than themselves walking into the job, and while I tend to be very enthusiastic, I am not younger than anyone I’ve interviewed with in many years.”

Ms. Parker’s story is a cautionary tale for anyone planning to postpone retirement and work indefinitely: It’s a fine aspiration, but it’s best to have a backup plan.

Many Americans understand that working longer can be a good way to improve retirement security. According to the Employee Benefit Research Institute, 33 percent of workers expect to retire between the ages of 65 and 69, and 34 percent at 70 or beyond, or not at all.

Yet a recent study by the Center for Retirement Research at Boston College found that 37 percent of workers retired earlier than planned — and that the odds of success fell as the goal became more ambitious. In that study, among the 21 percent of workers who said they intended to work to age 66 or later, 55 percent failed to reach that target.

The most common causes for unexpected early retirement are health problems and job loss, said Geoff Sanzenbacher, associate director of research at the center. He was quick to note, however, that the study, based on data from the long-running University of Michigan Health and Retirement Study, offers clear reasons for unplanned early retirement only in about one-quarter of cases.

Other reasons, Mr. Sanzenbacher suspects, are more difficult to measure. The pull of leisure activities and time with family are factors, he thinks, along with possible age discrimination. But the quality of work also matters.

“Do you feel motivated to go to work, and feel like you are accomplishing something?” Mr. Sanzenbacher said. “That can wear on older people nearing retirement faster than they might think.”

Labor-force participation rates for workers 62 and older have been rising over the past 25 years, according to research by Richard W. Johnson, director of the program on retirement policy at the Urban Institute. But the increases have occurred mostly among better educated workers.

“Participation rates have increased about three times as fast for college grads than high school dropouts,” Mr. Johnson said, “mainly because college grads tend to be healthier, they don’t usually work at physically demanding jobs, and employers value them.”

Working longer makes it easier to delay your Social Security benefit claim, increasing monthly benefit amounts through delayed retirement credits. Working longer can also mean more years of saving for retirement and fewer years relying on savings in retirement.

But counting on working longer to make a retirement plan work is fraught with risk — even during times when the labor market is healthy. The unemployment rate for workers 55 and older in April was just 2.6 percent, according to the Department of Labor — a full percentage point lower than the overall unemployment rate. But long-term unemployment is higher for older workers: 26.6 percent had been out of work 27 weeks or more last month, compared with 22.2 percent of all workers.

“Yes, the unemployment rate is low, but if you get laid off, the chances of ever really recovering are not very good,” said Marc Miller, a career coach in Austin, Tex., who specializes in advising older workers on career shifts.

Even those who do find new jobs don’t return to their earlier income levels, Mr. Johnson said. “You’d be lucky to get half as much as you were making — it’s a big hit at any age, but it’s so much worse when you’re older because you have so little time to recoup those losses. There’s not much time to reset your retirement planning before you stop working.”

Ms. Parker and her husband, Mike, a technician specializing in small engine repair who also lost his job late last year, had hoped to retire on their retirement account savings and Social Security, but the couple has been forced to tap those savings sooner than expected, along with some money Ms. Parker inherited from her mother. Some of the I.R.A. drawdowns occurred before she turned age 59½, but those came from a Roth account, so she was able to avoid paying early withdrawal penalties.

Ms. Parker thinks her savings will last until she turns 80, but isn’t completely sure, she said.

“This is a topic that makes me really uncomfortable, so I am not studying when we start circling the drain on a very frequent basis,” she said.

At this point, Ms. Parker is seeking full-time work and hoping to postpone filing for Social Security until her full retirement age of 66. She expects the couple’s combined Social Security benefit to provide $4,000 in monthly income.

She wants to work as long as possible, partly to support her lifelong passion for dogs — she has four bull terriers and participates in dog shows and other competitive events.

“I want to find work I enjoy and that would give me the time to show my dogs,” she said.

These days, Ms. Parker is working to develop a new career offering her marketing skills to dog-related businesses. She started a blog about dog marketing and is hoping to make a living working in that business. But she doesn’t expect her income to come close to the six figures she made earlier in her career.

Sporadic income can be especially damaging to household finances. Elizabeth White, an international development expert specializing in sub-Saharan Africa, was making $200,000 a year as a consultant when the economic crisis hit in 2008. Her consulting income disappeared, and she turned to a mix of consulting gigs, writing and speaking engagements.

“You have these big income gaps in between consulting assignments,” she said. “By the time you get something, you owe everybody and your mother; you’re in the hole again. You get, and you lose.”

A 2016 essay that Ms. White wrote for PBS NextAvenue about her employment crisis drew widespread attention on social media, ultimately opening the door to publication of her recent book, “55, Underemployed and Faking Normal.” A TED talk that she gave on the topic in 2017 has been viewed more than 1.5 million times.

Now 65, Ms. White has burned through her retirement savings, but owns her home in Washington with a low-rate mortgage that she is close to paying off. She is holding off on filing for Social Security until she reaches the full retirement age of 66 this year.

Planning to work longer still makes sense, experts say; if anything, too many workers retire at less-than-optimal ages. Mr. Sanzenbacher’s research found that the most popular planned retirement ages are 62 and 65 — the first years of eligibility for Social Security and Medicare, respectively.

“Neither of those ages maximizes an individual’s Social Security benefit, and claiming at 62 is far too early for most people,” he said.

At the same time, Mr. Sanzenbacher added, it is crucial to understand the odds of hitting your target date. He urges workers to make an honest assessment of their health and how that might affect the plan.

“When you make a plan, think realistically about your health,” he said. “If you are planning to work to 65 and you already have health problems in your late 50s, that plan may not work.”

Mr. Miller, the career coach, urges anyone hoping to work into the 60s or 70s to make a realistic assessment of future job risk well ahead of that time.

“If you think you are safe, then you are probably smoking something, and you are inhaling,” he said. “If you want to work through your 60s and even into your 70s, you need to do the planning now.”

Even that may not be enough protection for your plan, so what about that Plan B?

Said Mr. Johnson: “You want to save as much as you can while you’re still working.”

Retirement planning is a thing many Americans have on their radar.

Many may wonder how they can possibly save $1 million, and essentially guarantee a comfortable retirement, by the time they are 65.

Of course, the younger you are when you start, the easier it will be to hit that goal. But that doesn’t mean you are out of possibilities as you get older.

Across the board, workers of all ages are falling behind in their retirements savings, according to a new survey from the TransAmerica Center for Retirement Savings. 

Baby Boomers, the oldest of whom are in their 70s, have an estimated median of $152,000 saved in all household retirement accounts, according to the experts at the center.

The situation is even more distressing for the Gen Xers — the group that was born between 1965 and 1980. Those workers have a median of $66,000 socked away in all household retirement accounts, the survey revealed.

Millennials had the smallest median balances saved, with only $23,000 in the bank.

But financial planners say new millionaires are being created every day by following a simple formula. It’s a formula that is constantly being adjusted to allow for all age groups and changing market conditions.

Wage earners need to know that the stock market is a big player in making the formula work. A lot of people don’t like Wall Street.

But the facts are the S&P 500 has returned a steady 9.8% over the last 90 years. 

Let’s face it. You don’t really have a lot of options. Bank savings accounts and Certificates of Deposit (CDs) are still paying historically low rates. Treasury bills are a little better, but still terrible, and most of us don’t have pensions anymore.

So, you need to adopt the steely-eyed mindset of a long-term investor and the saving habits of your local minister. Then you can get to a million before you cross the career finish line.

Here’s the math on how it works:

If you’re in your early 20s, you can become a “lunch-bag” millionaire. That is, you can “brown-bag” it to work and cut back on dinner out.

9NEWS Financial Analyst Bruce Allen said you should take all that money, an average of $325 a month, and throw it into the stock market every month of your life.

“If you were to start at the age of 25 and you invested your money in a high-quality stock fund over the next 40 years, you will end up having over a million dollars by the time you are 65,” Allen said.

The hill will get steeper as you get older, but not impossibly steeper. At age 30, you’ll need to sock away $645 a month to hit a million.

At age 40, as you begin to hit the zenith of your earning power, you’ll need to bank $1,400 a month.

Allen said that sounds like a heavy lift, but he reminds us that in our 40s, in addition to having bigger incomes, we also are frequently in two-income households. A spouse who is also earning can help families reach retirement goals faster.

“If you have two people earning incomes, it may become an easier lift at that point. Also, if both people, the couple, are saving their money in a pre-tax 401k fashion, then that really compounds and adds to that strategy as well,” Allen said.

Even if they are working on mortgages and college educations, the experts say two-income families are in a good position to set budgets and pay themselves first.

If you’ve really been putting off saving for retirement, and you’ve arrived at age 45 without giving it much thought, Allen said you’ll need to come up with $2,000 a month to hit the million dollar goal. 

If you wait until age 50, you’ll need $3,000 a month and at age 55, really late to the game, the number climbs to a staggering $6,000 a month.

But don’t be deterred by the math. Allen said saving even portions of those amounts can still result in a comfortable retirement. He tells clients the key component is to save “something” and to develop a saver’s mentality and do it today.

“It’s very difficult to take someone who is not a saver and turn them into a saver,” he said. “But it’s very easy to help a saver achieve their financial goals.”

It’s all about discipline. Pay yourself first, make it your life plan, and become the master of your own destiny.

What’s more valuable — getting out of debt or getting away? Soon more workers will have the opportunity to make that calculation.

PTO Exchange, a platform that allows employers to give workers the ability to put the monetary value of their vacation days towards retirement savings, charitable donations and other goods and services, is expanding its offerings to include student-loan payoff, the company announced Thursday.

Over the past few years, companies have increasingly started offering student loan payoff — funded by the employer — as a perk to lure young, talented workers. Still, just 4% of companies offer the benefit, according to the Society of Human Resource Management. But Thursday’s announcement indicates that a new twist on this perk could help convince more companies to offer the it — by using money already budgeted for another benefit to offer student loan help.

It’s also an indication of the challenges our nation’s $1.5 trillion student debt problem poses to borrowers — some may be so burdened by their loans that they’re willing to give up earned rest to get out of debt more quickly.

“A lot of these companies think this is a great idea,” Rob Whalen, the chief executive officer of PTO Exchange, said of student loan help. “But it’s hard to find the funds. Here is an already budgeted benefit that’s accrued. Why not allow your employees to self-direct some of it — not all of it — to help them financially?”

Companies that decide to offer employees the opportunity to put the value of their vacation days towards their student loans would design their own plans, Whalen said. For example, some might require employees use a minimum of their vacation days for vacation before putting them towards another use, he said.

PTO Exchange is also launching a program that will allow employees to use the value of their paid time to cover certain emergency expenses.

The announcement comes both as employers are getting more creative with the paid time off benefit and as they’re looking for ways to cope with a tighter labor market, said Peter Cappelli, the director of the Center for Human Resources at the University of Pennsylvania’s Wharton School.

Over the past several years, it’s become more common for employers to offer unlimited vacation days to workers. Though that may seem like a good deal for employees, it’s a great deal for companies, Cappelli said, who are able to move the liability of the accrued vacation days they owe to their employees off their books.

At the same time, companies want to find a way to lure young, talented workers in a tight labor market, he said. Providing student loan help allows them to do that without upsetting current employees by paying new workers higher salaries. Allowing workers to put vacation days towards this purpose offers an added benefit to the company, he said. “It gets the obligation off their books as well, so it doesn’t look like they’re carrying all this debt to the employees.”

For workers who already aren’t using their all of their vacation days — a large share leave more than half on the table — trading them in for student loan help could be a better deal, Cappelli said. “If they feel they can’t use it, it is better to have this kind of arrangement, I suppose.”

Still, allowing workers to forgo time away in exchange for something else could help to reinforce the mentality that’s driving workers to leave so many of their vacation days unused, said Eileen Appelbaum, the co-director of the Center for Economic and Policy Research, a left-leaning think tank.

“People feel that if they take all of the paid leave they’re entitled to, they will be overlooked in promotion and in other ways that the company evaluates them because they will be considered not dedicated enough,” she said.

A system that allows workers to trade their paid time off for student loan help allows companies to get the benefit of having the employee at work while still spending the same amount of money as if they were away, she said. Right now, the average full-time worker with benefits has 14 paid vacation days and eight holidays, according to a forthcoming CEPR report due to be released next week.

At that level, “it may be more difficult to give them up,” she said.

And of course this is the type of benefit — like most employer-based student loan help — will only reach the most well-off workers, she noted. Nearly half of workers whose wages are in the bottom quartile of the income bracket receive no paid time off, according to a forthcoming CEPR report due to be released next week.

So while it’s nice to see more companies with the ability to offer this type of benefit providing it to their workers, “it’s nowhere near what we need,” she said.