Could You Retire Early? Just Answer These 7 Questions
By Marilyn Lewis
So you are dreaming of an early retirement. Are you ready to start acting on that dream?
It takes a bold spirit to quit work in the midst of your productive years. It's especially difficult these days: We're living longer, wages are flat and the economy has been brutal. But that's not to say you can't do it, only that you must be very well-prepared. See if you can answer "yes" to each of these questions:
1. Can You Live with Less Social Security, Forever?
Claiming Social Security at 62 means you'll get more checks and sooner. But make sure you think this through: It also means you get smaller checks for life. For every month you file early, your Social Security check shrinks by about half a percentage point, permanently, according to the Social Security Administration. Here's an example from AARP, based on someone who'll get $1,000 a month at full retirement age, which is the age when you're eligible for full Social Security benefits. That's 66 for most retirees today:
- Monthly benefits at 62: $750.
- Monthly benefits 66: $1,000.
- Monthly benefits at 70: $1,320.
2. Will Your Nest Egg Last 35 Years?
You could live many, many more years. Social Security's Life Expectancy Calculator will give you an idea of how long for you. Here's a general idea: "About one in four of today's 65-year-olds will live past age 90, and one in 10 will live past age 95," says The Washington Post. The recession caused Americans to reconsider when they'll retire. But even before that, attitudes were changing:
- Retirement age is rising. The average retirement age for Americans has climbed from age 57 in 1991 to 61 in 2013, when Gallup last looked.
- Expectations are falling. In 1995, nearly half of American workers told Gallup they expected to retire before age 65. In 2013, just a quarter expected to pull off an early retirement.
The Journal cautions against basing your available retirement funds on the value of a portfolio that's been swelled by the recent good years. "Stocks routinely give up some gains, and a selloff that starts just after you stop drawing a paycheck could do serious damage if you are forced to sell off assets at low prices to cover living expenses," it says.
3. Are You Set with Affordable Medical Insurance?
Waiting for Medicare keeps many people working until at least age 65. You're in luck if you have a retiree medical plan or insurance through your spouse.
Otherwise, look at the Affordable Care Act Health Insurance Marketplace. You might be able to pair a high-deductible plan with a tax-free Health Savings Account. Or think about moving abroad for a while to take advantage of lower health care costs in some countries, Kiplinger suggests.
4. Will Your Emergency Savings Cover You for Six Months?
Remember 2009, when the value of the stock market plunged? It wasn't a time when retirees wanted to be withdrawing from retirement accounts. Those with sizable emergency savings had a buffer. Those who could wait out the recovery probably saw the value of their investments return and grow. Those who could not wait lost not only the principal but also the money they would have gained in the upswing.
U.S. News says retirees should have enough cash in emergency savings to cover expenses for at least six months. Keep it super safe, in an FDIC-insured savings account or money-market account, says CNN Money. Some financial advisers also recommend keeping two to three years' worth of expenses in cash or short-term investments, for the downturn with legs.
5. Are You Debt-Free, or Close?
In your grandparents' era, entering retirement with no debt was the goal. Today, mortgages are bigger and life is more complicated, if not more expensive. It's terrific to have all debt, mortgage included, erased when you retire.
All your income, in that case, is available to support you. You can live on less. Your expenses are predictable, which counts for a lot when you're on a fixed income. The security you feel from being debt-free may be priceless.
But there are different schools of thought on this today. Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation and a certified financial planner, told Huffington Post that the type of debt matters: "Debt that is low-cost and potentially tax-deductible, such as a mortgage or student loans, may actually work in your favor. But high-cost consumer debt -- things like car loans and credit card balances -- can really derail you if you're not careful. If you cannot retire debt-free, at least eliminate credit card balances, auto loans and other debt that represents consumption."
6. Can You Pay $100,000 in Uncovered Medical Expenses?
Even with Medicare and supplemental plans, retirees' out-of-pocket medical costs -- including for serious illness and long-term care -- can cost hundreds of thousands of dollars over a retirement.
Medicare doesn't cover everything you might imagine. It doesn't pay for eye exams or dental care, for instance. Nor does it cover medical care outside the United States.
Basic Medicare -- hospital coverage -- is free for most Americans. Most recipients pay about $105 a month for Medicare Part B (doctor visits) plus a $147 annual deductible, says Medicare.gov. Since Medicare pays medical providers at a lower rate than most providers charge, if you don't want to pay the difference you'll need additional insurance, including perhaps a prescription drug plan. Such costs, including inflation and long-term care, could run an average 65-year-old couple $163,000 in out-of-pocket costs over the course of retirement, says USA Today.
7. Do You Have a Backup Plan?
In this era of economic uncertainty, early retirees need a strong backup plan. You'll have a longer time span to finance without working, increasing the risk of surprises. No doubt you've read stories of early retirees who faced unexpected expenses in retirement and had to return to work. You can't plan for every eventuality, of course. But you should have a concrete idea of how you'll survive if your plans fall through.
Has your plan for an early retirement changed? Tell us by posting a comment below or at Money Talks News' Facebook page.