Have you ever reviewed your pay stub and entertained thoughts of taking an early retirement? Suppose you are age 55 and could take home 60% of your pay if you were to retire now. If you are a high earner, it may seem that this amount would allow you to retire in reasonable comfort. However, before calling it quits, weigh all the facts carefully to be sure an early retirement makes sound financial sense.
Consider the following. . .
Lost Earnings. Retiring at age 55 with, hypothetically, 60% of your income may seem like a good deal at first. But, if you wait until age 65 to retire, you will have gathered another ten years of full earnings under your belt, along with any increases for promotions, merit raises, and inflation. This alternative will provide you with more money to save for retirement, and may also ultimately boost your Social Security and pension benefits. Also, if you consider the difference between the percents you will receive now and what you’ll receive in ten years¾for example, 60% if you leave now, versus 80% if you retire in ten years¾leaving now may not look so good after all.
Effect of Inflation. If you still think you can manage on, say, 60% of your income, remember that inflation will erode your pension. If you retire today on $1,600 per month, in 20 years at a 4% rate of inflation you will have the equivalent of only $707 in today’s dollars.
Life Expectancy. The longer you live, the greater inflation’s effects will be. For instance, if you retire at age 53 and your life expectancy is 83, you may have 30 years to support yourself on today’s fixed income. However, if you are still living at age 83, statistics show you could have another eight years to live. So, instead of needing to fund a 30-year retirement, you may actually require resources for 38 years—a shortfall you may want to be sure to guard against!
Other Retirement Income. If you already have a sizable retirement nest egg, or if you expect to collect a pension from a previous employer, the size of the pension you could get from your current employer may not be especially critical. If that is the case, perhaps you can feel financially secure in leaving the work world behind, since you will have other funds to rely on.
However, don’t make the mistake of expecting Uncle Sam to provide most of your retirement income. Also, the future of Social Security is uncertain, and cutbacks in other government programs, such as Medicaid and Medicare, may require you to provide even more of your own funds.
Post-Retirement Employment. If you do decide to leave your present company, are you banking on securing employment elsewhere to supplement your pension? The prospect of earning ongoing income may make it possible to consider early retirement. However, it is important to bear in mind that it may be difficult to find another equally high-paying position. Be sure of the earnings and longevity you can expect from your next job before depending on it for income until you permanently retire.
Social Security “Giveback.” The first factor you’ll need to consider is your age and the so-called “giveback.” If you are under full retirement age (66 to 67 depending on your year of birth), and continue working after you begin collecting Social Security, you have to “give back” $1 in benefits for every $2 earned above the annual earnings limit ($15,720 for 2015) until the year you reach full retirement age. For the year full retirement age is attained, and until the actual month in which it is reached, your benefits will be reduced by $1 for every $3 earned above $41,880. No earnings “giveback” is required after you reach full retirement age.
Taxation on Social Security Benefits. You should also know that if you continue working after you begin collecting Social Security, a portion of your Social Security benefits may be taxed. The calculation to determine how much of your benefits will be included in your gross taxable income is somewhat complicated. For more information, contact the Social Security Administration.
Threat of Being “Downsized.” Is there a chance your company will lay you off if you do not elect to leave on your own? Many companies now lay off high earners as part of their cost-cutting measures. If your company is experiencing financial difficulties and “downsizing” appears imminent, you may get a better deal through early retirement than through the company’s severance package.
In summary, early retirement may be desirable, and certainly has psychological appeal. Yet, before calling it quits, it is important to analyze your situation carefully. You will have to live with the effects of your decision for the rest of your life. Consider taking the time up front to make sure your decision will hold up for the long run.