Here’s why you might want to think twice about that early retirement plan

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Life can be short, but early retirement can also be so if you do not have a solid financial plan for life after work.

Whether it’s due to pandemic burnout, a new outlook on life, or optimism driven by rising stock and real estate markets, more Americans appear to be retiring early, based on data from the U.S. Bureau of Labor Statistics.

The employment rate for Americans over the age of 55 rose 0.7% in January to 39.1%, but remains well below the 40.3% recorded in February 2020 and has recovered more slowly than the general population rate .

“I think Covid has increased interest in retirement in general and accelerated the number of people retiring early,” said certified financial planner Lazetta Rainey Braxton, co-CEO and senior financial planner at 2050 Wealth Partners in Brooklyn, New York. “People reconsider everything and often more emotionally than practically.”

For those who have the resources, opening up from everyday life opens up a new world of possibilities. But it comes with risks and for everyone except the richest Americans – and the earlier you retire, the greater the risk.

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“If you have no debt, have a track record of living within your means and have enough resources to cover emergencies, knock yourself out,” said Danny Artache, a financial advisor based in Jupiter, Florida. “But if you run out of money, you could end up being a greeting at Walmart.”

Are you ready to retire both emotionally and financially?

There is no substitute for beating the numbers on the expected costs and sources of income you will have in retirement. Simply settling on a “comfortable” nest egg figure will not cut it.

The costs include housing, insurance – if you retire early, you will need to buy health insurance before Medicare starts at age 65 – food, gas and vehicle expenses. Main sources of income include pension payments, social security benefits and withdrawals from your investment portfolio.

Braxton advises its customers not to carry any debt for retirement, except in the rare cases where the value of the mortgage interest deduction is greater than the price of your annual mortgage payments.

If you are planning to travel and / or take on hobbies that cost significant money, incorporate this into your ledger.

“Do not be afraid of your numbers,” Braxton said. “You need to know what they are.

“The more comfortable you are with these numbers, the easier you can turn when things change.”

And they will change. A commonly accepted rule of thumb is that you will spend about 80% of your earned income annually on retirement.

But no matter how well you specify expected costs and sources of income upon retirement, there will be curveballs. There are several major unknowns that make retirement planning particularly difficult.

“Retirement is the mother of all financial planning problems,” said Christine Benz, director of personal finance at Morningstar. “There are so many variables in the mix.”

The three biggest are your health and longevity, the performance of investment markets and the level of inflation through retirement.

When you continue to make money, you do not need to use your investment portfolio and you increase your future social benefits.

Christine Benz

director of personal finance at Morningstar

The first factor is completely personal. Based on your current health and family history, you may not expect a long retirement, but conservative retirement modeling typically uses a 30-year time horizon.

Another rule of thumb, first formulated by financial planner William Bengen, is that with the conservative 30-year time horizon, you can safely withdraw 4% of your portfolio assets annually, provided a portfolio of 50-50 equities-to-bonds.

The rule could use a tweaking, Benz suggested. The remarkably strong returns on equities and bonds over the last 30 years may not be repeated in the next 30. In an environment of low bond yields and high valuations of equities, the return on investment may become thinner going forward.

“The next decade may not be good for market returns,” Benz said. “If we’re dealing with higher inflation, it adds another risk.” Morningstar now estimates that the “safe” portfolio withdrawal rate should be lowered to 3.3%.

If this retirement rate combined with guaranteed pension and social security benefits can cover the cost of your average retirement year, you’re in good shape. But if you are at all worried about your financial situation on the way to retirement, keep working.

“Working longer in a job you hate is not good, but the job market is so strong that you may be able to strike a more comfortable work-life balance,” Benz said.

The value of additional income years is enormous. It will stretch your resources in retirement and reduce the risk of running out of money along the way.

“It has a multiplier effect,” Benz said. “When you continue to make money, you do not need to use your investment portfolio and you increase your future social benefits.

“Your assets may continue to grow and possibly help you delay taking social security,” she said to receive a higher benefit.

Your pension may be shorter, but it may be much sweeter.

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