Before you answer “yes” or “no,” look at the real issues behind leaving the workforce earlier than planned
If you’ve been regularly saving and investing for years, you may find yourself considering early retirement. Retiring “early” for many means leaving the workforce before age 65. Is early retirement for you? Here are the things you need to consider and plan for to make it happen.
No one should make the decision to forego health insurance, since a single serious illness or injury could be catastrophic for your finances. Opt for the best coverage you can afford as this will give you more options when seeking care.
Whether you’re still working or retired, you have expenses. To cover those costs, look at what your income needs are going to be. Your expenses may fall, especially if you’re downsizing your housing and suddenly don’t have the costs of commuting. If you plan on traveling extensively in retirement or spending more money to enjoy your other hobbies, your overall spending may increase. Work with a TIAA-CREF advisor to take a close look at your current expenses.
Add up prospective income sources. What income will be coming in during retirement and when is the best time for you to access these sources? Most pensions can typically be accessed when the contributor is between ages 55 and 65, which can be an important deciding factor in early retirement. IRAs have fewer restrictions on withdrawal options once you reach age 59½. Social Security retirement benefits are available starting at age 62, though you may benefit from waiting to claim until “full retirement age,” which increases based on when you were born and ranges from 65 to 67, with benefits continuing to increase in value if you postpone claiming them until age 70. Also consider converting a portion of your savings to create a guaranteed lifetime annuity income stream to cover fixed expenses, such as housing costs and food.* This will create an income floor, along with Social Security and any pension income, you cannot outlive.
You might even continue working in some capacity, with options ranging from launching a new full-time business or engaging in occasional consulting work. Note that working in retirement may affect your Social Security benefits.
Paying off debt, especially high-interest consumer debt, is an important part of retirement planning. Even if you have adequate income to achieve your early retirement goals, those funds can quickly disappear if it must be used to pay off debt each month. If working another year or two will allow you to eliminate credit card balances, consumer loans, and other forms of debt, it might be a good idea to put off retirement.
In some cases, you may have the opportunity to take advantage of an early retirement package or “buy-out” where you receive a lump sum distribution based on your longevity with the company or organization. In these cases, you need to consider more than just the amount offered. For example, what long-term impact would early retirement have on your pension and other retirement income? Working a few more years could boost your monthly benefit, which adds up over time. Also, what are the tax implications of taking a lump-sum distribution? Consult your tax advisor to evaluate the true cost of taking such a buy-out, which could significantly offset the initial distribution.
Given longer life spans, leaving work permanently before age 65 could mean spending 25 years or more in retirement. Are you ready with activities to fill those years? Retirement is a big adjustment, both financially and psychologically. Look for opportunities to “try on” retirement before you actually commit to it. Working part-time hours or taking an extended break or sabbatical from work can give you the experience of leaving daily full-time work. You may find that you miss working and go back to it. Or, you might find that early retirement is everything you’d dreamed and feel confident in making it a permanent arrangement.
Wondering if early retirement is within your reach? Don’t figure it out alone. A TIAA-CREF advisor can help you run the numbers to see if stepping away from work is the right move for you.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Past performance does not guarantee future results.
TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.
The statements made above represent TIAA-CREF’s interpretation of applicable law. It is presented with the understanding that TIAA-CREF is not engaged in rendering legal or tax advice. This information is not intended to be used, and cannot be used by any individual for the purpose of avoiding laws or tax penalties that may be imposed on the taxpayer. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
*Annuities are designed for retirement savings or for other long-term goals. They offer several payment options, including lifetime income. Guaranteed lifetime annuity income is subject to the claims paying ability of the issuing insurance company. If you make a withdrawal from an annuity prior to age 59½, you may be subject to an additional 10% penalty on earnings, in addition to ordinary income tax.Please note investing involves risk.
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