Can You Retire Early?


A woman taking a napBefore 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.

Weigh your options

If you’re planning on stopping work before age 65, weigh the advantages of stepping away early versus the benefits of working until 65 or beyond. Will you be leaving money on the table in terms of generating a bigger pension payment from your employer? Could working a few more years let you build up a greater nest egg and help you cover unforeseen expenses? Remember that once you stop working and saving it may be difficult to rebuild your nest egg after any big expenses or market volatility.

Account for healthcare expenses

If you’re retiring before age 65, be sure to account for the cost of continued coverage through your employer or private health insurance, as Medicare is generally unavailable for those younger than 65, unless you are a widow and/or disabled.

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.

Evaluate income needs

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.

Ditch your debt

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.

Adjust your expenses

If your income isn’t quite what you’d like it to be, but you would still prefer to retire early, examine how your spending can be adjusted. Do you dine out frequently? Are there ways you can cut back on non-essential expenses or only take one vacation per year? If you can cut back spending to a level you can live comfortably with, that might help you achieve early retirement. Consider tracking your expenses for a few months using expense-tracking software. 

Re-allocate your assets

You should always pay close attention to your asset allocation, especially as you near retirement. Your mix of assets—stocks, bonds, money market accounts, annuities, real estate, and others—should be examined to make sure the money you have saved is allocated appropriately to potentially meet your retirement income needs. Each asset class has its own levels of risk and return. You may have to sacrifice some risk and its potential to generate greater returns in favor of lower returns in more income-generating investment vehicles. It is important to keep in mind that there is no guarantee that asset allocation reduces risk or increases returns.

Investigate long-term care options

Even though you’re retiring early, you’re going to need to provide for your care later in life. You need to decide if you are going to self-insure your long-term care or if you are going to purchase long-term care insurance. This type of policy will assist or, sometimes, fully cover eligible costs related to extended hospital, rehabilitation or other care facility stays.

Considering buy-outs.

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.

Test-drive retirement.

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.

Seek out advice

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.

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