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

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Life can be short, but so can early retirement if you don’t have a solid financial plan for life after work.

Whether due to pandemic-induced burnout, a new outlook on life, or optimism fueled by soaring stock and housing markets, more and more Americans appear to be retiring. early, according to data from the U.S. Bureau of Labor Statistics.

The labor force participation rate for Americans over 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 Lazetta Certified Financial Planner Rainey Braxton, co-CEO and senior financial planner at 2050 Wealth Partners in Brooklyn. , New York. “People rethink everything and often more emotionally than practically.”

For those with the resources, stepping back from the daily grind opens up a whole new world of opportunity. However, it comes with risks and for all but the wealthiest Americans – and the sooner you retire, the greater the risk.

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“If you’re debt-free, living within your means, and have enough resources to deal with emergencies, put yourself out there,” said Jupiter-based financial adviser Danny Artache. in Florida. “But if you run out of money, you might end up being a greeter at Walmart.”

Are you ready to retire emotionally and financially?

There is no substitute for analyzing the costs and sources of income you will have in retirement. Simply settling on a “comfortable” nest egg will not be enough.

Costs include housing, insurance—if you retire early, you’ll need to purchase health insurance before Medicare kicks in at age 65—food, gas, and vehicle costs. Major sources of income include pension payments, social security benefits, and withdrawals from your investment portfolio.

Braxton advises clients to be debt-free in retirement, except in the rare case where the value of the mortgage interest tax deduction is greater than the cost of your annual mortgage payments.

If you plan to travel and/or pursue hobbies that cost a lot of money, make that a part of your registry.

“Don’t be afraid of your numbers,” Braxton said. “You have to know what they are.

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

And they will change. A widely accepted rule of thumb is that you will spend about 80% of your working income annually in retirement.

However, no matter how detailed you are about the expected costs and sources of income in retirement, there will be upheaval. Several major unknowns 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 main ones are your health and longevity, the performance of investment markets and the level of inflation until retirement.

When you continue to earn income, you don’t have to dip into your investment portfolio and you increase your future Social Security benefits.

Christine Benz

director of personal finance at Morningstar

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

Another rule of thumb, first stated by financial planner William Bengen, is that with this conservative 30-year time horizon, you can safely withdraw 4% of your portfolio assets per year, assuming a portfolio of 50 to 50 stocks against bonds.

The rule could use a tweak, Benz suggested. The remarkably strong returns in stocks and bonds over the past 30 years may not be repeated over the next 30. In an environment of low bond yields and high equity valuations, investment returns may be thinner going forward.

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

If this withdrawal rate combined with a guaranteed pension and social security benefits can cover the costs of your average year of retirement, you’re in good shape. However, if you’re anxious about your financial situation as you approach retirement, keep working.

“Working longer at a job you hate isn’t good, but the job market is so strong you might be able to find a more comfortable work-life balance,” Benz said.

The value of years of extra income is enormous. This will stretch your resources in retirement and reduce the risk of running out of money later.

“It has a multiplier effect,” Benz said. “When you continue to earn income, you don’t have to dip into your investment portfolio and you increase your future Social Security benefits.

“Your assets can continue to grow and possibly help you delay taking Social Security,” she said, in order to receive a higher benefit.

Your retirement might be shorter, but it might be much sweeter.

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