Can You Afford Early Retirement?
Thinking about early retirement? Here are some of the things you should look at closely.
Early retirement is a phrase many Americans wish they could turn into a reality. While retiring in your 50s or early 60s sounds enticing, it typically requires years of planning to make sure you've accumulated enough retirement assets to last for 20 or 30 years or more. It's important to factor in how an early retirement could affect your Social Security benefits, options for health insurance, and the nest egg you plan to rely on for ongoing living expenses.
Social Security and Medicare
Those who collect Social Security at age 62, the earliest age when most retirees are eligible, face a permanent reduction in benefits. For example, if your full retirement age is 66, collecting benefits at age 62 will result in a 25% reduction in the monthly benefit you would have received by retiring at 66.1
Those born in 1960 or later will experience a permanent 30% benefit cut if they choose to begin collecting benefits at age 62 instead of their full retirement age of 67. In contrast, delaying benefits past full retirement age results in a higher benefit, with a maximum delayed retirement credit of 8% annually for those who were born in 1943 or later and wait until age 70 to retire.
Regardless of your age when you retire, Social Security is not likely to pay all of your living expenses. Social Security currently comprises 35% of the aggregate income of Americans aged 65 and older, with remaining income coming from employer-sponsored retirement plans, wages, and other sources.2
Finding health insurance is equally important if you plan to retire early. Eligibility for Medicare begins at age 65, and those who retire earlier typically must obtain health insurance on their own or through a former employer, which can cost thousands of dollars annually in premiums.
Saving and Budgeting
Early retirement typically requires a larger nest egg to finance living expenses over a longer period of time. Contributing as much as you can afford to qualified retirement accounts, such as an IRA or an employer-sponsored retirement plan, can help you build this nest egg.
Retiring early requires advance planning to make the situation work to your advantage. If you have the financial resources to do it, you may want to start the process at your earliest opportunity.
Dwight Lee, Craig Fein, June Cachola are LPL Financial Consultants located at NuVision Federal Credit Union. If you have any questions or would like to make an appointment, please call Dwight Lee at 714.375.8227, Craig Fein at 714.375.8222, Boris Castillo at 323.859.5563 or June Cachola at 714.375.8334.
1 Source: Social Security Administration.
2 Source: Social Security Adminstration, Fast Facts & Figures About Social Security, September 2014.
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