Offered Early Retirement? Start Here.

Offered Early Retirement? Start Here

A listener was offered early retirement.  There is a lot to consider before making your decision to retire—even if you weren’t offered an incentive.  If you’re thinking about retiring soon, and don’t know where to begin, start here.

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This week we have a question from David. He writes, “I’ll be 62 in the spring. My employer has offered early retirement. How do I know if I can make it work?

This is an excellent question. Let’s cover some of the basics.

Know Your Numbers!

This means your income and your expenses.

Your Savings

How much have you saved? And how much income can your nest egg provide? This is an important thing to determine. The more you withdraw from your nest egg, the greater the risk of running out of money during your lifetime.

You want to get as much as you can without putting too much stress on that account.

Pension

Are you going to get a pension? If so, how much will it be? Should you consider a lump sum payout if it is available? This is an important decision to make. For some people taking the monthly payments makes the most sense. For others, taking a lump sum is a better choice. You will want to work through the numbers and determine what is right for you.

Social Security

You need to make a decision about your Social Security. You are eligible to start your Social Security at 62. But that comes with big discounts. Can you wait to take your Social Security until age 65 or your normal retirement age? Waiting to start your benefits reduces the discount. This can result in thousands of dollars of additional benefits over your lifetime. But it does not always make sense to wait. Sometimes it makes sense to start it at 62 if you need to. Please look at this decision very carefully.

Early Retirement Incentive Payment

If you are getting an incentive to retire, how will that impact your cash flow? Does the payment mean you will not have to take income from your 401k? Does it provide enough income so you can delay your Social Security?

If you can use that money to pay your expenses, you can reduce stress on your savings or improve your Social Security benefits.

Expenses

Knowing your expenses is very important. Look at what you are spending now and how it will change when you retire. Certain things in your budget are going away. You are not going to be driving to work every day. You won’t be buying clothes for work and you may spend less on meals, too.

Some expenses might increase. You may play golf more often. You may have other hobbies that cost money. That means you might be spending more on some things.

If things are tight, is there anything that you can cut from your budget? Are there lower priority expenses that you can drop to help make things work for a few years.

Spending is a major component of your long-term financial success. In fact, overspending can be one of the biggest reasons people run out of money.

Debt

Do you have a lot of debt? Loan payments can be a significant expense, especially car payments and mortgage payments. Can you can use your early incentive payment to eliminate some of those debts? That could have a big impact on your cash flow. You need to work through the numbers to see if this is worth considering.

You may want to consider refinancing your mortgage. This isn’t an ideal strategy. The ideal situation would be to be debt free when you retire. Refinancing your mortgage could lower your monthly payment and help your budget.

Early Retirement Offer Start Here
early retirement offer start here

The Big Issue: Health Insurance

Because you are only 62, one of the biggest things that you will face is buying health insurance. Recently, we have heard quotes for coverage between $2,000 and $3,500 a month. This is a very significant expense. You can expect the premiums to increase each year until you are eligible for Medicare.

Most of those policies are going to have big deductibles, and the coverage may not be ideal. You may also have to change doctors, and you may not be able to go to your preferred hospital.

The health insurance marketplace in our area is very difficult right now. But, if you can figure this out, you have a real chance to make early retirement work.

Your Spouse

Is your spouse going to retire or continue working? If they are going to keep working, how will they adjust to you being home all day when they have to get up and go to work? Maybe they are retiring too, and you both will have to adjust to both of you being home all day.

Practical and Objective Advice

You want to make the right decision for your family.  Consider talking to a fiduciary financial advisor to help you work through the numbers.
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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Start Social Security at 62?

Should I Start My Social Security At 62?

This question is from Lloyd. He asks, “I’m planning to retire in the spring when I turn 62. Should I start taking my Social Security or should I wait?”

This is a big decision. The only decision we have when we’re looking at social security is when to file for our benefits.

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The impact of retiring early

The year you were born determines your normal retirement age. When you start Social Security before your normal retirement age, your benefits are reduced. If you’re married, the spousal benefit is also discounted. It also means a lower survivor benefit. The dollar amount of your cost of living adjustments will also be smaller. The percentage will be the same, but the dollar amount of the increase will be smaller.

A lot of people still signed up for social security early.

  • 31% of men and 27% of women sign up for their social security benefits at age 62
  • 6% applied at age 63
  • 7% filed at age 64
  • 10% applied for social security at age 65
  • 33% filed for their benefits at normal retirement age
  • 6% waited until age 70 to maximize their benefits

A little more than half of the recipients file for their benefits early.

A look at some numbers

You can do a lot of calculations to help determine when to start your benefits. Delaying your retirement can lead to thousands of dollars of additional benefits over your lifetime. But, you must live long enough to make it work. Generally speaking, you have to live until you are in your early 80s.

Here is how this can impact Lloyd. Let’s say his full retirement benefit is $2,300 per month. If he starts Social Security at 62, his benefit shrinks to $1,640.

At his full retirement age, his wife’s spousal benefit, if he’s married, would be half of the $2,300 or $1,150. At age 62, the spousal benefit will be, at most, $820. The combined benefits are nearly $1,000 less each month.

If Lloyd waits to start his Social Security, his discount isn’t as big.

  • By waiting a full year to apply for benefits, his amount grows by 7%
  • If he waits two full years, his benefit grows by over 14%
  • Should he wait until age 65, three years later, his benefit grows by 24%

A big decision

Should Lloyd take his Social Security benefits at 62?

It depends. Is he healthy? Is he married? Can he afford to retire without taking his benefits and not to put too much stress on his savings? There are a lot of factors, and it’s hard to say yes or no.

Here is what we typically see. People start their social security when they retire—regardless of their age. Most of the time, it’s because they need the money. The ones who retire and delay their Social Security have been good savers and have low expenses.

You need to consider your entire situation. You can’t make the decision about Social Security in a vacuum. There are many other factors involved in this process.

If you are unsure what to do, talk to a financial advisor before you make a costly mistake.

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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10 Years From Retirement: What Should I Be Doing?

10 Years Away From Retirement: What Should We Be Doing?

Heidi asks: “We’re 10 years away from retirement.  What should we be doing to prepare? Should we pay off our mortgage before we retire?”

Please note:  This is a highlight from our July Ask a CFP Pro show.

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Transcript: 10 years from retirement: What should we be doing?

We want to retire in about 10 years. What’s the best way to prepare for that? And is it best pay off our house before retiring?

Still in growth mode

If you’re 10 years away from retirement, you still should be in growth mode. This means you’re more heavily invested in stocks. You’re looking to pursue higher returns.

Over the next decade, bonds aren’t going to help you a whole lot. You’re looking at 1% to 2% returns going forward based on current yields.

If there is a major downturn in the stock market, you have some time to recover from that. Even though we’re not out of this bear market yet, there could be another one in the future. You’re still going to be able to recover. If we do have that downturn again, it becomes a great buying opportunity. You may never find prices that low again.

Volatility shouldn’t be a significant concern at this point. As you get closer, when you’re five years away, that story may change. But, right now, you still have the ability to enjoy those compounded returns. If you can save and invest for higher returns, it should pay off for you in the long term.

I wouldn’t have any problems being 100% invested in stocks for the next four or five years, if I were you. I think the benefits will outweigh the long term risk. It could be tough to do. When you have those volatile times, nobody likes to see their balances go down. But again, I think the growth will be significant for you.

Eliminate debt

Should you pay off your house before you retire? If you can do so in a reasonable fashion, absolutely—yes! In fact, you should try to have all your debts paid off by the time you retire. That means car payments, your mortgage, and credit card debts. The fewer expenses you have, the better your retirement is going to be.

Retirement is all about cash flow. In our experience, the biggest reason people run out of money is because they spend too much. And debt payments are a form of spending. So the more you spend to pay debts, the less you have to do other things. Or it could mean you have to take more money from your nest egg than you should.

Eliminating debt can be a huge boost to your retirement plans as a whole.

Here are some other things that you want to do

Know your Social Security numbers…

Get your Social Security earnings record and benefit estimates. This is going to be a key component in helping you plan for retirement. It will help you make good decisions about when to start your Social Security benefits. And for most of us, it’s still a key part of our income.

Get organized

Get things organized. Understand where all your accounts are and how they’re invested. This allows you to create a better plan.

What does retirement look like?

It’s too soon to do detailed budgeting. But at the same time, you can start thinking about what your retirement is going to look like. You can think about what you want to do in retirement. Then you can see how much it will cost.

Health insurance

Have a good idea of what your health insurance is going to be if you’re going to retire before age 65. This is huge. If you have to go out and buy your own health insurance, that’s a big expense that you’re going to incur. You want to know what that’s going to be because it will have an impact on the numbers.

Work on your current cash flow

The last thing I would suggest is get your current cash flow situation in order. Know where your money’s going. Know how you’re spending it. If you can rearrange things to focus more on saving and eliminating debt, you’ll be glad you did. You have to make those things a priority. When you do that, you’ll have some flexibility and freedom in your retirement.

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Maintaining Spending Levels in Retirement

Maintaining Spending Levels in Retirement

Maintaining spending levels in retirement can be a challenge.  A recent study showed that nearly half of retirees were forced to reduce their spending because they didn’t have adequate resources. What are some of the characteristics of those who were forced to cut their spending?  We’ll explore that so you can make better decisions about your retirement.

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Show Outline

  • Intro
  • Consumer Financial Protection Bureau Study
    • Looked at the ability of retirees to maintain their spending level 5 years into retirement.
    • Most retirees see their spending decrease naturally.
      • Spend less on things like transportation and clothing
      • Do fewer things as you get older
      • On average, spending in retirement decreases by 19%
  • The Data
  • What can you do?
  • Outro

Spending in Retirement Decreases...

In general, people tend to spend less in retirement.  Many people find they spend less on transportation, clothing, and entertainment.  Those who had adequate savings saw their spending level decrease by 19%.  But, those who couldn’t maintain their spending level saw their spending drop by 28%.

The Factors in Maintaining Your Spending Level

Marital Status

Married couples are better able to maintain their spending level.  Receiving two Social Security payments is a significant factor.

Age

Older retirees had more success than the younger generations.  More older retirees received company pension benefits than Baby Boomers. 

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Social Security

Starting Social Security at younger ages means you receive a smaller benefit.  Delaying your retirement improves your benefit, spousal benefits, and survivor benefits.  This means you rely less on your savings.

Home Ownership

Home ownership factored into retirees ability to maintain their spending level.  Renters struggled compared to those who own their homes. 

Mortgage debt also played a role.  Those without a mortgage had more success maintaining their spending level in retirement.

Debt

Non-mortgage debt includes things like credit cards, car loans and leases, or other types of loans.

Those who carried debt into retirement struggled more than those who were debt free.

What Can You Do to Plan for A Better Retirement?

1. Consider delaying your retirement

Delaying your retirement can improve your Social Security benefits.  It can give you an opportunity to save more and benefit from compounded returns.  And it can help you eliminate debt.

2. Create a plan to be debt free

The data shows people who have debt struggle more.  Many times, loan payments are your larger expenses.  Eliminating those before you retire can reduce the stress on your retirement budget.

3. Save more aggressively

This doesn’t mean use more aggressive investments (though that can help).  It means make saving a higher priority, and try to save more.  

maintaining spending levels in retirement
maintaining spending levels in retirement
maintaining spending levels in retirement

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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4 Ways The Pandemic Could Impact Social Security

4 Ways the Pandemic Could Impact Social Security

Social Security is the cornerstone of retirement income for many Americans.  Have you wondered if the Coronavirus outbreak will impact your benefits? Here are four ways the pandemic could impact Social Security.

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The Covid-19 Pandemic and the Economy

The Covid-19 virus has turned the world and the economy on its head. The financial impacts are being felt far and wide. We have record unemployment claims, with nearly 22 million people out of work–so far. And Pew Research estimates 27% of American workers have seen their pay reduced.  Government response has also been extreme.  All of that will impact the future.

Most of the media focus has been on how this outbreak has impacted current workers. But it can also affect retirees. Here are four ways the pandemic could impact your Social Security benefits.

pandemic social security impact

Social Security does provide an inflation-adjusted income stream. But over the past several years those average increases have not been all that great. In some years, it hasn’t been enough to cover the increase in Medicare premiums. 

According to the Federal Reserve Bank of Cleveland, the current 10-year inflation expectation is less than 1.2% per year. If those projections hold, it means small benefit increases. In some years, it could mean your net check decreases due to rising Medicare costs.

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Pandemic Impacts Social Security

Depending on how long the economic shutdown lasts, many older workers could be forced to retire earlier than they expected. For many, this forces them to start Social Security earlier than their normal retirement age. And those discounts could be close to 30%.  

Social Security Impact pandemic

Social Security uses Average Indexed Wages to compute your Social Security benefits. The economic downturn means total wages earned in 2020 will be less. They could be a lot less.

This could impact how they compute your Social Security benefits. The end-result could be a smaller monthly payment. This will most likely impact those who are close to age 60.

Are You Ready to Retire?

If you are 50 or older, and thinking about your retirement, click here for a free retirement assessment.

Pandemic Impacts Social Security

Right now, fewer payroll taxes are being collected. This places an extra strain on an already stressed system.

Prior to the pandemic, Social Security looked to be solvent until 2034. This means they had enough to pay the promised benefits. But the reduced tax collections could mean the problems could happen a year sooner.

Unless there are major changes, when Social Security reaches this point, benefits will have to be reduced.

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Far Reaching Impact

The coronavirus pandemic has affected more than our health. It has had a significant impact on many areas of our economy. And this includes your Social Security benefits.

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Financial Planning

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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How Does Your Age Affect Your Retirement?

Last week we asked the question, “Will your retirement savings last 23 years?”  Today we ask, how does your age affect your retirement?

Video: How Does Your Age Affect Your Retirement?

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How Does Your Age Affect Social Security?

We are eligible to begin Social Security retirement benefits at age 62. But if we retire before our normal retirement age, our benefits get discounted. The discount can be as much as 30%.
 
Delaying Social Security beyond normal retirement age means larger benfeits. Each year we delay, our benefits increase by 8%.
 
The income you need from savings depends on how much Social Security you receive. If you get less from Social Security, you need more investment income. When your investment income gets too high, you increase the risk of running out of money.
How Does Your Age affect Your Retirement

A Case Study: John and Patty

John and Patty are both 60 years old. They have accumulated $330,000 in their retirement accounts. Between contributions and earnings, their accounts should grow by $15,000 each year.

At normal retirement age, John will receive $2,000 per month in Social Security benefits. Patty will receive $1,500.

Remember, every year everything you buy costs more.  So John and Patty will need more income later in retirement.  

Let’s see how the age they choose to retire impacts the financial parts of their retirement.

how does your age affect your retirement

Click image to enlarge

Age 62 WD Rate
A 6.5% Withdrawal rate is high. It increases the risk of running out of money.
 
What happens if they wait?
Age 65

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Age 67 WD Rate

Better, But Still Not Ideal

Waiting an additional 3 years does two things.  It reduces the Social Security discount.  And, it gives them a chance to save more.

As a result, they need less income from their savings. And because they have more in savings, the withdrawal rate is better.  But it still isn’t ideal.

Age 67

Click image to enlarge

Age 67 WD Rate

That's Much Better

Now both John and Patty receive their full Social Security benefit.  And the additional years of compounding also help.  Now the withdrawal rate is 4%, which has a higher probability of success.

For good measure, let’s look at what happens if they wait until age 70.

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Click image to enlarge

Age 70 WD Rate

How Does Your Age Affect Your Retirement?

Time can be your greatest asset. And this is especially true if you aren’t as prepared for retirement as you hoped to be.

Early retirement discounts in Social Security benefits work against you. It places more responsibility on your nest egg for your income needs. And we believe the biggest threat to your retirement savings is your withdrawal rate.  

If you are able, working a few extra years should improve your retirement picture.  Those early retirement discounts disappear.  And the extra time you have to save won’t hurt either.

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