By: Trent Grzegorczyk
The economy throughout the course of the pandemic has been a roller coaster. During three months of COVID-19, the unemployment rate in the U.S. grew more than it did in two years of the Great Recession1. Not to mention the sharp 35% drop in the stock market investors experienced during February and March. Luckily, the stock market rebounded over 60% since March 23rd, providing Traverse City Pre-retirees a second chance at a 2020 or early 2021 retirement.
For individuals nearing retirement, economic and health uncertainty is all the more unsettling. It raises the question: should you consider retiring earlier than you originally planned? Before making a decision, be aware of the special considerations that retiring early entails.
Considerations of Retiring Early in Traverse City
Retirement requires lifelong planning, in addition to adequate preparation in the years preceding your eventual retirement. If you’re thinking about pushing up your planned retirement even earlier, there are certain questions you need to ask. If you've recently been furloughed or let go from your position and considering retirement not by choice, you'll definitely want to polish up on the following areas below as soon as possible.
Consideration #1: Retirement Savings & Investments
The foremost thing to consider is your retirement savings. Are you in a good place financially to retire, especially considering that you’re losing extra time to save and will need to stretch your savings over a longer period of time? The last thing you want is to retire early without adequate savings, forcing you to sacrifice the quality of your retirement. 59.5 is typically the minimum age you would begin distributions from retirement accounts, so you'll want to make sure that you'll have enough non-retirement account savings. Use our Retirement Readiness calculator to get an idea if you are on track.
If you need to tap into your retirement savings prior to age 59.5, you might have to face an IRS early distribution penalty, unless you elect to establish a SEPP Program. A SEPP allows you to tap into your retirement accounts prior to age 59.5 without having to pay the early withdrawal penalty. However, there are downsides to setting up this sort of arrangement, which might not make sense for your financial situation.
Additionally, how are your investments looking? As you near retirement, it’s likely that you’ll need to adjust your asset allocation and align it with your retirement goals, time horizon and risk tolerance. If you’ve already made these adjustments in preparation for retirement, you might be in a good spot. If you haven't revisited your asset allocation recently, and you're thinking about retirement in the next few months or years, you should highly consider dialing in your investment strategy. The strategy that you used to accumulate assets during your working years is usually different than the strategy used as you start to spend your retirement savings. One mistake that investors tend to make is being too aggressive as they head into retirement. One of the worst things that can happen for a new retiree is for the market to crash within their first few years of retirement, especially if they are too aggressive and tapping into their portfolio.
Below is a nice visual of just this, being too aggressive when spending from your portfolio during market turbulence and big drawdowns. The blue line is a more appropriate income focused portfolio and the red is an aggressive portfolio that is typically not suitable for many retirees. The bottom line here is to make sure that your asset allocation is aligned with the needed distributions from your retirement accounts. Otherwise, you could risk depleting your accounts prematurely.
Consideration #2: Health Insurance
If you’re looking at retiring before 65, there’s a chance you’ll need to acquire health insurance before you’re covered by Medicare. As you age, health insurance gets more and more expensive. This means you’ll need to factor this in as an extra expense to determine if you can afford to retire early. Our friends at Fidelity Investments lay out everything you need to know about bridging the Medicare gap here: Check out their article.
Consideration #3: Social Security
Social Security retirement benefits (SSRB) are available to you as early as 62 years old. However, it's a common mistake to think that you should collect sooner, even if you retire early. If you start collecting benefits before your full retirement age, determined by your year of birth, your benefits will be smaller.2 If your early retirement plans also include collecting Social Security, this is another financial consideration to acknowledge. You can get your estimated benefit numbers by heading to SSA.gov and creating a profile or by visiting the Social Security Administration in Traverse City at 1329 S Division Street. Here is a link to their address on Google.
Unfortunately, many Pre-Retirees don't put enough time into learning about their benefit options. SSRB income has a greater value than one might think. A $25,000 benefit could be the equivalent to an IRA or 401(k) that's worth well over $500,000. If you aren't confident with your SSRB strategy, its best to work with an expert retirement planner who can walk you through your best options so you can make the most informed decision.
Consideration #4: Post-Retirement Plans
Do you want to retire early only because you’re overwhelmed by the current state of affairs? While this certainly isn’t a trivial reason, it’s important to evaluate whether or not you’re actually ready to retire. It's one thing to be financially ready to retire, but it's another thing to be emotionally ready.
Do you have a plan for what you want to do with your retirement, and are you ready to get started on it? Are you ready to actually finalize your career, or is there a possibility you’ll quickly bore of your early retirement? Whether you plan on spending time giving back to the community through organizations like Habitat for Humanity GTR, St. Francis' Gladhander, or by mentoring with SCORE, you'll really want to think this through so that you enter your retirement with purpose.
Perks of Retiring Early in Traverse City
If you’ve considered all of the above and find yourself certain about your early retirement, there are a few perks. It could reduce your stress levels from work, giving you more time to explore recreational hobbies like cycling around the Old Mission Peninsula or cross-country skiing on the VASA Pathway. You can spend more time with your family and spend more time traveling around Northern Michigan, or you can even get a head start on a new business venture you’ve been looking forward to by leveraging local organizations like 20 Fathoms.
With everything going on, it’s tempting just to go ahead and retire early if you’re nearing the age. However, there are more factors to consider than you may realize. Genuinely reflect on your motivations for wanting to retire and lay out a comprehensive plan in order to make the most informed decision possible.
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