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Is Early Retirement as Good as It Sounds?

| February 01, 2019
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Have you ever considered taking an early retirement? If you are age 55 and could take home 60% of your pay if you retire now, it may seem that you would be able to retire in reasonable comfort. However, before calling it quits, weigh all the facts carefully to make sure an early retirement makes good financial sense. 

Consider the following. . . 

Lost Earnings. For example, retiring at age 55 with 60% of your income may seem like a good deal at first. But, if you wait until age 65 to retire, you will have gained another ten years of full earnings, along with any increases for promotions, merit raises, and inflation. This will provide you with more money to save for retirement, and may also ultimately boost your Social Security and pension benefits. Also, if you consider the difference between how much you will receive now and how much you’ll receive in ten years¾for example, 60% if you leave now, versus 80% if you retire in ten years--leaving now may not sound so good after all. 

Effects of Inflation. If you still think you can manage on, say, 60% of your income, remember that inflation will erode your pension. If you retire today on $1,600 per month, in 20 years at a 4% rate of inflation you will have only the equivalent of $707 in today’s dollars. 

Life Expectancy. The longer you live, the greater will be the effects of inflation. If you retire at age 53 and your life expectancy is 83, you may have 30 years to support yourself on today’s fixed income. However, if you are still alive at age 83, statistics show you could have another eight years to live. So, instead of needing to fund a 30-year retirement, you might actually need resources for 38 years. 

Other Retirement Income. If you already have a sizable retirement nest egg, or if you expect to collect a pension from a previous employer, the size of the pension you could get from your current employer may not be critical. If so, perhaps you can leave the work world behind, since you will have other funds to rely on. However, don’t make the mistake of expecting Uncle Sam to provide most of your retirement income. Many retirees receive only slightly more than one-fifth of their annual incomes from Social Security (Source: U.S. Department of Health and Human Services). With the future of Social Security uncertain, and with cutbacks in other government programs, such as Medicaid and Medicare, you may need to provide even more of your own funds. 

Social Security “Giveback.” If you are under age 65, and continue working after you begin collecting Social Security benefits, you may have to “give back” a portion of your benefits. In other words, your Social Security benefits may be reduced once your earnings exceed a certain income cap. For more information, contact the Social Security Administration (SSA). 

Taxation on Social Security Benefits. You should also know that if you continue working after you begin collecting Social Security, a portion of your Social Security benefits may be taxed. For information on calculating how much of your benefits will be included in your gross taxable income, contact the Social Security Administration. 

Early retirement has a strong psychological appeal for many people. In addition, those who face the threat of being “downsized” may get a better deal by taking an early retirement rather than the company’s severance package. However, before calling it quits, analyze your situation carefully. You will have to live with the effects of your decision for the rest of your life. Take the time now to make sure today’s decision will still be smart in the long run.

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