A great alternative to early retirement

Many of my baby boomer clients are questioning their ability to retire before they reach their Full Retirement Age (FRA) for Social Security. When we do our annual retirement planning, we always explore several different retirement options to allow for the abundant retirement they desire.

The goal of any retirement plan is to live throughout the retirement years without depleting retirement savings. An abundant retirement provides adequate income to continue living the current lifestyle plus additional funds to better enjoy retirement through additional activities such as travel and hobbies. As there is a 40 percent probability that at least one person in a healthy 65 year old couple will live an additional 30 years, providing for an abundant retirement requires advanced financial planning.

One factor that is not often fully appreciated in retirement planning is the large “cost” of early retirement. However, if you are actively saving for your retirement years, there is a seldom explored alternative to early retirement.

The goal is often to retire at age 62, the earliest age at which Social Security payments are available. Another option is to stop making contributions to your retirement plan saving at age 62 and use these funds to better enjoy your final working years. By doing this, retirement savings continue to grow, Social Security payments continue to increase by approximately 8 percent per year and your pre-retirement years can include the travel and hobbies that may have previously been unaffordable.

Let’s consider an example of how this option can help assure an abundant retirement:

Mary and John Smith, both 61, have a combined income of $100,000 per year. Throughout their careers they have saved 15 percent of their pretax earnings, providing them with $800,000 in retirement savings. At their full retirement age (FRA) of age 66, their combined Social Security benefits will be $40,000 per year. They have determined that they will need $80,000 per year to live the abundant retirement that they desire and would like to begin retirement when they are age 62 and eligible for Social Security benefits.

If John and Mary retire at age 62, their annual Social Security benefits will be reduced to $30,000. They will need to spend $50,000 per year from their retirement savings to provide the required $80,000 in annual income. Assuming no inflation and a 3 percent real rate of return on their investments, John and Mary could deplete their funds in 22 years, when they are only age 84.

Since both John and Mary are in good health, there is a very high probability that one or both of them will live past age 84. They must consider other options if they wish to have the desired abundant retirement.

Their planner suggests that they continue working until their Social Security FRA age of 66. However, he also suggests that instead of continuing to save for retirement, they use their annual $15,000 in retirement savings for vacations and new hobbies that they have been postponing due to lack of funds.
When John and Mary retire at age 66, their $800,000 in savings, growing at just 3 percent, will have grown to $900,407. At age 66, they will receive their full Social Security benefits of $40,000 annually, reducing the annual savings withdrawal to $40,000 per year. With these changes, John and Mary’s savings will now last for 38 years.

By working an additional four years and spending their annual retirement savings of $15,000 on vacations and hobbies, John and Mary will be able to live an abundant retirement and never deplete their savings.

If your company offers a 401(k) match, continue to contribute to your 401(k) up to the company matching amount. Take the amount contributed to your 401(k) plan out of a taxable investment account. You will still come out ahead thanks to the “free money” contributed by your employer’s match.

Retirement options need to be explored before you retire. Work with a qualified financial planning professional to explore all of your retirement options. A relatively small change can make a huge difference in your ability to have and maintain an abundant retirement.
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