In Patrick Doherty’s work as a certified financial planner with the Danbury wealth management firm Reby Advisors, more than a few clients have mulled whether to call it a career earlier than they might have otherwise as a result of the pandemic, whether by choice or loss of a job. While the psychology of the big decision has changed for some, the basic financial calculus is largely unchanged, Doherty says. Here, Doherty discusses factors to consider when contemplating early retirement.
What impact has the pandemic played in early retirement decisions?
We have a lot of people who are saying, “I’ve been doing what I’ve been doing for the last 25 or 30 years — now I want to do something for the next five to 10 years that I actually want to do.”
And then we have people who have been forced to look at things, situations where they have been downsized from the company and are [saying], “What do I do next?”
The majority of people want to stay active in some way and keep up on things. I have clients who have gone back to school. I have clients who have started new careers. And it could be at a lower level of income. But they are happy. They don’t have the extra stress.
If you have any licenses or certificates, make sure that you keep them current. Don’t let them lapse, because that’s important — if you do decide to go back, you don’t want to have to get recertified.
What age do most people who are considering retiring early target?
This year has changed some people’s thinking. I don’t think there’s one type of person who’s looking to early retirement — it’s broad, but it’s a late-50s executive who’s just feeling a little burnt out. What we find a lot is it’s not only early retirement but, and I think this is where we come in as financial planners, it’s changing jobs — going from “the job I have to to do” to “the job I want to do.” The landscape has changed somewhat in the last 10 years. It’s gone from people in one job looking at retirement at age 65, collect a pension if they have one and Social Security and moving on, to, “You know what? I’m still active, I have human capital, I want to give back. But I want to do something I want to do.”
Has that changed the math for drawing on assets?
You hear a lot about the 4 percent withdrawal rule from your assets, so if you have $1 million saved, you can take $40,000 out of it a year. If you retire at 60, you are going to need more, so you can’t get overly conservative — your assets are going to have to keep working for you.
If you retire at 70 or 75 and you say, “You know what? I want to die with a dollar in my pocket,” you could be closer to 6 percent. Every individual is different. But one thing you can look at is say, “OK, if I retire at 62, maybe for five years I take 6 percent out of my investments and then I turn on Social Security at 67 and then I can take less out, go back to 4 percent.”
Lifestyle is a big determinant. What do people want to do with their life? Do they have extravagant plans? Do they take one trip a month, one trip a year? Do they want to downsize? We get a lot of that right now.
What financial traps do people need to watch for?
If you take Social Security too early, you miss out on a big chunk of it. If you wait until you’re 70 to take Social Security, that’s maximizing it. The difference between 62 and 70 can be huge — I’ve seen it up to $250,000 or $300,000 for a couple over their lifetime. If you take Social Security at 62, your benefit could be 75 percent of the benefit at retirement age. If you wait until age 70, you could get 132 percent of your full retirement asset.
The other pitfall I see is health care. If you retire at 60, you have five years to get to Medicare. You can take COBRA to get you 18 months, but you have to pay the full benefit and after that you have to go get insurance on your own. On a corporate plan, if you look at the premiums and out-of-pocket costs, it’s probably about $1,400 a month for an average person — that’s one person. You can go onto the [Affordable Care Act] marketplace with a Silver Plan — a Bronze Plan would be a little cheaper, maybe $1,100 a month or under. But either way, for a couple that’s expensive.
We are living longer. When I came into the business back in early 2000, I planned out to age 85 for clients. Now, we’ve upped it to age 95 and we’re looking at planning to 100. The chances of one spouse living to 100 is not outrageous.
The challenge is we all need our assets to last longer, so if you retire at 60 you can have a 40-year retirement. You really have to have a plan on how your assets are going to keep up with inflation, and withdrawal rates, and always taxes. Taxes will always be there and they are probably not going to get any better, so you want to mitigate that and keep as much in your family’s pocket as possible.