Retiring Earlier Than Expected? How to Manage Your Finances

Key Takeaways

• There is a disconnect between when people think they will retire and when they actually do retire.
• If someone’s portfolio has performed really well, and they’ve been a great saver—they may be able to retire earlier.
• Buying financial advice at this life stage can be money well spent.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Many people will say they intend to work until age 65 or even longer, but data suggests that, in reality, many retire earlier than they expected. Morningstar’s director of personal finance and retirement planning, Christine Benz, is here to discuss what to consider if you need to retire earlier than you’d planned to.

Nice to see you, Christine.

Christine Benz: Hi, Susan. Great to see you.

When Should You Retire?

Dziubinski: So, researchers have found that there can be this disconnect between when people think they’re going to retire and when they actually do retire. What are some of the key conclusions when you look at that research?

Benz: There have been numerous studies that have looked at this disconnect between when people thought they would retire and when they actually did retire. And so, when you look at the data, people in the preretirement mode, just 6% of them thought they would retire in their 50s, between the ages of 50 and 59. In reality, 30% or 29% of people, actually, those same people, actually retired in their 50s. Similarly, from the ages of 60 to 64, 19% of preretirees said, you know, “I’ll probably retire in that ballpark”; 31%, or almost a third, of these folks retired in that zone. So, generally speaking, we do see people needing to retire a little earlier than they expected, which is one reason why I always feel a little bit nervous when I talk to preretirees who say, “Yeah, it’s my plan to continue working until I’m 70 or even later than that.” As Mark Miller often says to us, “It’s a great aspiration. It’s not necessarily a plan.”

How Do You Know if You Can Retire Early?

Dziubinski: Talk about some of the factors that may lead someone to retire earlier than he or she had planned.

Benz: There’s that sort of happy story, which is that if someone’s portfolio has performed really well, they’ve been a great saver, they may be able to retire earlier. We’ve been hearing this drumbeat of news about FIRE—the financial independence, retire early—where folks have been really aggressive savers in their working years. That’s the happy story. Less happy and, frankly, more common is when people are unable to work even though they intended to. So, they may have been forced to retire either because of layoffs or because they do a job that’s just physically untenable to do as they age. They may have encountered some health issue themselves or perhaps someone in their immediate orbit, a spouse, a parent, where working full-time at least is not possible, and they’ve been required to retire earlier than they expected.

Retirement Asset Planning

Dziubinski: For those who find themselves in this situation of retiring earlier than might be ideal for them, what steps can they take to really try to make sure that those retirement assets will last their lifetime even though they have retired earlier than expected?

Benz: First step would be to line up some help. I think a lot of people in this position might say, “Wait, I don’t want to spend any money,” but this can really be money well spent. Buy yourself some peace of mind, buy yourself a plan, which is not to say that you can’t do some work on your own to figure out what your plan is. But I think buying financial advice at this life stage can be money well spent. It’s also worth negotiating, if you’re still in a position to do so, negotiate with your employer with the best possible exit package that you can, whether that means continuing health insurance in some fashion or maybe negotiating a good severance package. Then, if you’re pre-Medicare, you obviously want to look at what you will do for health insurance prior to Medicare kicking in.

Then spend some time looking at your anticipated spending. Also look at your income sources. And both of those things are going to ebb and flow more than we really talk about. We often talk about these guidelines, like the 4% guideline or whatever. We know in reality people’s income is moving around, so they might delay Social Security, for example, and that means that they’re having to spend more aggressively from the portfolio earlier on, less later on. And the actual spending can vary based on your own situation. So, spend some time plotting out really on a year-by-year basis what you expect those income sources to look like, what you expect your cash flow needs to be. And then spend some time looking at the sustainability of whatever that spending plan looks like. And we’ve done research on this topic, looking at sustainable safe withdrawal rates. Make sure that whatever plan you’ve come up with passes the sniff test on the sustainability ability front.

When Should You Claim Social Security?

Dziubinski: Christine, you mentioned Social Security, and you think it’s important that someone not necessarily immediately assume, “Ooh, I need to claim Social Security” as the first thing they need to do when they find that they need to retire, right?

Benz: Right. And I understand the impulse, first of all, because if you’ve lost an income, you feel like job one is: How do I replace that income? But as people have heard us discuss many times over the years, the name of the game with Social Security is maximizing your lifetime payout. If you’re claiming prior to full retirement age certainly, and you can claim as early as age 62, that will potentially reduce your lifetime benefits. So, you need to really give thought to what is the optimal claiming decision if you’re someone who thinks that you have above-average longevity on your side, or maybe you’ve been the primary earner in your family and you have a younger spouse. It’s oftentimes a great idea to actually delay claiming Social Security with an eye toward enlarging that lifetime benefit. Do your homework on that front before claiming Social Security.

How to Save When You Retire Early

Dziubinski: Christine, what about those investors who maybe find that they have tighter financial plans and find themselves having to retire early? What are some ways that they can, as you would say, make a save in those cases?

Benz: One of the first things you can do is consider lifestyle changes. Obviously, relocating can be a big-ticket savings, especially if you live in a high-cost part of the country or if you live in a very large home that you don’t necessarily need. If you’re willing to consider some of those lifestyle changes, both big ones like relocating, as well as smaller bore ones, like cutting some of your streaming services. Look at all of your budgetary items. Just make sure that they’re worth it to you. So, take stock of your budget. Also consider whether, even if you are not any longer working in your full-time job, see if you are willing to consider working in some capacity that can help forestall withdrawals from your portfolio. It can help support strategies like delaying Social Security claiming. So, lots of financial benefits associated with working longer, as well as some sort of personal quality-of-life benefits like maintaining connections, which we know are so important. So, investigate whether working in some fashion is an option for you.

And then, from a spending standpoint, when you’re thinking about your portfolio, I think you want to be careful about swinging for the fences in terms of making your portfolio really aggressive. Even though the stock market has performed well recently, it may not always be the case. But you do want to look at spending from the portfolio because research from us and from other entities that have examined safe spending in retirement have come down to this conclusion that if you’re willing to be flexible about your spending as retirement stretches on, that really redounds to the benefit of a higher starting withdrawal amount. So, investigate some of that research that we and others have done on flexible spending systems. Generally speaking, it does tend to support a higher starting withdrawal.

Dziubinski: Christine, thank you for your time today and for your tips on a very important topic that affects a lot of people.

Benz: It does, Susan. Thank you so much.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch “Money Market Funds vs. CDs: How To Choose” for more from Christine Benz.