Retiring Early? What to Keep in Mind
Opting into the "Great Resignation" calls for mindful choices.
Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Retirements appear to have accelerated during the pandemic. Joining me to discuss what you need to bear in mind if you plan to retire early is Christine Benz. Christine's Morningstar's director of personal finance and retirement planning.
Hi, Christine. Thanks for being here.
Christine Benz: Susan, it's great to see you.
Dziubinski: What's prompting all of these early retirements we're seeing?
Benz: There are different motivations, I'm sure. I suspect there are some frontline workers who decided to leave their jobs in the wake of pandemic. It certainly put added stress on them to do their day-to-day jobs. I think there's another huge contingent of new retirees, would-be retirees, who are looking at this very strong market environment that's prevailed over the past decade-plus, so their portfolios are enlarged, and they think that they have enough to retire. I would expect that that's a strong motivator for a lot of new early retirees. And then I would say another softer consideration in the mix is that the pandemic has given a lot of people some additional time to think about their lives and the trajectories of their lives. And I think you've got some people deciding that they want to try to live their best life and that doesn't necessarily involve working. So, I think that there are a variety of motivations, but I would say those are probably key for a lot of people.
Dziubinski: If you are someone who's considering leaving the workforce a little early, what are the main things that you need to be thinking about and have on your dashboard?
Benz: I would say a key consideration is healthcare coverage. If you are pre-age 65, so you're not yet eligible for Medicare, you've got to figure out where you are going to go for healthcare. And if you're part of a married couple where your spouse is employed, this might be an easy answer, where you can go on to your spouse's healthcare coverage. But if you do not have that luxury, you've got to figure out whether you're buying private insurance or going through the exchanges and factor in that extra cost in terms of your in-retirement budget, because until you are eligible for Medicare, you will have that headwind of additional bills. And even when you are eligible for Medicare, you do need to bear in mind that you'll have additional healthcare expenses that Medicare doesn't cover. So you will probably want supplemental insurance coverage, for example. Definitely factor in those healthcare outlays.
Another thing I would mention, Susan, is that we now have a pretty big body of research that points to working longer, even working past the traditional age 65, as being valuable, not just from a financial standpoint, which it obviously is, but also valuable from a health, physical health, emotional health standpoint. That working longer seems to do something for us that keeps us well later in life. Some people think that it might be having that sense of purpose, maybe it's physical exercise, the fact that getting out there, continuing to work, actually gives you a little bit of exercise. And then another big factor is the social considerations. Definitely, I would say, bear in mind all of that research when thinking about your decision to retire early.
You may decide that from a lifestyle perspective, you still definitely want to go ahead and do it. But just do bear in mind the research and bear in mind that working longer doesn't necessarily entail sticking it out at your current job, especially if it's one that you don't love. You may be able to find a career path that gives you that social connection, that gives you that sense of purpose but doesn't sort of wear on you in that same way.
Dziubinski: Let's talk a little bit about Social Security, which of course, you can claim benefits starting at age 62. But should people do that?
Benz: Big question. I would say that certainly it's attractive from the standpoint of--retirees want to replace that paycheck that they had while they're working. And I think that's why many do gravitate to claiming Social Security right out of the box--to have that cash flow coming in the door through some source that is not their portfolio. But I would really spend some time running the numbers. One calculator that I recommend is Mike Piper's Open Social Security calculator. It's a free calculator. Run the numbers on your own situation. Oftentimes, if you're a healthy person, especially if you're a healthy single person, or you're the main earner in your family, delaying will make sense. We don't have to delay all the way until age 70, but you may pick up a benefit by delaying at least past your full retirement age, perhaps a year or two. Run the numbers on that. Decide what makes the most sense given your situation. But just remember that Social Security is a lifetime benefit, and if you're able to claim a higher benefit by delaying, that can be incredibly valuable, even if that means that you have to take higher withdrawals from your portfolio early on in retirement.
Dziubinski: Now, you've always said that it's very important for pre-retirees to sit down and figure out what their portfolio spending rate will need to be in retirement. This is extra important if you're planning to retire early, right?
Benz: Absolutely, Susan. Because there have been a lot of valuable research in this space about what's a safe and sustainable withdrawal rate, but most of it considers a 25- to 30-year time horizon. Very few researchers have looked at a very long time horizon. So you'd want to be more conservative. If you expect that you might have a longer than 30-year time horizon in retirement, you'd certainly want to take less than, say, the standard 4% starting portfolio withdrawal. And there are reasons to be cautious on withdrawal rates, even if you're retiring at a normal or a traditional retirement age, because of the investment environment that we find ourselves in, where we have very low bond yields today, we have not-inexpensive equity valuations, which portend a not-great environment for investors over the next decade. And that calls for being conservative on the withdrawal rate front. So definitely don't just take the 4% guideline and run with it. My bias would be to be more conservative given where we are today.
Dziubinski: And then lastly, Christine, what about from an investment standpoint. How should a younger retiree be thinking about positioning his or her portfolio?
Benz: It's a big topic, Susan. But I would say one major thing to bear in mind is risk tolerance versus risk capacity. Know what the difference is and don't confuse the two. So "risk capacity" means the amount of risk that you can take, given your proximity to needing to spend your money. If you're getting close to retirement, if you're in retirement, you'd want to have some safe assets in your portfolio to tide you through if the market environment is not great, especially in the early years of your retirement. A lot of people retiring today have pretty high risk tolerances, meaning that they feel OK with tolerating equity market volatility, tolerating volatility in their portfolios. And so they might say "Equity risk, bring it on. I have done this through my whole career, and I'm ready to keep holding lots of stocks." But just make sure that you're not confusing those two concepts. Risk capacity becomes even more important as you get close to drawdown mode. You do need to have some safe assets in your portfolio, even though the return potential is really low on cash and bonds today.
Dziubinski: Christine, thank you so much for your perspective today. You've given people a lot to think about--what they should be thinking about--before they turn in that resignation. We appreciate it.
Benz: Thank you so much, Susan.
Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.