Can You Retire Early? Should You?

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Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. The pandemic may be leading some people to think about retirement a little bit earlier than they expected. Here with me today to explore the topic is Christine Benz. Christine is Morningstar's director of personal finance.

Christine Benz: Susan, it's great to be here.

Dziubinski: So, what are you seeing in terms of what impact the pandemic might be having on people deciding to pull that trigger a little earlier than they might've expected and retiring early?

Benz: It's interesting. Mark Miller, who's a contributor to Morningstar.com, has been monitoring the employment situation for older adults. And one thing we saw in the last financial crisis is that older adults hung on to their jobs at higher rates than younger adults. So people 55 and over managed to lose their jobs at a lower rate than the rest of the population.

This current situation appears to be different, where we have seen the older cohort, so again, people 55 and above, lose their jobs at a higher rate than the younger age bands. The youngest age band, so like people under age 35, they still are the hardest hit in the current pandemic, but we are seeing higher rates of unemployment among older adults as well.

I think that this is an area to watch closely, especially given that this economic crisis is also a health crisis. Where you may have some older adults, especially those who have preexisting health conditions or other things that might make them concerned about being out there if their jobs require them to be physically in the community, they may be mulling early retirement. I think we may see more people contemplating retirement either by choice or because they have had some sort of displacement as result of the current crisis.

Dziubinski: Given that we're seeing higher unemployment this time among that cohort that is closer to retirement, are you suggesting that they should consider looking for work? Should they be considering retirement? What's your take?

Benz: I think it's up to each individual obviously to make health decisions--do what's best for their health first and foremost. But when you look at all of the research that's been done over the years about what helps people sustain themselves, sustain their finances throughout retirement, you see that the benefit of continuing to work longer can be incredibly beneficial. So not only do you keep earning a paycheck, but you have fewer years that you are drawing down upon the portfolio, delayed Social Security filing can be immensely helpful, continued contributions to retirement plans, additional tax-deferred compounding. All of those things add up to continuing to work in some fashion, maybe not in the most remunerative position that you could possibly have, but in some fashion, all of those factors do add up in terms of improving a portfolio's sustainability.

Dziubinski: For those who might be mulling an earlier-than-expected retirement, what are the key factors or key considerations that they should be taking into account right now?

Benz: One of the key things I would say, Susan, is get some help because as much as I would love retirement planning to be more simple, one thing you see is that there are so many moving parts. And we all come into retirement with our own tool kits, our own situations, our own set of types of accounts that we have. I do think that this is a great spot to stop and get some help from a financial advisor. You needn't necessarily sign on for a long-running engagement, but you can pay advisors on a per engagement basis or an hourly basis if you so choose. Get some help before proceeding further. That's my first and main piece of advice in this space.

Dziubinski: Now if someone wanted to even just get a ballpark of whether this is feasible, and if they find it might be feasible, they might want to seek the help of an advisor. How could they go about doing that, back of the envelope?

Benz: I think that you absolutely should do that back-of-the-envelope type of calculation. Even if you hire an advisor, you should be on board and understand the different variables in your plan. I would really break it down into three key parts.

You want to think about forecasting your spending needs. How much are you going to need? And ideally do this on a year-by-year basis. And I see retirees getting quite specific, which is great, where they're actually forecasting, "OK, in five years we think our roof is going to need to be replaced. In two years, we're going to need to replace one of our cars." And so on down the line where you're really specific. You're not just using today's spending to determine how your spending needs will change. Also factor in healthcare costs. That's a huge variable, especially for people who are pre-65, pre-Medicare age, who may have to shoulder some of the healthcare insurance costs because they're no longer covered by the employer plan. That's definitely top of mind for many retirees today. That's the first step. Just getting your arms around how your spending might change.

The next step is to look at what your nonportfolio sources of income might be in retirement. So for many of us that'll be Social Security. For some of us that might be a pension. Other people might have income sources like rental income. You want to tally those up--again, look at those on a year-by-year basis. The benefits of delaying Social Security if you possibly can cannot be denied. But tally those up and see how much of those income needs will be supplied by those nonportfolio sources of income.

Then you can subtract out your nonportfolio sources of income from your spending needs. And the amount that's left over is basically the amount that you'll need to draw upon from your portfolio. And there's certainly been a lot of work done on what is a sustainable starting withdrawal rate. How would that sustainable starting withdrawal change over time, potentially to incorporate changes in your spending, to incorporate inflation, to incorporate fluctuations in the market?

That would be sort of the three-step, back-of-the-envelope process that I would take just to make sure that you understand the moving parts of retiring early and making sure that whatever plan you've created is sustainable.

Dziubinski: Well, Christine, thank you for your time today. A lot of great advice. A big part of that being seek professional advice on such a big, life-changing decision.

Benz: Absolutely. Thank you, Susan.

Dziubinski: Good to see you. Thanks for being with us today. I'm Susan Dziubinski with Morningstar.com. Thanks for tuning in.