Should I stay or should I go?
Recent research has found that millions of Americans who lost their jobs during the early months of the pandemic have decided to call it quits and retire early.
Before COVID-19 came along, people over age 55 represented 25% of the American workforce. There were more workers over age 55 than under age 30. In the course of just a few months, that ratio reversed. While older Americans have proved more susceptible to the ravages of this virus, younger people are willing to stay in the workforce. Even if they’ve had hours reduced or been laid off, they are seeking and plan to resume work in the future.
That future is not so rosy for more mature workers. We don’t know what the normal, onsite work environment will be like a year from now. If the public is still social distancing, that means people are still at risk — and those age 55 and older may not want to take chances with their health. After all, they’ve been saving for decades. They’re not about to miss the opportunity to enjoy retirement just to eke out a few more years of work in an environment fraught with health risks.
“Based on past experience, the longer the situation continues, the more severe the issue of discouraged workers and early retirements.”
Michael Weber, Finance Professor, University of Chicago’s Booth School of Business
Unfortunately, not everyone is in a position to retire right now, at least not the way they originally planned. If you find yourself considering early retirement, do a little prep work to see how feasible it is and what you’re willing to do to make it work. To get started, consider these steps:
- Calculate your annual retirement income needs.
- Calculate your net worth based on current assets and liabilities.
- Check out your (and your spouse’s) level of Social Security benefits based on different ages you can begin drawing them.
- Estimate how much savings you need to have for the latter stages of retirement, such as the for the cost of long-term care assistance.
- Consider if you need to keep a portion of your portfolio invested for long-term growth.
- Consider your appetite for various forms of risk, including market volatility, sequence of returns, inflation and outliving your money.
Think about the obvious sources of income, such as Social Security benefits, a pension, your retirement accounts and investments. However, also consider other potential sources, such as real estate, an inheritance or other income-generating investments.
If retiring early is still going to be very difficult, then the real solution is to pare back your lifestyle. You may want to consider downsizing to a smaller house or a condominium to reduce ongoing utility, tax, maintenance and insurance expenses. You might consider combining households with an adult child, using your assets to build on a mother-in-law suite to his or her house or add a granny flat in the backyard. While you may not be able to leave your child a large inheritance, this could help add to the real estate value of his or her home.
If you have plenty of assets now but worry about running out in the future, you may want to consider moving to a Life Plan community. This would enable you to consolidate expenses such as living, utilities, dining, household maintenance, health and long-term care all under one fee. This can help you estimate your lifetime expenses from the outset. Here’s a key principle to remember: Most people draw retirement income from a number of different sources. By diversifying your portfolio across fixed income sources, guaranteed income sources and long-term growth opportunities within your comfort level for risk, you may be able to retire early while still growing a nest egg for the latter stages of your retirement. Just as it’s a good idea to diversify your investments, it’s equally important to diversify your retirement income sources. This may help reduce your tax liability and the risk of your income sources drying up. Remember, retirement may last 20 years or more, so spend a lot of time upfront working with an advisor to develop your plan. This is all the more critical if you decide to retire early.
Brett Arends. MarketWatch. May 2, 2020. “COVD-19 crisis sparks ‘early retirement’ wave.” https://www.marketwatch.com/story/covid-19-crisissparks-earlyretirement-wave-2020-04-30?mod=home-page. Accessed November 8, 2020.
