Thursday, May 1, 2014

The Problem With Early Retirement

Early Retirement?  It sounds easy, but it ain't!

I was on an "Early Retirement" discussion group the other day, and folks were making out like it was easy to retire early (before age 65).   But it really is kind of hard to do, as I am finding out.   There are a number of problems with the idea of early retirement, as I am finding out:

1.   You have to have more money saved up.    $1 Million will generate $50,000 a year for you (using the 5% rule) for 30 years.  So if you retire at 65, that should be enough to last you until age 95.   If you want to retire at 45, however, you need 50 years of income, which is a lot more money - perhaps $2 Million instead of a "measly" $1 Million.   Most of us cannot save that much money in a lifetime.

2.  Less time to save.  It is hard enough to save up $1 Million after working for 45 years (from age 20 to age 65).   Trying to save twice as much in a mere 25 years is next to impossible.

3.  Health Care Costs.  Once you reach age 65, Medicare kicks in and covers most (but not all) of your health care costs.   Between ages 55 and 65, however, health insurance costs skyrocket (even with Obamacare) to the tune of $1000 a month or more.  Retiring early means you (not your employer) having to pay for this.

4.  Taxes.   When you hit age 62 or 65, all sorts of tax breaks kick in.   You may end up paying no income tax at all, and if you do, many States reduce taxes for older citizens.   Property taxes may be reduced or increases stayed, if you are over 65.   Until then, though, you have to pay "full boat" on your taxes - no special treatment for retired 55-year-olds!

5.  401(k) and IRA penalties.   If you tap into your 401(k) or IRA at an earlier age, not only will the money not last as long, but you'll have to pay a 10% surcharge on your taxes.

So, even with a "paid for" house and a million bucks in the bank, it is darn hard to retire at age 55.   That million dollars ain't gonna last long, if you start tapping it early.   Not only that, if you can wait 10 years, that million bucks will become two million bucks if invested properly, and your eventual retirement will be that much sweeter.

It is a conundrum.   When do you pull the ripcord on your career?   Most don't have a choice in the matter - their career peters out and they retire, not by choice by circumstance.   Others have to make a careful calculation, and this is where it gets tricky.

The sad conclusion I reach, after much calculation and thinking is, that, like it or not, I will have to work at least part-time, until age 62, if I am going to make this work in a manner than insures a comfortable retirement, and also that I don't run out of money.

Early retirement sounds like a lot of fun, but you'll need at least twice as much money saved up, if you want to retire early.