COVID-19 has forced us to look closely at many areas of our life, including our plan for retirement. As this pandemic continues with new variants of the Coronavirus, some people nearing retirement are looking at this time of uncertainty as an opportunity to leave the workforce.
Whether you are someone who is being forced into early retirement or you’re choosing to jump into it, there are plenty of variables you should consider. The last thing you want to do is make a hasty decision that could impact your financial security.
Here are three things to consider before jumping into an early retirement (and some advice for those who don’t have a choice in the matter):
When Will You Claim Social Security?
You can claim Social Security benefits as early as age 62, but you need to understand your monthly check will be permanently reduced by up to 30%. If you can wait to claim until you hit full retirement age, you will receive your full benefit; that’s somewhere between 66 and 67, depending on the year you were born. For those who turn 62 this year, full retirement age is 66 and 10 months. One more thing: If you can hold off until after your full retirement age to claim, your benefit will continue to grow about 8% per year until you reach age 70, when it will be at its peak. So it can pay to wait to claim, if you can.
Take a look at your retirement plan and the budget you’ve outlined for yourself. How much of your monthly income is coming from Social Security, and when should you claim to get the most out of your benefit? The average monthly check for Social Security recipients this year is more than $1,500 per month, and the maximum amount for those who retire at full retirement age is just over $3,100. Be realistic about how heavily you will rely on Social Security. I recommend talking to a financial professional to discuss your Social Security claiming options.
What Are Your Health Care Options?
Retiring before 65 means Medicare isn’t an option for you (yet), so you’ll likely have to purchase some form of private health insurance. This will be crucial in case of emergencies but also for routine checkups and prescriptions. You will want to factor anywhere from $500 to $1,000 monthly, per person for health insurance premiums if you’re retiring before 65.
It’s important to look at the fine print of private health insurance plans to make sure it’s the right decision for both your medical and financial situation.
Other options for health insurance for those retiring early include COBRA, a spouse’s policy and short-term health insurance.
Ultimately, however, the cost of health care alone might make your decision to retire early far less feasible, depending on your current savings as well as your age.
Do You Have Enough Retirement Income?
Finally, make sure you’re looking at the full picture and have a long-term plan for your retirement. You need to be sure your retirement savings will cover your expenses for 25 years or longer. The last thing you want is to find out your early retirement put you in a financial bind months or years down the road. Sit down with a financial adviser before making your decision to determine how early retirement affects your income. From missing out on future contributions by leaving the workforce to withdrawing from accounts earlier than expected, you may not understand how an earlier retirement impacts your nest egg.
The coronavirus pandemic and recession are leading to more companies offering early retirement incentives. If you’re offered an early retirement package from your employer, remember it could be negotiable, so do your homework and find out if there’s even more incentive for you to accept it. Any additional income can be seen as a bonus and should be factored into your overall plan.
Finally, a Word to Those Forced into Retirement
You don’t always get to choose when to leave your job. If you receive a buyout or are let go before you plan to retire, there are a few options. First, talk to your financial adviser to see if retiring early is feasible. You may be in a better position to retire than you previously thought.
Partial retirement is another option. You can take on a part-time job to secure benefits and explore another line of work that interests you. Working part-time could allow you to delay your Social Security benefits, growing them by as much as 8% a year from your full retirement age up until age 70. No matter what decision you make, let it be one that’s based on a solid plan and a meaningful discussion with people who know you the best.
Founder & CEO, Drake and Associates
Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.