It’s fairly common knowledge that the average person lives to between 75 and 80 years old, but not everyone knows that life expectancy increases with age. If they make it to 60, men can expect to live to at least 82 and women to 85.
Because of this, people often underestimate how long they’ll need their nest eggs to last in retirement — and while more good years are always better, no one should strive to outlive their savings.
“Running out of money in retirement is not only a major concern for many, but it’s also the No. 1 risk retirees face,” said Alan Porter, certified financial fiduciary and owner of Strategic Wealth Strategies.
Retiring early magnifies this risk because each additional post-career year is one less you spend saving and one more you have to finance. Even so, many Gen Xers and boomers plan to retire early, but they’re in for an ugly reality check if they take the plunge before they’re ready.
If any of the following signs apply to them, they’re probably jumping the gun.
You’re Relying Solely (or Mostly) on Social Security
According to the SSA, 37% of men and 42% of women aged 65 and older count on Social Security for at least 50% or more of their income. Twelve percent of men and 15% of women count on the program for at least 90% of their income.
If you’re anywhere near this dependent on monthly benefits, you should keep working and saving.
“Social Security is only designed to replace about 40% of your income,” said Porter. “While you may have Social Security benefits or a pension, these sources of income are often not enough on their own.”
You’re Planning To Claim Social Security Early
If your full retirement age is 67, you might think that you can pull it off five years early because the Social Security Administration (SSA) lets you start receiving benefits as early as 62.
There are a few problems with that line of thinking.
Claiming benefits early indicates your savings aren’t sufficient to carry you to your full retirement age. If that’s the case, then what about the years and hopefully decades that follow?
“Baby boomers and Gen Xers may run into money issues if they plan to turn on their Social Security benefits early in order to afford retirement,” said Porter.
The other reason you probably can’t afford to retire early if you take Social Security before 67 is that doing so locks in a smaller monthly check for life.
“Claiming benefits before full retirement age results in a permanent reduction by as much as 30% of your benefit,” said Porter.
On the other hand, the Gen Xers and boomers with nest eggs capable of carrying them beyond 67 can grow their monthly payments and guarantee more income in their later years by delaying.
“Waiting to claim your benefits past full retirement age will allow your benefits to grow by as much as 8% a year,” said Porter.
You’re Banking Only on Social Security and a Retirement Fund
Even if Social Security makes up no more than 40% of your income as Porter and the SSA recommend, the composition of the other 60% will play a big role in whether or not you’re ready to retire early.
The two most common sources usually won’t suffice.
“Depending solely on Social Security and a 401(k) to fund your retirement is insufficient for most retirees,” said Porter. “When you consider taxes and market risk, your savings will be quickly depleted.”
Social Security Is Your Only Guaranteed Income Stream
Unlike Social Security checks, which are guaranteed for life, finite income sources like stock portfolios and savings accounts require you to deplete them to spend their contents — and eventually, they run out.
A better alternative is non-depleting income sources like dividend stocks or rental properties, which provide income without you having to sell them.
But dividend stocks can lose some or even all of their value and investment properties can sit vacant and deny their owners rent payments.
A better alternative is guaranteed income.
“If baby boomers and Gen Xers do not have multiple sources of guaranteed income to use in retirement, they likely cannot afford to retire early,” said Porter.
“Creating sources of guaranteed income helps mitigate this risk and ensure your funds last well beyond your ’80s. Most retirees need multiple sources of guaranteed income just to pay for life’s essentials like housing, gas and food.”
So, how can boomers and Gen Xers with an eye on early retirement secure guaranteed income?
“Cash-value life insurance and properly-structured fixed and fixed indexed annuities can generate guaranteed income in retirement, providing security and peace of mind knowing your money will last, no matter how long you live,” said Porter.
You’re Planning for the Best-Case Scenario
Finally, Gen Xers and boomers should not plan to retire early if they haven’t stress-tested their strategies against crashes, downturns, recessions and the many other threats that will inevitably materialize if given enough time.
“If you don’t have a comprehensive retirement plan that protects your money from future risks, like tax risk, sequence-of-returns risk or healthcare risks, you likely aren’t ready to retire,” said Porter.
“You may be ready to quit your job, but unless you have multiple sources of income, a plan to lower your tax liability and a diverse portfolio that includes products outside of the stock market, you may be in for a rude awakening when you see your savings start to disappear quickly.”
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