Many people seek financial planning advice to get a better handle on their over all financial situation and to better understand what they need to do to better meet their future goals.
A very common goal is to “retire early” and lead the, good life! Normal retirement age, is defined by Social Security, for those born after 1960, would be age 67. Many people will be disappointed to learn that an early retirement may not be in their future and here are the 5 most common reasons:
1-Mortgage payments in retirement can be a problem due to reduced income. Many people buy a home later in life or refinance, which re-sets the clock on a 30-year note to pay of the loan. Lets say that a 50 year old buys a new house, uses equity from the prior house as a down payment but will still have a mortgage payment until age 80. For every $100,000 of mortgage, the payment will be about $500 a month not including property tax or insurance. The current average social security benefit is about $1350 a month.
2-Health costs are a huge issue, more so than what most workers understand and health insurance premiums are rising faster than workers income and certainly faster than retiree’s income. Let’s say that a 60-year old couple living in Sacramento, CA with a good retirement income of $65,000 a year wants similar health insurance coverage as to the employer plan when they were working but now have to pay for their own health insurance. The current monthly cost would be about $1800 a month for a couple. However you need to consider that rates have been rising at over 20% a year. This means that if you are currently age 52 and want to retire at age 60 your heath insurance cost at that time could be over $9,000 a month and does not include dental, vision or hearing. You can buy a policy with less benefits but it will still be much more costly than you think. Continued health benefits from an employer is a major reason why many people are still working when otherwise they would retire.
3-Not wanting the good life to stop in retirement is a very common issue. When you are working, you have a good income in addition to a spouse’s income as well. Going out to eat, designer labels, periodic new cars, and nice vacations are all doable with that earned income. But with a reduced retirement income, these types of expenditures are often not possible so many people continue to work to maintain their lifestyle.
4-Social Security is not as secure as many workers believe. Without changes to increase taxes, the Social Security system will be broke (have no reserves) thus not being able to meet its obligations to retirees. The “then current” workers social security taxes will all be spent on the current beneficiary’s income and that would lead to only 76% of benefits being paid to recipients. An example is if you were retired with a benefit of $2000 a month and the Social Security reserves were gone, your monthly benefit could be reduced to about $1520. That would be a sure disaster for most retirees.
Changes will have to be made to keep the Social Security system viable. These could include: increasing the full retirement age to more than 67. This was done once before, increasing the full retirement age from 65 to 67. Increasing the Social Security taxes above the current 6.2% paid by both employees and employers is an option but would not be taken well by voters. Removing the limit as to what is taxed for Social Security is a viable option, which is currently $118,500 a year of earned income. There could also be “means testing”, as was added to the Medicare Premium rates, meaning that if you have a lot of other retirement income then you would not receive your full benefit. Even with some changes, there are no guarantees that Social Security will be there to pay what you are expecting from this social benefits program.
The big problem is that our politicians do not want to tackle this issue because of voter backlash. They stick their head in the sand and kick the “can” down the road to let someone else deal with the crisis in the future. The longer the government waits, the worse the impact becomes.
5-Did not start saving properly for retirement. This is the primary reason why people will not be able to retire early. There are three components to this cause.
- Not saving soon enough. Virtually everyone knows that they need to save for retirement but there are so many other places for the income to go such as: kids education, money for a down payment on a house or a house remodel, a more expensive car or costly vacation, because you feel you deserve it. Most people say, “ I know I need to save for retirement but I will start later, after the kids are through school or after we have the new house” etc.
- Not saving enough. One study found that only about 11% of Americans are saving enough for a reasonable retirement. A good goal would be to save 10% of your income for retirement from the time your start working. Another goal is to save 8 times your final year’s salary. In other words, do not retire until you have saved that much.
- Not saving Tax effectively. Only about 1/2 of American workers have the option of an employer’s retirement plan such as a 401(k) or 403(b) where workers can defer up to $18,000 a year ($24,000 if over 50). Those that do not have access are limited to the tax deferred amounts available in an IRA or Roth IRA $5,500 ($6,500 if you’re age 50 or older) The benefit of these plans is that you do not pay income tax on the amounts that you defer so that those dollars that would have gone in taxes grow for the future.
According to the Employee Benefit Research Institute, 28% of current workers have less than $1,000 in savings that could be applied toward retirement. In another sampling of 1,003 workers and 1,001 retirees, 57 percent indicated that they have less than $25,000 in retirement savings. Clearly, most people will not be able to retire early or retire at all without a big reduction in their lifestyle.
Many advisors recommend that your retirement income goal should be 70% of your present income from all sources. Social Security is not going to provide what is required to retire comfortably and most folks do not have a pension, so they need to start saving significant amounts of money ASAP or many will not be able to afford to retire early.