Americans are now retiring earlier than their parents and grandparents – at age 62, on average, according to the Transamerica Center for Retirement Studies' survey of American Retirees.
But there’s a caveat – and it’s a big one.
Out of the 2,012 Americans Transamerica surveyed, only 12 percent said they retired because they had enough cash saved up for their golden years. Most of the rest? They were forced out of the workforce, according to Transamerica.
- 27 percent retired because of "organizational changes at my place of employment.”
- 27 percent retired due to health issues.
- 26 percent retired because of direct job layoffs.
No matter what the circumstances of your early retirement (and here’s hoping it was by good planning and choice), you’ll have a tough time making a go of it in your post-career years if you don’t have certain financial criteria working in your favor. To pitch in, MagnifyMoney reached out to financial experts to identify the best pre-retirement planning indicators that bolster your odds of having a financially comfortable retirement.
Here are those “indicators” that are at the top of the list:
1. You already have a retirement budget.
A big step in enjoying an early retirement is that you’ve already tried living within your retirement budget before you actually retire, notes Joe Jennings, wealth director for PNC Wealth Management in Baltimore, Md. Ideally, Jennings suggests getting accustomed to living off of 60 to 80 percent of your current income. “Try meeting your expected expenses for six months before you actually retire, to gauge your comfort level,” he says. “If the new budget works well after that six-month trial period, that’s a good sign you can retire early and comfortably.”
2. You’ve stress-tested your retirement savings.
Deborah Meyer, chief executive officer at WorthyNest, a fee-only financial planning firm, is a big advocate of “battle-testing” your retirement savings plan to ensure it has the capacity to withstand the ups and downs of a volatile market.
When workers are close to retirement or have already retired, they may not have time to allow the market to rebound and make up losses incurred during a bear market. Retirees and pre-retirees whose portfolios were heavily invested in the stock market were pummeled during the most recent economic downturn. Between 2007 and 2009, the S&P 500 and Dow Jones Industrial Average each fell by more than 50 precent. Consequently, Meyer suggests working with a financial adviser to help run your portfolio through a number of different scenarios to see how it can handle ups and downs.
A healthy portfolio should be able to tick these three boxes:
- Your portfolio can financially withstand five years of a bear market.
- You can afford to handle a 10 precent portfolio loss, two years in a row, early in retirement.
- Your assets are sufficient enough to handle household expenses that are 20 percent higher than expected.
“If the confidence level of success is still high with all of these stress tests, you could be ready for retirement,” says Meyer. “If you grade out at a 90 percent level or better, you’re on the right track,” she adds.
3. You can afford health care costs before you’re eligible for Medicare.
Retirees often ignore how much more expensive their health costs will be in retirement, says Scott Vance, a financial adviser with Trisuli Financial Advising in Cary, N.C. According to Fidelity, a 65-year-old couple retiring in 2016 will need an average of $260,000 to cover medical expenses throughout retirement, up from $245,000 in 2015.
“In my financial advisory practice, I’ve met several people who thought they could retire before being eligible for Medicare,” Vance says. “[But] when we ran the health insurance cost numbers, it quickly became apparent that they had to stay in their jobs, which had health benefits, until they could qualify for Medicare.”
4. Your annual income “drawdown” meets or exceeds specific rates.
Oscar Vives Ortiz, a financial planner with First Home Investment Services in Tampa Bay, Fla., says most families with a retirement savings portfolio must rely on safe withdrawal rates – that is, an initial withdrawal rate from your portfolio that gets adjusted annually for inflation. A withdrawal rate is simply how much retirees withdraw from their retirement portfolio for living expenses each month. “Depending on investment industry figures, the safe initial withdrawal rates are about 5 precent for 20 years in retirement, 4 precent for over 30 years in retirement, and 3.5 precent for 45 years in retirement,” Ortiz says. “If you expect your retirement period to last more than 45 years, you can probably assume 3 precent annual withdrawals. Do that, and you should be in good shape to retire.”
5. Your home is already paid off.
From an expenses perspective, not having a mortgage is a huge deal, Ortiz adds. “As this is usually the biggest line item in many families' budgets, not having to shell out mortgage money goes a long way to making your retirement savings last,” he says. Some retirees are also turning to reverse mortgages, which essentially provide homeowners with cash payments based on the equity value of their homes. However, reverse mortgages aren’t always the best financial option.
If you can meet most or all of the above financial criteria for early retirement, you’re in good shape to call it a career before age 60.
If not, like it or not, you’ll likely have to hang on in your current job, or head somewhere else in the workforce, until you’re finally ready to hang up that I.D. card, and drift off into retirement – just not before age 62.