Many of my clients are hoping for early retirement – meaning before the standard age of 65. With proper planning, this can be an attainable goal. If you are positioned for retirement, you might be able to throw your retirement party, even though you might not yet be eligible for Social Security benefits, Medicare or your pension.
Those looking to turn their office key in early just need to do a little extra planning to address what we at Capital Investment Advisors call the “Retirement Grey Zone” – the time in early retirement when certain government and employment benefits have yet to kick in. If you run your numbers (or better yet, have a trusted financial advisor run them) according to the outline below, and find that you have the savings on which to live off for a few years, you may want to recalculate your retirement date, if that is something you desire.
Let’s talk about Bob and Sue.
Bob and Sue have both just retired, at ages 60 and 58, respectively. The couple has decided that they each want to begin taking Social Security at 62, before they hit full retirement age.
For the first two years of their retirement, Bob and Sue will need to withdraw more than the generally accepted, prudent 4% from their investment accounts. Here, it is critical that an analysis is done on that withdrawal rate to ensure that this short-term, elevated withdrawal schedule will not cause problems later in their retirement.
Once Bob begins taking his Social Security at age 62, the couple can reduce the draw on their investments. Then in two more years, they can further adjust their investment withdrawal down as Sue becomes eligible and begins receiving her monthly Social Security benefit checks.
This same iteration of decreasing the level at which they are making withdrawals from their investments will happen again when Bob and Sue each hit age 65 and are eligible to begin receiving Medicare. And, if either one of them is lucky enough to have a pension, their investment withdrawal can be further reduced.
Additionally, Bob and Sue may choose to work part-time to help fill some of the gap in their monthly income and to take some pressure off of their investments. Because they are still so young, they may explore working part-time as consultants in their field, or they may choose to get involved in a different area of interest. This option can be both a fun and helpful way to generate additional income during the Retirement Grey Zone.
The long-term goal is that once all their income streams are in place and working together to fill their early retirement income gap, the couple can reallocate and work within the practical guideline of taking 4% from their investments. So, while they may begin retirement at a higher withdrawal rate, they want to end here.
From our example, it is clear why running the numbers before embarking on early retirement is critical to prudent planning.
At Capital, we have an upfront way of decoding the changing nature of income streams during early retirement. We make a timeline, beginning in the year in which our clients want to retire, and chart out the various income sources that they will be using in the first year of retirement, the second year, and so on.
This timeline provides a guide for the Retirement Grey Zone. It accounts for all of the foreseen fluctuations of the early retirement years and provides our early retirees with a clear picture of where their money is coming from on a yearly basis until all of their benefits are in full swing.
Despite the desire to retire early and all of the attendant benefits of entering this next phase of life, it can feel unsettling once your paychecks have stopped and your income streams have not yet begun. With proper planning, however, you can leave any feelings of worry behind, and revel in your newfound freedom.