Have you ever considered taking early retirement? Many people can only dream of retirement in their early 60s or later. However, nurses are often able to achieve retirement much earlier.
However, before calling it quits, weigh all the facts carefully to ensure an early retirement makes good financial sense.
Consider the following. . .
Lost Earnings (also known as lost opportunity cost).
Opportunity costs are the potential benefits an investor misses when choosing one alternative. They're unseen by definition, so they can be easily overlooked, making them too easy to forget. But if you understand how many opportunities there might be in your life due to what you choose not to do now, then making better decisions becomes easier for you.
For example, retiring at age 55 with 60% of your income may seem like a good deal. But, if you wait until age 65 to retire, you will have gained another ten years of total earnings, along with any promotions, merit raises, and inflation increases. This will give you more money to save for retirement and boost your Social Security and pension benefits.
Also, considering the difference between how much you will receive now and how much you'll receive in ten years, for example, 60% if you leave now versus 80% if you retire in ten years, it may sound like you could be better.
Effects of Inflation.
While this may seem like a complicated economic topic involving the Federal Reserve Bank, Consumer Price Index, Short-Term Interest Rates, and people tweeting angry things at the Federal Reserve Chairman, all you have to know is that it's been about 3% (per year) for a long time.
Remember that inflation will erode your pension if you still think you can manage 60% of your income. If you retire today on $1,600 per month in 20 years at a 4% inflation rate, you will have only the equivalent of $707 in today's dollars.
While inflation impacts all of us, it affects us differently. Why? We must accept some financial expenses and lifestyle choices, whereas, for others, we get to choose. People planning to retire commonly ask how to calculate the future inflation rate because projecting what price increases lie ahead is central to anticipating annual income needs.
Sadly, there is no magic number. And often, the assumed number can be flawed and vary significantly from one family to the next.
The longer you live, the greater will be the effects of inflation. If you retire at age 53 and your life expectancy is 83, you may have 30 years to support yourself on today's fixed income. And, if you are still alive at age 83, statistics show you could have another eight years to live. Instead of needing to fund a 30-year retirement, you might need resources for 38 years.
Other Retirement Income.
If you already have a sizable retirement nest egg, or if you expect to collect a pension from a previous employer, the size of the assistance you could get from your current employer may not be critical. If so, you could leave the working world behind since you will have other funds to rely on. However, don't make the mistake of expecting Uncle Sam to provide most of your retirement income.
With the future of Social Security uncertain and cutbacks in other government programs, such as Medicaid and Medicare, you may need to provide even more of your funds. A consensus is that you will need about 60-80% of your pre-retirement income to support a comfortable retirement lifestyle.
Proceeds from pension plans and Social Security currently account for only about 35% of the typical retiree's income. Another 23% is derived from earned income, either full or part-time employment. The remaining amount needed would have to come from your retirement savings or investments to retire comfortably. This amount may be as much as 39% of your retirement income.
The amount needed to fill this income "rift" will depend on the amount of Social Security you will receive and what income you will have from other sources, such as a company pension plan or your own Individual Retirement Account (IRA). That is why the steps you take today (investing, diversifying, increasing already existing investments, etc.) will be vital to help fill this gap and secure a comfortable retirement.
Social Security "Giveback."
You can get Social Security retirement or survivor benefits and work simultaneously. But your benefits will be reduced if you're younger than full retirement age and earn more than specific amounts. However, the part where your benefits are reduced isn't truly lost. Your benefit will increase at your full retirement age to account for benefits withheld due to earlier earnings. Spouses and survivors, who receive benefits because they have minor children or have disabilities in their care, don't receive increased benefits at full retirement age if benefits were withheld because of work.
If you are under 65 and continue working after collecting Social Security benefits, you may have to "give back" a portion of your benefits. In other words, your Social Security benefits may be reduced once your earnings exceed a certain income cap. For more information, contact the Social Security Administration (SSA).
Taxation on Social Security Benefits.
You should also know that if you continue working after collecting Social Security, a portion of your Social Security benefits may be taxed. For information on calculating how much of your benefits will be included in your gross taxable income, contact the Social Security Administration.
Early retirement has a solid psychological appeal for many people. In addition, those who face the threat of being "downsized" may get a better deal by taking an early retirement rather than the company's severance package. However, before calling it quits, analyze your situation carefully. You will have to live with the effects of your decision for the rest of your life. Take the time to ensure today's decision will still be innovative in the long run. Our software can show you real-time 'what ifs' based on potential scenarios so you can make an informed decision.
Financial planning isn't an option if you want the best possible future for yourself and your family. It's a necessity. One of the most important things you can do to protect yourself and your family from financial ruin is to have a personalized plan designed specifically around your needs, goals, lifestyle choices, current situation, etc. And when it comes to financial planning, there's no better place than Prosperity Financial Solutions.
We'll not only develop your customized financial plan but also provide continued motivation to inspire you to stay on course while making smart money moves, giving you peace of mind to enjoy life's little luxuries without worry or hesitation.
Prosperity Financial Solutions wants to help you achieve your financial goals, and our complimentary call or appointment is the perfect way to start. Contact us today to get started!