Even in a chaotic economic environment, Americans of a certain age want to retire early. It’s a tempting siren call for hard-working people who’ve been on the job 30 or even 40 years and seek the easy life.
According to a study from Northwest Mutual, the average American believes they’ll need $1.25 million for an adequate retirement — up 20% from last year’s numbers. “At the same time, Americans’ average retirement savings has dropped 11% — from $98,800 last year to $86,869 now — while their expected retirement age has risen,” Northwest Mutual reports.
Americans who want to plow ahead and retire early can’t ignore the numbers, and they shouldn’t ignore the relative risks — including financial, social and health-related — of retiring at age 50 or even 60. Here are eight major myths that represent the most risk for career professionals mulling an early retirement, according to money management specialists.
1. Early retirement will be wonderful.
2. Your financial worries are over.
3. Health care costs can easily be handled in your healthy 50s and 60s.
4. You’re done working forever.
5. You can tap into retirement savings without consequences.
6. You can live on a fixed budget.
7. Your investment portfolio must avoid risk.
8. You can easily cut back on spending.
1. Early Retirement Will Be Wonderful.
“The real myth on retiring early is that retirement is the goal,” says Steve Davis, CEO of Total Wealth Academy, a passive income training firm in Katy, Texas. “The first thing that people need to know is that retirement is not what you think. It’s not the wonderful end game everybody believes. You can only fish so much, you can only golf so much, you can only travel so much.”
“There is not much happiness in just doing nothing or only doing things for yourself,” Davis notes.
After retiring early himself, Davis began to realize he found no happiness in retirement — just “useless, selfish goals.”
“I went back to work within six months of early retirement,” he says. “Only this time at something I truly enjoyed doing.”
2. Your Financial Worries Are Over.
Another myth is that once you execute your financial plan, early retirement will be void of financial worries.
“There’ll always be concerns about the economy, inflation and the state of the world,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors, a fee-only investment management firm in Atlanta. “Plus, when you’re no longer bringing in wage income, there is less room for error.”
To minimize those errors, Moss advises having a retirement “gray zone” of between three to five years. “This is where you take on a new second act career that’s more enjoyable and which brings in some level of replacement income,” he says.
Financial planning here is also key. According to Moss, some core financial principles associated with happy early retirees include:
— An average of close to $1 million in liquid net worth.
— Mortgage payoff within sight (over the next one to five years).
— Multiple streams of income. “Happy retirees average three to four different or unique streams of income,” Moss says.
[READ: Can You Retire on $1 Million? Here’s How Far It Will Go.]
3. Health Care Costs Can Easily Be Handled in Your Healthy 50s and 60s.
Many Americans erroneously assume that Medicare will handle their health care needs, but that’s not the case.
According to a 2022 study from Fidelity Investments, even a healthy 65-year-old couple retiring now can expect to spend an average of $315,000 on health care costs throughout retirement. “The estimates for single retirees are $150,000 for men and $165,000 for women,” the study notes. “For single retirees, the 2021 estimate was $157,000 for women and $143,000 for men.”
Additionally, Medicare doesn’t cover every health care need, and you’re going to need to put aside cash for extra health care coverage, anyway — especially long-term care needs.
“With early retiree health care coverage, you have to understand your needs in retirement,” says Tatiana Tsoir, certified public accountant and founder of Tatiana Tsoir Inc., a business management consultancy in New York City. “Most importantly, where is that money coming from?”
Early retirees will need to find out what Medicare covers. “You’ll want to know if you need to buy any supplemental items to support your health care needs,” Tsoir says. “Consider life insurance with a chronic illness or a long-term care rider. This will rule out having to buy expensive long-term care insurance.”
4. With Early Retirement, You’re Done Working Forever.
There’s a “good news-bad news” mindset when it comes to work ending in early retirement. Yes, you’re out of the working world. But it’s tough to get back in if you need to.
“With early retirement, you can’t change your mind, and quite possibly you’ll never be able to work again,” says David Blanchett, head of retirement research for PGIM DC Solutions in Newark, New Jersey. “I think what happens a lot is people are absolutely burnt out from working too much and want a break.”
When you’re not sure about leaving the working world, run the numbers to get a sense of where you’ll be financially, Blanchett advises.
“If you think you’d be able to rejoin the workforce in some capacity, know that it won’t be the same income you were earning previously,” he warns.
Ideally, one potential option is to “retire” from your primary job and move into a part-time job, at least at first. “That move allows you more freedom while at the same time ideally providing health benefits and minimizing when you have to dip into savings,” Blanchett adds.
[See: 15 In-Demand Jobs for Seniors.]
5. You Can Tap Into Retirement Savings Without Consequences.
The reality is that withdrawing from retirement accounts before age 59½ can incur early withdrawal penalties and taxes.
“If you’re planning to withdraw from your retirement accounts before this age, you should consult a financial advisor who can guide you through the proper retirement account withdrawal method,” says Tammy Trenta, founder of Family Financial in Los Angeles.
6. You Can Live on a Fixed Budget.
One of the biggest myths about early retirement is that retirees will have a fixed budget throughout their retirement.
“That just doesn’t happen,” says Michael Kazakewich, a partner at Coastal Bridge Advisors, in Westport, Connecticut. “Home repairs, medical expenses and the unforeseen can dramatically throw off the budget and reduce available assets of an individual that retired early.”
7. Your Investment Portfolio Must Avoid Risk.
Another myth about retiring early is that investments must become more conservative. Not so, Kazakewich says.
“We believe that with a longer retirement time period, investors still need equities and other asset classes that will provide growth over the long term,” he notes. “That growth can help to offset the impact of inflation over the long term.”
8. You Can Easily Cut Back on Spending.
Early retirees believe they can live on 80% of their pre-retirement wages, but that’s easier said than done.
“The reality is that most people who are planning on an early exit are doing so to pursue travel, golf and other pursuits,” says Brian Ream, principal at CliftonLarsonAllen Wealth Advisors LLC. “The reality is that in the early years of retirement, in pursuit of these activities, we spend at least as much if not more than our working years.”
[READ: Costs to Include in Your Retirement Budget.]
3 Tips for Early Retirees
Being reliant on your investments means little room for error, and that’s a problem when most investors are predisposed to risk aversion.
“That’s especially the case in a high inflation environment, and that’s doubly so when portfolio growth has to play a role in any allocation strategy to preserve buying power and longevity of the asset base,” Ream notes.
To shine some light on the investment side of early retirement issues, Ream offers three investment tips for like-minded individuals considering an early exit from the working world.
Clearly define, at a granular level, what retirement really means. Travel is too broad to plan for in retirement. Does that mean a pop-up camper or a large RV?
“Details matter in order to assign accurate costs to the goal,” Ream says.
Know that what you’ve saved is important, but what you spend can be more important. A degree of discipline related to budgeting is paramount.
“In addition, there needs to be flexibility in the budget for the unexpected and built-in pivot points in order to react in a measured and meaningful way,” Ream notes.
Define “happy.” Clients often reach their financial targets, feel they can take the leap, and life will be all rainbows and unicorns, only to find six months later that they are sitting around the house going stir-crazy.
“This is especially true for ‘type A’ personalities who have thrown themselves into work for years and that’s their identity,” Ream says. “We have to plan for the emotional aspects of reinventing how we find purpose and meaning. When clients say, ‘I’ll be happy when I retire,’ it’s a good indication that we need to discuss what ‘happy’ means.”
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Biggest Myths About Early Retirement originally appeared on usnews.com