The number of early retirees is huge. In 1970, 83 percent of the men 55 to 64 were still in the labor force. By 1980, that had dropped to 72 percent and it’s 67 percent today. Growing numbers of younger men are also on the beach, thanks to the mass defenestration of middle management. (The 45 percent rate for women hasn’t declined, probably because they’ve built smaller retirement funds.)
But most people in their 5Os cannot afford a traditional retirement, in the view of George Barbee, executive director of client services at the accounting firm, Price Waterhouse. They’ll need some earnings-a fact they should face “before they’re 70 and can’t work,” he says.
The silent enemy: inflation. If you retire on $30,000, you’ll need $44,000 ten years later just to pay the same bills, assuming that expenses rise 4 percent annually. In 25 years, you’ll need $80,000. A quarter of that money might come from social security, which rises with inflation. But the value of most pensions declines. If you don’t have earnings, you’ll need more from your savings every year.
How big should your kitty be? Here’s how to estimate the cost of underwriting 35 years of leisure in a world of 4 percent inflation. (1) Add up how much money you’ll need in the year you retire. (2) Reduce that by your income from pension and social security. The remaining money has to come from savings. (3) For every $10,000 you’ll need from savings, your kitty should contain $198,000 earning an average of 8 percent, says planner John Allen of Allen-Warren in Arvada, Colo. If your money earns only 6 percent, you’ll need $258,000 for every $10,000 you’ll draw. This assumes that you’ll gradually use up your capital over your lifetime. In the perfect financial plan, the check that’s written to the undertaker bounces.
If you haven’t saved that kind of money you cannot truly retire early. You’ll have to keep working (or your spouse will) to avoid surrendering your standard of living. Planners who work with early retirees carry these messages to the generation that’s coming up next:
Expect to slash your budget, especially if you’ll still be repaying your kids’ college loans. You can live on less by moving to a cheaper part of the country.
Don’t sell your home and rent. You’re too young and the future is too uncertain. If you have two cars and you’re both retired, sell one of them.
Wait as long as you can before dipping into tax-deferred retirement savings, says planner Jane King of Fairfield Financial Advisors in Wellesley, Mass. Leave these funds in your former company’s plan, if it offers you good investment choices. If not, roll the money into an Individual Retirement Account.
Don’t cling to your former company’s stock just because you feel loyal. It’s risky to have too much money invested in one place. Another investment to avoid: limited partnerships (now called “direct investments”). They tie up your money and may not deliver the promised income.
Planners disagree on whether you should pay off your mortgage. In one corner, Judith Lau of Lau & Associates, Wilmington, Dela.: “Paying up an 8 percent mortgage means you’re getting an 8 percent return,” she says. “To preserve your access to that cash, open up a home-equity line you can borrow from.” In the other corner, John Sestina, Columbus, Ohio.: “Paying off the mortgage is a bad move. The value of compounding your cash in various types of mutual funds will exceed the cost of the loan.”
Open up a home-equity line before you retire. Some banks lend only on earnings, not on retirement income.
To make your income stretch, up to half of your savings need to be invested for growth. Over most five- and 10-year periods, stocks outdo bonds by comfortable margins. Yet retirees as well as pre-retirees tend to shy away.
So here’s John Allen’s approach to stocks for ultraconservative retirees. Put enough money into short-term investments, like money-market funds and short-term bond funds, to cover your expenses for five years. With the rest, buy mutual funds invested in stocks and bonds. Every year, cash in enough shares to cover another year’s expenses, so you always have a five-year cushion. How big does your five-year “safe” account have to be? For every $5,000 you’ll need in the first year, put away $24,500 (assuming you’re earning 5 percent on the money and that your expenses rise by 4 percent annually). Less conservative retirees should be comfortable with a three-year cushion ($14,900 for every $5,000 in first-year expenses).
Don’t mourn any opportunities you may have missed in the 1980s. Says Allen, “Worry instead about all the opportunities that you may be losing now.”
Nurturing Your Nest Egg How long will $100,000 last? It depends how much you spend each year-and what return you get on the rest. This shows what happens if you make withdrawals that go up 4 percent a year to cover inflation. WITHDRAWALS YEARS MONEY WILL LAST INVESTED STARTING AT AT THE FOLLOWING YIELDS 4% 6% 8% 10% 12% $ 2,000 50 51 FOREVER $ 69,000 17 20 25 43 FOREVER $ 10,000 10 11 12 14 17 $149,000 7 8 8 9 10 ASSUMES A SINGLE WITHDRAWAL AT THE START OF THE YEAR.
