While the employment situation has brightened somewhat since the unemployment rate nearly hit 15% in April, it’s still considerably worse than it was before the coronavirus pandemic hit. And things could be about to get worse for many high-earning white-collar employees.
In a recent article in The Wall Street Journal, the CEO of Discover Financial Services noted that thus far, the economic impact has largely been to lower-wage workers. “Many white-collar layoffs are still to come,” he stated in the article.
Challenges for Older, Higher-Paid Workers
Layoffs can be especially difficult for older, highly compensated employees who get let go, and planning for early retirement may become a necessity. It has been estimated that for every ten thousand dollars in salary earned, it can take one month to find a job. Given the challenge of finding a high-paying job late in their careers, some white-collar employees in their late 50s or early 60s might decide to just go ahead and retire instead.
Additionally, some businesses are offering high-earning employees early retirement packages in an effort to cut costs and realign their workforces. This may serve as another incentive to retire instead of looking for another job. (Read my previous blog about weighing the pros and cons of taking early retirement packages.)
Factors to Consider
If you’re currently thinking about retiring early, there are a number of different things you should think about as you build a financial plan for early retirement:
- Your financial resources— It all starts here because without adequate retirement savings, you probably can’t afford to retire early. The big question, of course, is how much money do you really need to retire comfortably? This is a highly personal question that’s different for every individual and couple. For example, do you plan to travel extensively and live lavishly in retirement? Or would you be happier staying close to home and living a more frugal retirement lifestyle?
One rule of thumb sometimes used to help answer this question is known as the 4% Rule. This rule assumes that your retirement portfolio will last as long as you live if you withdraw 4% or less of your retirement assets each year, adjusting for inflation annually. If you think you need $40,000 a year from your portfolio to augment Social Security benefits and other retirement income, a retirement nest egg of $1 million could be enough for you.
As you consider this, don’t forget that withdrawal of pre-tax dollars from retirement accounts are treated as income. Lastly, putting together a retirement paycheck as we outline in this post is a key exercise in planning for retirement.
- Paying for healthcare— This is one challenge that early retirees sometimes overlook. Medicare eligibility doesn’t begin until 65 years of age so you need to plan for how you’ll meet healthcare expenses if you retire before you turn 65.
One option, of course, is to purchase a health insurance policy on the ACA exchange at HealthCare.gov. If your former employer offers retiree healthcare benefits, be sure to look into these as well, including cost and coverage. When we build financial plans that include early retirement, we typically assume much higher healthcare expenses prior to Medicare eligibility if an employer healthcare benefit isn’t available.
- Your emotional state— The non-financial aspects of retirement are often just as important as financial considerations. This includes the emotional side of things. For example, some people who are closely defined by their jobs struggle with their identity after leaving their companies. For others, the workplace represents their main social outlet.
If you fall into either of these categories, you should give careful thought to how you’ll deal with the emotional impacts of retiring early. For example, is there a social cause you can take up and from which you can derive a sense of identity? Are there environments where you can meet people and make new friends so you don’t fall into social isolation?
- Your retirement lifestyle— How much thought have you given to what retirement is actually going to looklike for you and your spouse? Or put another way: What are you going to do to occupy your time each and every day? Many new retirees go through a difficult adjustment period as they transition from a demanding and time-consuming career to waking up each day without job responsibilities to attend to.
Research has suggested that the happiest retirees have one or more core pursuits that occupy their time. These include hobbies and activities they’re passionate about and that provide a sense of purpose and opportunities to socialize. It doesn’t matter what your core pursuits are — the important thing is that you have some to help provide structure to your retirement lifestyle.
Start Planning Now
The time to plan for these and other retirement-related issues is before, not after, you make a decision about retiring early. If you’re not comfortable doing this yourself, find a financial advisor who can help. Doing so could help you avoid some of the challenges and pitfalls faced by many early retirees.