Retirement Planning

Planning for the New Retirement

You remember your parents or grandparents counting down the days to age 65 when they could enter their “golden years” and finally enjoy life a little. But, the truth is you don’t want to retire like they did. Today, there’s a new self-directed retirement model, and many people are ready to retire early.

If you’re one of them, you’re not alone. According to Pew Research, 28.6 million baby boomers reported retiring from the workforce as of the third quarter of 2020. That’s an increase of 3.2 million over the same period in 2019.*

The joys of early retirement

Whatever the reason, many people are retiring early, starting new careers, volunteering, learning new skills or ticking items off their bucket list. And, why not? Chances are you’re healthy, in a good frame of mind, and ready to actively participate in the things you want to do. Maybe you watched your parents miss out on that opportunity, and you don’t want that happening to you.

The big concern

If you’ve had the itch to retire early, there might be one thing holding you back: The fear of running out of money. And rightly so. Retirement is expensive, so it follows that early retirement has an even bigger price tag. At age 50, your retirement could easily last 35 or 40 years. That’s a long time to pay for your current lifestyle with your Social Security benefits and qualified plan money. Even if you cut back a little, you still have to plan for many years of housing, food, transportation and leisure. And, then there’s health care. A healthy 65-year-old couple that retired in 2019 is expected to spend more than $387,000 in health care costs during retirement, and that doesn’t include long-term care.**

Retirement’s hidden costs

If that isn’t enough to think about, the hidden costs of retirement can take an unexpected chunk out of your retirement money. Inflation, taxes and the volatility of your investments aren’t always top of mind, but they do add up over time. Your trusted financial professional can help you navigate through some of these hidden costs. But one thing they can’t help with is your health — the retirement wild card. A lengthy illness can wreak havoc on your retirement unless you’re protected through a chronic illness rider on your life insurance policy that lets you access your life insurance benefits while you’re still alive. You might also consider purchasing a long-term care policy.

Planning for retirement income

If you want to retire early and not run out of money, you need to start your retirement savings plan early. The best time to start was 20 years ago, but the second-best time is today. The longer you can let your assets grow, the better. There is a time value of money and the longer you give it, the larger nest egg you’ll have when you’re ready to retire. If you want a steady stream of guaranteed income, you might consider investing some money in an annuity, which offers monthly payments for life. The bottom line is that there are products available that can help you mitigate the costs and risks of early retirement.

Social Security

Like annuities, Social Security gives you a guaranteed monthly benefit for life. But there are some decisions to make. You can start collecting your benefit at age 62 but expect up to a 30% decrease in your monthly benefit than if you waited until your full retirement age. After that, your benefit increases by 8% a year up to age 70, when you can begin taking your full benefit. There’s no right or wrong answer in deciding when to take your benefit. Your decision needs to be individually tailored to your financial and health situation.

Qualified Plans and IRAs

If you plan to retire early, you’ll probably need significant retirement savings, typically in the forms of qualified plans, such as a 401(k) or 403(b), and traditional and Roth IRAs. But to avoid taxes and tax penalties, you need to wait until you’re age 59 ½ to begin taking distributions from these accounts. However, you can withdraw the money you contributed to your Roth IRAs at any time without paying taxes or penalties. If you’re older than 59 ½ and your account is at least five years old, you can also withdraw earnings with no tax or penalty. And if you’re younger than 59 ½ or don’t meet the five-year rule, there are withdrawal exceptions for such things as a first-time home purchase and college expenses. With this kind of flexibility, you may want to include Roth IRAs in your retirement plan.

SECURE Act and Required Minimum Disbursements

The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law in 2020 to encourage increased retirement savings and to motivate businesses to offer more and better retirement plans. But another important provision increases the age from 70 ½ to 72 to take your initial required minimum distribution (RMD) from your retirement plan. The Act also allows you to keep making contributions indefinitely to your traditional IRAs. These provisions can help you add more funds to your retirement accounts, which will grow a year-and-a-half longer before you have to begin taking money out. Additionally, non-spouses who inherit IRAs generally have 10 years — instead of their lifetime — to take disbursements and deplete those accounts. Exceptions to this rule include minor children, persons with disabilities or chronic illness, and people less than 10 years younger than the plan participant.

Diversified Retirement Income Sources

An approach I like is what we at Penn Mutual call a Diversified Retirement Income Sources (DRIS) plan. The worst time to take a distribution out of your equity-based investment account is in a year when the market drops. A DRIS allows you to access the cash value from your permanent life insurance policy on an income tax-preferred basis to use years after a market downturn. This gives your investment funds a chance to recover when the market does. It’s nice to have a second plan in place with funds that are not correlated to the equity market.

It can be done

So after considering everything, you’ve decided to take the leap and retire early. Although you might feel that you have a good grasp of the opportunities and challenges that lie ahead, don’t do it alone. You need a trusted financial professional to guide you through the process. Sure, you have plenty of options for what to do, but proper planning can give you even better options. To learn more, contact a financial professional today.


This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. Always consult your legal or tax professionals for specific information regarding your individual situation.

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