You Will Probably Retire Earlier Than You Expect

Lynn Nolan

By Lynn Nolan | August 15, 2014

Data from Social Security and the Employee Benefit Research Institute (EBRI) show that people retire much sooner than they plan to. 49% of retirees leave the workplace earlier than planned for a variety of reasons ranging from personal and family health to layoffs and simple personal choice.

There are many things in life you don’t have control over, but there are steps you can take now to give yourself more options.

Step 1. Save more now.
The one obvious step, if you are to retire earlier than you plan, is that you need to start saving more money now. Penn Mutual has put together a marvelous infographic, “Countdown to Your Retirement,” that lays out examples of what you should be doing at each life stage, as you are ten, 20, 30, or even 40 years from retirement. Take a look at that infographic and subtract ten years from your countdown, imagining that your retirement is ten years closer than you plan, and see how that change might reshape your retirement planning.

What would happen if you were forced to retire at the age of 60? What impact would that have on you and your plans for retirement? Accelerating your savings plan now can help you be prepared for the unexpected things that happen in life.

Step 2. Delay taking Social Security if you can.
More people start taking Social Security at 62 than any other age, which may not be the best strategy if you anticipate a long retirement. You get the highest payment if you wait until age 70 but even delaying it one year can make a difference.

Social Security is perhaps one of the best “annuities” around, but you have to plan carefully to maximize your benefits. Taking Social Security at an early age will lock you in at a lower monthly payment, reducing the payment 25 to 50 percent over what it would have been had you waited. Delaying past your full retirement age provides an eight percent increase in your payment for every year you wait up until age 70. There are few investments in this world that will earn you a guaranteed eight percent return! Plus, cost of living adjustments are added on as well.

Penn Mutual financial professionals have access to a tool called the Social Security Explorer, which they can use to help you run different scenarios to maximize your Social Security benefits. Circumstances vary from person to person, and working with a professional can help you fully understand your choices. In some cases, it might make sense to take the payments early rather than wait.

Even if you have to retire early for whatever reason, you should avoid taking Social Security starting as long as you can. For most people it makes sense to delay taking Social Security as long as possible.

Step 3. Consider accessing the cash value of your life insurance policy as a bridge to retirement.
If you need to retire early, by health or circumstances, the cash value of a permanent life insurance policy can provide a valuable bridge between early retirement and when you take Social Security. A lot of people think of life insurance only for its death benefits, but it offers some important living benefits as well.

A permanent life insurance policy builds up cash value that can be accessed through policy loans or withdrawals. The key is to have a policy that you have properly funded, even over-funded, so that you can start drawing down tax-free withdrawals of your cash value to fill that income gap while you delay taking Social Security. It’s important to note that if you borrow from your policy, it will reduce the death benefit unless you pay the loan back. If you take cash withdrawals, the amount you paid into the policy can be taken with no tax1. If you take out gains or earnings, those payments are taxable.

There are some strategies you can use to accelerate the growth of your policy’s cash value, which we may cover in a future blog post.

Using your policy’s cash value for retirement is not for everyone but it is a strategy you should talk over with your financial adviser.


1 As long as the policy is not a MEC (modified endowment contract)

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