Retiring before 65 can be a challenge even for the folks that have their financial ducks in a row. Last week, an employee called into our financial helpline and asked me what he should be considering to retire early. He was 62 and wanted to retire in a year but he didn’t know of anyone in his professional or social circles that was retiring early and could give him advice. No one he knew was retiring before 65.
My response was that there was a reason for that – medical expenses. Unless a company provides a retiree medical plan that subsidizes health insurance premiums or allows group rates for insurance, a retiree under the age of 65 would need to continue their medical insurance with COBRA or secure a private health insurance policy on their own. Though the rise in the cost of health insurance to the average family slowed from a 9% jump in cost in 2011 to 4% in 2012 according to the Kaiser Family Foundation, budgeting for medical expenses is difficult. Here are a couple of suggestions I made to the anxious pre-retiree:
Work part time - When I suggested to the caller for him or his wife to work part time to either pay the medical insurance premiums or find a company that provided health care for part time employees, he wasn’t too keen on the idea. He said, “Doesn’t that defeat the purpose of retiring?” Of course, he is right. In most cases, working isn’t retiring. But in some cases it might work. I happen to live in a ski resort town and run into retirees on a daily basis who work part-time at one of the ski resorts or in the travel industry, whether it is in catering, a ski rental shop or running a lift. These retirees are very satisfied to work a few days a week and ski the other five.
Delay retirement until 65 – Unless delaying retirement is an extreme hardship, the pay off for working just 24 more months could be huge. Health insurance premiums upwards of $1000 a month are just part of the picture. You also have to consider the double whammy of a drain on your finances.
Let’s look at an example –
If you retire at 63 with $250k in your 401(k) earning 6% on your balance and withdrawing $1500 a month to live on (with 3% inflation increase), you would run out of money in 17 years – when you are 80 years old. With the average life expectancy of a 63-yr old being a few years longer, this plan might not work.
Retire at 65 and you have two more years to save (and for your money to grow at 6%). Your 401(k) balance at retirement is now $300k instead of $250k in your 401(k). Using the same payout example, your money will not run out for 22 years since your balance is higher. You are also 2 years older so your 401(k) would pay you $1500 a month (with 3% annual increases) until age 87 – seven years longer. We didn’t even take into account the savings on the out-of-pocket health insurance premiums for two years.
Uncertainty around health care expenses is a barrier to retiring early. For those employees whose company offers a retiree medical plan, it makes all the difference in the world even if they have to share costs. Though we can never ultimately predict every expense we’ll ever have in our lives, we can try! We do the best we can to prepare for every obstacle when it comes to financial planning. In the case of the caller to the helpline, he is going to wait even though he really wanted to retire on his 63rd birthday. In his case, he doesn’t really need to wait until 65 because he has sufficient assets to fund his retirement income stream. However, he is going to wait until 63 ½ so he can pick up a little certainty at least for 18 months of his life with COBRA health insurance from his company – better safe than sorry.