The National Bureau of Economic Research (NBER) has been comparing data gathered this year to learn how labor markets are being affected by this pandemic and they have concluded that Americans are choosing to retire early.
The economists reported the employment-to-population ratio declined sharply from January to early April. In January, 60 percent of Americans participating in a survey were working. By early April, that number had declined to 52.2 percent.
Some issues to consider
It’s not difficult to understand why Americans are considering or pursuing early retirement. During the past few months, many have become comfortable at home. It’s possible companies, which are offering early retirement packages to reduce overhead, also contribute to the decision.
Before deciding to retire early, anyone contemplating that course of action should carefully consider these issues:
1) How much will health insurance cost? For anyone too young to be eligible for Medicare, health insurance is a serious concern. Options available to younger Americans include:
- A spouse’s employer-sponsored plan. People with employed spouses may have the option to participate in their partners’ employer-sponsored health plan.
- Federal Health Exchanges. Open enrollment for 2020 is over, but people who are newly out-of-work may qualify for a special enrollment period.
- Continuation of health coverage. The federal government requires companies with 20 or more employees to offer health coverage identical to that offered to an employee while employed. This option, known as COBRA, can be quite expensive.
2) How much income will Social Security benefits provide? Anyone who was born after 1960 has a full retirement age of 67. It is possible to claim Social Security benefits early though, after age 62. Early claimants typically receive lower monthly benefits. For example, a person who would have received $1,000 a month (full retirement benefit) at age 67 and decides to retire at age 62, may receive $700 a month.
3) How much income will your savings generate? It’s important to assess how much income your retirement and other savings could provide if you retire early. Our Live Well Plan is designed to help you determine how much you can safely withdraw from your investment portfolio.
4) Can you take withdrawals without owing a penalty tax? When people take distributions from 401(k) plan accounts, IRAs, and other qualified savings plans before age 59½, they may owe penalty taxes – and that can lower the amount of income their savings will generate over the long term. The CARES Act made it possible for plan sponsors to loosen these restrictions temporarily. As a result, retirees who are younger than full retirement age may be able to take distributions without paying penalty taxes for a limited period of time.
5) How much tax will be owed each year during retirement? The amount of tax owed may vary from year-to-year depending on the distribution strategy adopted. Also, the amount of income taken each year may affect the tax status of Social Security benefits.
6) What does the company’s early retirement package offer? If your company offers an early retirement package, evaluate it carefully. Be certain you understand exactly what is included. The possibilities include:
- Severance pay
- Salary continuation
- Bridging payment
- Pension lump sum payout
- Health insurance coverage
- Life or disability insurance coverage
- Any accrued vacation or unused sick leave
In addition, ask about the consequences of not accepting the package. If your company is in financial straits and early retirement is an effort to remain solvent, it’s possible you may experience a layoff with less generous benefits in the future.
In Summary
If you think early retirement may be the right choice for you, creating a Live Well Plan can help you make this difficult decision. We’ll help analyze your Social Security and Medicare options so you may make an informed decision. We can also help you understand investment, cash flow, and tax planning choices, so you are confident about your retirement decision.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 10 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Sources:
https://www.healthcare.gov/coverage-outside-open-enrollment/special-enrollment-period/
https://www.ssa.gov/benefits/retirement/planner/agereduction.html
https://www.irs.gov/publications/p590b#en_US_2019_publink1000231057
https://turbotax.intuit.com/tax-tips/retirement/tax-strategies-for-an-early-retirement/L6U8FKvbN
https://money.usnews.com/money/retirement/articles/how-to-evaluate-an-early-retirement-offer