In Perspectives

Studies show that most Americans say they hope to retire at age 62, even though the age in which you can receive full Social Security benefits from the federal government is 66 or 67 years old depending on when you were born.  Between 2019-2021, more than twice as many people retired than normally would have done so over a similar two year span. While the pace of early retirees is slowing in 2022 due to inflation and recent declines in the investment markets, many people still say they want to retire early. If you’re one of those people, here’s what you need to know.

What financial elements do I need to have in place to retire early?

One of the best things to do as you contemplate retirement is to take stock of your current financial situation. Put together a personal balance sheet consisting of assets such as your home, investment accounts, retirement accounts, bank accounts and any investment property such as real estate.  Then list any liabilities you may have such as mortgage, home equity line, credit card debt, auto loan, etc. From there, compare and contrast the two; how do you look from a financial health standpoint? Do you have ample assets over and above any debt obligations?

The next item to really scrutinize is your spending and income.  What is fixed and what is variable? How will your spending differ in retirement? What does your income look like today and how will it look when you retire? What is your Social Security benefit? Do you have any pension funds that will help out?

Finally, you will want to marry all of these items together –  balance sheet, income and expenses. Hopefully by going through the spending and income exercise you got a good feel for what income you will have in retirement and what your expenses might look like. Any excess cash to cover your expenses will need to come from your portfolio of assets. In an ideal world, your withdrawal rate from your portfolio should not be greater than five percent annually. By keeping your withdrawal rate below that level, you will hopefully allow your principal portfolio to stay intact and even grow with solid investment performance.

I’ve read that my retirement portfolio balance should be ten times my final year’s salary to ensure I’m okay financially to retire.  I had that level in 2021, but it’s lower now in 2022. Does this mean I should wait to retire?

There is a ton of literature out there regarding multiples of salary, percentages, etc. and those are all decent guideposts but the truth is that every situation is different. You really need to look at those items above all in coordination to make an informed decision.

When it comes to drops in the market, while it is never fun to experience these downturns those are events that need to be factored into a long term investment portfolio. If you retired last year, my hope is that you set aside 3-5 years’ worth of income needs from the portfolio in a very conservative, short duration fixed income investment. These investments while likely modestly negative this year, have held up much better than stocks and longer dated bonds. Having this pool of more conservative dollars provides you with time for your more volatile stock investments to come back as the market recovers.

On the flip side, if you remained in all equity funds after retirement and need substantial dollars each year from your portfolio to live on, you are faced with some difficult decisions. You will really need to evaluate your portfolio and potentially look at obtaining some type of outside income to supplement your lifestyle in an effort to prevent having to take more out of your portfolio at these substantially lower levels.

Our hope would be to have discussions with individuals and families about retirement prior to the actual event. This way we can make sure the portfolio is set up properly to distribute cash for living expenses in any market environment and we can really evaluate if you can afford to retire.

What about taking Social Security benefits if I retire early?  Should I take them as early as possible or wait until I’m closer to full retirement age?

Again, I sound like a broken record but every situation is different. Depending on your cash flow needs and the types of assets/investment accounts you have, it may make sense to elect to take your benefit early, wait until age 70, or collect any time in between. The typical suggestion is to wait until at least full retirement age in order to lock in your full benefit amount, especially if you are married and you were the primary earner. This will guarantee your spouse your full benefit if you were to predecease.  However, waiting until age 70 will maximize your annual lifetime and survivor benefit and may be right for you if you are healthy and have other cash flow or assets to fund your lifestyle expenses until you collect.

It is very difficult to make the Social Security election in a vacuum as it really should be made in coordination with your overall financial plan taking into account your health history, other income sources and pools of assets.  For married couples, it is important to analyze collection options for each spouse to create a coordinated collection strategy that best fits with your overall needs.

Some of my friends who retired early say they miss working – but they’re concerned about going back to work and changing their retirement distribution plan. Is it hard to stop taking money from my retirement account if I decide to go back to work and no longer need those funds?

Generally speaking if you are under age 72, it is pretty easy to stop taking money from your retirement investment account regardless of whether it’s a 401k, 403b, IRA or some other plan.  This should be as simple as contacting your advisor or provider and shutting off the distributions.

However, Social Security can be a more challenging issue. You are able to withdraw your Social Security application within 12 months of the date you first claimed your benefits. However, you would then have to repay every dollar of Social Security benefit you had received in the initial collection period. Essentially, Social Security treats this as if you never applied for benefits in the first place.

Another Social Security scenario is if you claimed benefits prior to your full retirement age, continued receiving the benefits and then obtain employment again. In this scenario, if you earn more than $19,560 you can expect to have one dollar withdrawn from your Social Security benefit for every TWO dollars earned over the limit. Ultimately, when you reach your full retirement age, your Social Security payment will be recalculated to give you credit for the portion of your benefit that was withheld.

Bottom line – it is easy to stop and start distributions from a retirement account but more complicated when it comes to Social Security.  

What other financial planning steps should I take if I want to retire early and don’t want to worry about running out of money in my “golden years?”

The most beneficial thing you can do as you contemplate retirement is to speak with a financial advisor prior to making any big decisions. An advisor can walk you through your current financial situation and then help you look ahead into retirement. This process will help you determine if you can truly afford to retire. From there, the advisor will be able to assist you with structuring your investment portfolio, navigating Social Security, healthcare, including Medicare and long-term care and ultimately put you on a good path to retirement. We have many great advisors here at Legacy Trust who can assist you with this process.

Another item to look into and confirm is your estate plan. This may seem like a daunting and unenjoyable task but it is better that you handle this when you are competent and thoughtful rather than after a significant health event.  Trust me, your loved ones will thank you for the planning.

Brian Balke, CFP®, CIMA®
Vice President, Wealth Advisor

 

Legacy Trust and Your Right to Financial Privacy

At Legacy Trust we have established policies and practices that respect the financial privacy of all individuals who use our trust company. We believe it is critical to comply with the laws and regulations designed to secure your financial privacy. Your relationship with us as our client is very important to us, and we want you to understand our policies and practices about handling your information.

This Policy applies to you – This Policy applies to our relationships with individual clients who inquire about or obtain products or services from us for personal, family and household purposes.

Strict security measures – We take the security of information very seriously. We have established security standards and procedures to prevent access to client information. We maintain physical, electronic and procedural safeguards to guard client information.

Limited employee access – We have established procedures to limit employee access to information to only those employees with a business reason for accessing such information. We educate our employees about the importance of confidentiality and client privacy. We take appropriate disciplinary measures to enforce employee responsibilities regarding client information.

Why we collect information – We collect information about you to:

  • accurately identify you;
  • protect and administer your records, accounts and funds;
  • help us design or improve our products and services;
  • understand your financial needs;
  • save you time when you apply for new products and services; offer you quality products and services; and comply with certain laws and regulations;

We collect information – We collect and maintain your personal information so that we can provide investment management and other services to you. The types and categories of information that we collect and maintain about you include:

  • Information we receive from you to open an account or provide investment advice or other services to you (such as your home address, social security number, telephone, financial information and investment objectives).
  • Information that we generate to service your account or from our transactions with you (such as account statements and other financial information).
  • Information on your transactions with nonaffiliated third parties.

We have established procedures so that the financial information we collect is accurate, current and complete. We are committed to work with you to promptly correct any inaccurate information.

Our selective sharing of information – In order for us to provide investment management and other services to you, we do disclose your personal information in very limited instances, which include:

  • Disclosures to nonaffiliated companies as permitted by law, including those who help us service your account (such as providing account information to brokers and custodians).
  • Other limited disclosures as permitted by law, for example, required reports to government entities.

We do not share your information with third parties for marketing purposes. We do not sell your information.

Former clients – If you end your relationship with us, we will continue to adhere to the privacy policies and practices described in this notice.

×
USA PATRIOT Act

Important Information About Procedures For Opening A New Account

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account.

What this means for you: When you open an account, we will ask for your name, address, date of birth and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.

We apologize for any inconvenience this may cause; however, federal law prohibits us from waiving these requirements.

×
You are leaving the Legacy Trust website

Legacy Trust makes no representation concerning nor is it responsible for the quality, content, nature, or security of any hyperlinked site. This link is provided as a convenience and does not imply any investigation or endorsement of the site.

×
Warning!

Do not send sensitive information over email. If you need to communicate sensitive information, please call us at 616.454.2852

×

The views expressed on Linkedin do not necessarily reflect the views of Legacy Trust

×