INTRO…
The American dream is to retire soon and retire well. I mean, who wouldn’t want to figure out a way to permanently put work behind them, get that early retirement, and spend the rest of their days traveling, hanging out with friends and family, chasing and developing different hobbies, and relaxing? I know I would.
In the past, early retirement was an option for only those in good financial standing. Most considered it a lifetime achievement award for good saving and meticulous planning. Today, many Americans are being pushed into early retirement. For some, the reality of retirement is more of a nightmare than a dream.
One might be pressed to ask, why the push for early retirement? Statistics show early retirement is pervasive in the auto industry. The manufacturing industry has taken several hits over the past
two to three decades. Many American manufacturing companies are finding it increasingly difficult to balance the books. The prominent agenda at every board meeting is need to trim costs. One of the easiest ways is with furloughs and layoffs.
THE UGLY TRUTH ABOUT EARLY RETIREMENT…
Unfortunately, the majority of workers costing these financially strapped companies the most money from a compensation standpoint are those who have been with the company the longest. They are the longest tenured, perhaps the best at what they do, and as such, have been rewarded over the years with merit increases and generous bonus structures and incentive pay plans. By virtue of their longevity with the company, most are in their 50’s.
If you are one of those individuals, your employer may suggest early retirement or adamantly nudge you into looking strongly at taking it. Yes, the decision to retire now versus later, comes with its perks – most obviously an end to having to wake up daily and answer to authority. But, is it right for you? What happens to your 401k plan and how does this shift in retirement plans influence your long term financial goals and sustenance post retirement?
First, though a sore topic sometimes depending on the reader, you have to take your age into consideration. Again statistics show most individuals wait until they are between the ages of 60 and 65 to retire. This coincides with when (as stipulated by the laws governing retirement) most can dip into their 401k plans, Individual Retirement Accounts (IRAs), and collect Social Security. If you are 54 years old and had planned to work till the age of 65, 11 years is a long time. That is an extra 11 years of a steady income, 11 years of continued contributions (and matching contributions) into your 401k, and 11 years of being able to fund your IRA. You anticipated having that extra time and all of that is potentially being negated by one decision.
You may consider the option of taking an early withdrawal from your 401k plan. Unfortunately, that comes with its own set of headaches as the rules in place (at age 54) are not in your favor. You’ll have to account for penalties and they are no fun. There is 10% charge for early withdrawals from your 401K. This means for instance, if you’ve built your account to $1m, you’re immediately charged $100,000.00 as a penalty for withdrawing your million.
On the backend, your 401k contributions and all matching contributions over the years are tax sheltered, until used. This means you’ve been able to make these contributions pretax over the past few decades. Upon early withdrawal, you will not only be charged an early withdrawal fee or penalty if you will, but you must pay taxes on those withdrawals. Those fees and taxes could begin to add up very quickly.
Depending on where you are financially and how much you do in fact have saved up, a 10% early withdrawal fee may not at first glance, seem like it adds up to much, but it is definitely money you are losing. Most importantly, while you weigh the option of taking an early retirement, you need to bear in mind and account for those added years of productivity and contributions, which are now being lost. Remember, the plan was to stay in the work force till the age of 65. At 54, that’s 11 years of life financially unaccounted for. It’s best you have a plan mapped out as soon as you can, prior to accepting early retirement.
HOW LATE IS TOO LATE?
I’m no longer an itty-bitty kiddy in a cribby myself. I definitely do wish I had taken the idea of investing and saving for the future a lot more seriously earlier. But there’s never too late a time to begin. In addition to my bride and me making contributions to our company 401k’s, we also have accounts with Fundrise where we are invested in various private real estate properties, as well as an account with Betterment. Betterment is a robo-advisor that tailors your retirement or savings accounts to you based on questions you answer at account initiation.
TO ACCEPT OR REFUSE EARLY RETIREMENT
While employers can and do suggest early retirement, the final decision to retire now or later lies with you. You have the option of politely refusing to accept request. However, the offer was made for a reason. As a seasoned and tenured employee of your company, you are likely costing your employer a good chunk of money. You are paid more, or should be getting paid more than recent graduates or newer, less experienced employees. Sometimes however, you do not get the luxury of refusing the request. You could be asked to retire, or else…
If you choose not to accept early retirement, you may still find yourself completing the unemployment questionnaire as your employer was left with no choice. This does however; give you the opportunity to seek out something new. This would of course be the ideal scenario, especially if your new employer offers a 401k of their own. You can simply rollover the funds from your previous employer’s 401k plan to your new plan provider.
You’ll have to go through the fun process of monitoring your funds and investments switch hands, but most companies today do a good job of making a rollover not as painful as it used to be. This way, you can continue working until you reach your planned retirement age and live off your retirement without the cloud of risks and penalties hanging over your portfolio.
All of these life changing events could however be taking place at an age when you were truly nearing retirement. If that’s the case, you may be inclined to take a totally different approach or have a uniquely different outlook to what could be viewed as a seismic shift in plans by most. Did you anticipate working 3 more years for instance, instead of 11? If that’s the case, only other unanswered question is, have you properly managed your emergency and other savings up to this point? IF you answered yes to both of those, you belong to an elite company of super savers, and may have enough personal savings to financially survive those 3 years, without having to dip into your retirement accounts early. Go you!
Early retirement, especially considering the circumstances leading up to the decision (or forced decision) to retire, could be either be truly joyous or highly stressful for the would-be retiree. If you find yourself faced with the decision to take an early retirement, be sure to take a step back and look at the situation through a clear lens. This would a great time to set aside wants, and only consider your needs and the needs of those closest to you, and would no doubt be affected positively and/or negatively by your decision. Yes, you absolutely should want to live a work free, stress free life. I want that for you too. The question however is, can you afford to? Answer that question with a clear conscience and you are likely to be making the right decision.
Also, if you are not in a high pressure situation and do not have to accept or deny early retirement immediately. Take the time given. Most employers should give you at least a few days to maul the decision over. Most definitely speak to family, but also a financial advisor before making any irreversible commitments.
HELPFUL TOOLS
Below are some of the tools I am using today as various types of investments to not only diversity my portfolio, but also provide me with passive income for many decades to come.
- Fundrise – the pioneer online real estate crowdfunding company that lets average (non-accredited) investors invest into private commercial and residential properties. With a $500 minimum for the starter portfolio, the company’s main investment vehicles are electronic real estate investment trusts (eREITs) and electronic funds (eFunds). I have nothing but good things to say about Fundrise. I have been investing with the company since Jan 2019 and have a long-term outlook specifically as regards to my FundRise account. Do feel free to check out the company here, and make an informed decision of your own
- Betterment is a robo-advisor site that enables investors to invest in stocks and Exchange Traded Funds (ETFs) with the help of their asset allocation tool. Just answer a few questions around age, income, goals, and projected years till retirement and Betterment builds a portfolio tailored to you and you only. If you don’t want to get bugged down with trying to decide what stocks or ETFs to try out as you begin your investing journey, I suggest you take a look at Betterment.
