Employers typically provide several benefits such as health insurance, life insurance, long-term disability insurance, and other benefits. These benefits can be very important to your overall financial health. These benefits are lost if you retire before the age of 65. After losing your benefits due to early retirement, most people are left on their own to go out and find the benefits needed in the private market which can be very expensive.
For individuals with pensions, something to think about would be to make sure that you are fully vested in your pension and that you understand how your benefit will be calculated. We have witnessed scenarios play out where people were fully vested, they had the proper years of service, were the proper age, however, began receiving benefits before age 65 and the benefit was reduced for the rest of their life.
Many people depend on Social Security as part of their retirement plan and strategy. The earliest you can receive Social Security is age 62. If you retire before age 62, there will be certain years where you are not eligible to receive it. However, if you do take it at 62 or before your full retirement age, there could be several years where you don’t receive a benefit. If you start receiving your benefit early, it could reduce the amount that you receive for the rest of your life, which could impact your long-term financial plan. The benefit is a calculation based on your 35 highest-earning years so if you have not worked for 35 years before you decide to retire, every year under 35, they will count as a zero and could affect the calculation of your benefit going forward. One large factor that we like to talk about with clients who are considering an early retirement is what is called the two-for-one phenomenon. Basically, what this means is that for every year that you retire early, it’s like two years coming off your plan. What that means, is it’s one less year that you were contributing towards your retirement and one less year that your assets are growing but, at the same time, it’s also one more year that you will be pulling money out of your savings. There are a lot of factors to look at when you’re considering early retirement and it’s important to make sure you understand all aspects of your decision.
Jay McGowan, CFP®, CPA, PFS
Senior Vice President
Director of Financial Planning
Email Jay McGowan Here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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