Take early retirement? As the old saying goes, it’s a good job if you can get it. But as a respected Harvard economist notes, too many Americans are get it without saving enough for it.
Late-career Americans have faced a big temptation during the pandemic: With office life reduced to remote work and the stock market pushing up 401(k) accounts, early retirement has become one of the terms the most searched on the web.
So why is this plan, in the words of economist Laurence Kotlikoff, “one of the worst financial mistakes” you can make?
For starters, the market has since pulled back, wiping out many of the gains from the pandemic and waking up many to their dreams of early retirement.
But the reasons for Kotlikoff’s skepticism run deeper.
Few things expose his financial habits like retirement planning. Aggressive, ritual savers who start early are rewarded with reliably growing account balances, supercharged by dividend reinvestments and compound interest.
But the reality is that millions of Americans simply aren’t saving enough for traditional retirements, let alone the early exits envisioned by 50-somethings – a decision Kotlikoff says they’ll “regret” unless they don’t. adjust their expectations or abandon the plan altogether. .
“We are, as a group, bad savers, making early retirement unaffordable,” Kotlikoff wrote in a guest column for CNBC. “Financially speaking, it’s usually a lot safer and a lot smarter to retire later.”
It should be noted that Kotlikoff ends his argument by stating that he plans to “die in the saddle” because he loves what he does. But those who are tired of climbing the corporate ladder or reporting to a manager may have different plans for their golden years.
How many are really ready for it?
A recent Federal Reserve survey found that the median savings in Americans’ retirement accounts was $65,000. Savers aged 55 to 64 had median account values of around $134,000, well below what they would need as life expectancies rise, inflationary pressures persist and rising healthcare costs borne by patients is devastating.
Underestimating health expenditure
A study conducted earlier this year by Boston College’s Center for Retirement Research found a significant disconnect in how future retirees view the effects of market volatility and longevity when calculating their post-retirement plans. work.
The report found that many overestimate the effect of market fluctuations and pay less attention to the length of their life and the impact of that longevity on their finances. Unforeseen health care expenses – not to mention long-term care – are a major drain on retirement funds.
The study data, concludes author Wenliang Hou, “confirms the importance of longevity and market risk, underscoring the need for lifetime income either through social security or private sector annuities. Finally, long-term care is also a major risk faced by retirees, but which they often underestimate.
Fragile social security
There may be encouraging signs in the federal government’s main social safety net. Social Security payouts are rising in 2023, and several rule changes will boost recipients who have been waiting to tap into the system.
But Social Security is currently on a timer. Without changes at the federal level, economists estimate that the main fund supporting Social Security will be weak by 2034. Recipients could see less than 80% of the benefits they expected.
Economists have long warned against overreliance on Social Security, and many are urging investors to build retirement plans that assume the program will be gone.
Kolitkoff’s and others’ top advice when it comes to retiring or collecting Social Security benefits is to wait and instead consider increasing your savings and investments while you keep working. The extra time will keep your investments working harder and longer, and delaying Social Security benefits means a bigger monthly payment down the road.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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