Should I Retire Early?

Americans are choosing to retire early.

Economists Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber associated with the National Bureau of Economic Research (NBER) have been comparing data gathered in January and April 2020 to learn how labor markets were affected by the crisis.¹

They shared their work in Labor Markets During the COVID-19 Crisis: A Preliminary View. 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. The authors explained:¹

“…this decline in employment is enormous by historical standards and is larger than the entire decline in the employment to population ratio experienced during the Great Recession…

…we see a large increase in those who claim to be retired, going from 53 percent to 60 percent. This makes early retirement a major force in accounting for the decline in the labor-force participation…

…for each part of the age distribution, a larger fraction of the survey population now claims being retired. Hence, even for those that are well before retirement age, we see a large increase in early retirement. Moreover, a notable jump in the difference occurs at age 66 which is the first year people can claim retirement benefits without penalty from the Social Security Administration (SSA).”

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. In addition, the risks associated with many types of work in the midst of the COVID-19 pandemic are unappealing. 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, especially during a pandemic. 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.²
• 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.³

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, reports the Social Security Administration.⁴

3. How much income will your savings generate? It’s important to assess how much income your retirement and other savings will provide if you retire early. Sources of retirement income may include benefits from pension plans, distributions from 401(k) plan and IRA accounts, withdrawals from non-qualified savings accounts, and income from Social Security benefits. Some people have other sources of income as well.

If you need help deciding how much income to safely withdraw so you don’t run out of money during retirement, or you’re uncertain which accounts to tap into first, get in touch with financial professional.

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

Contributions to Roth IRAs may be withdrawn at any time tax-free and penalty-free at any time, as long as certain requirements are met. However, when earnings are distributed before age 59½, taxes and penalties may be owed.⁶

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.⁷

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:^{8, 9}

• Severance pay
• Salary continuation
• Bridging payment
• Pension lump sum payout
• Health insurance coverage
• Life or disability insurance coverage
• Any accrued vacation
• Any unused sick leave
• Outplacement services

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.⁸

If you think early retirement may be the right choice for you, let us know. 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.

Sources:

¹https://poseidon01.ssrn.com/delivery.php?ID=707091125114113026100091122106011077118020024084061089000004119106020064002075099096026057102032006102108123122117122086106009038034045078021109101121110068091120095081028071014073002027081087000007024022067125108106092096116119127027116119011017105&EXT=pdf (or go to https://peakcontent.s3-us-west-2.amazonaws.com/Peak+Documents/Sep_2020_SSRN-Labor_Markets_During_the_COVID-19_Crisis-A_Preliminary_View-Footnote_1.pdf)

²https://www.healthcare.gov/coverage-outside-open-enrollment/special-enrollment-period/

³https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/cobra-continuation-health-coverage-consumer.pdf

⁴https://www.ssa.gov/benefits/retirement/planner/agereduction.html

⁵https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

⁶https://www.irs.gov/publications/p590b#en_US_2019_publink1000231057

⁷https://turbotax.intuit.com/tax-tips/retirement/tax-strategies-for-an-early-retirement/L6U8FKvbN

⁸https://money.usnews.com/money/retirement/articles/how-to-evaluate-an-early-retirement-offer

⁹https://www.investopedia.com/articles/financial-advisors/090915/should-you-accept-early-retirement-offer.asp

Securities and advisory services offered through LPL Financial, Member FINRA/SIPC.

This material was prepared by Carson Coaching. Carson Coaching is not affiliated with the named broker/dealer or firm.

In general, a distribution from a Roth IRA is tax-free and penalty-free, as long as the account has been open for five years and the account owner is age 59½, has become disabled, is making a qualified first-time home purchase ($10,000 lifetime limit), or dies. Minimum required distributions do not apply to the original account owner, although they may apply to heirs.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

This is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax professional.