retire early? As the old saying goes, it’s good work if you can get it. But as a respected Harvard PhD economist notes, too many Americans are get it without saving enough for it.
Late-career Americans faced a major temptation during the pandemic: With office life reduced to telecommuting and the stock market boosting 401(k) accounts, early retirement became one of the most searched terms online.
So why is that plan, in the words of economist Laurence Kotlikoff, “one of the worst money mistakes” you can make?
First, the market has since retreated, erasing many of the pandemic’s gains and waking many from their dreams of early retirement.
But the reasons for Kotlikoff’s skepticism run deeper.
Don’t miss out
Few things reveal one’s money habits like retirement planning. Aggressive, ritual savers who started early are rewarded with reliably growing account balances, burdened by dividend reinvestments and interest compounding.
But the reality is that millions of Americans simply aren’t putting away enough for traditional retirements, let alone the early exits that 50-somethings are thinking about — a move Kotlikoff says they’ll “regret” unless they adjust their expectations or abandon the plan altogether .
“We are, as a group, lousy savers, which makes early retirement unaffordable,” Kotlikoff wrote in a guest column for CNBC. “Financially, it is generally far safer and much smarter to retire later.”
It should be noted that Kotlikoff ends his argument by saying that he plans to “die in the saddle” because he loves what he does. But those tired of corporate climbing or reporting to a manager may have other plans for their golden years.
How many are actually ready for it?
A recent survey by the Federal Reserve revealed that the median savings in Americans’ retirement accounts was $65,000. Older savers between the ages of 55 and 64 had median account values of about $134,000, well below what they would require as life expectancy increases, inflationary pressures remain and rising health care costs take their toll.
Underestimates health costs
A study earlier this year by the Center for Retirement Research at Boston College found a significant link in how potential retirees perceive the effects of market volatility and longevity when calculating their post-work plans.
The report found that many people overestimate the effect of market fluctuations and place less emphasis on how long they will live and how much that lifespan will affect their finances. Unexpected health care expenses – never mind long-term care – are significant drains on retirement funds.
The study’s data, author Wenliang Hou concluded, “confirms the importance of longevity and market risk, and underscores the need for lifetime income either through social security or private sector annuities. Finally, long-term care is also a significant risk for retirees, but one they often underestimate.”
Terrible social security
There may be encouraging signs in the federal government’s primary social safety net. Social security payments go up in 2023, and several rule changes will increase recipients who waited to tap into the system.
But Social Security is currently on a timer. Without changes at the federal level, economists project that the main fund supporting Social Security will run low by 2034. Recipients could see less than 80 percent of the benefits they expected.
Economists have long warned against relying too heavily on Social Security, and many of them encourage investors to build retirement plans that assume the program will be gone.
The most important advice from Kolitkoff — as well as others when it comes to retiring or taking Social Security benefits — is to wait, and instead consider growing your savings and investments while you continue to work. 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 supplied without warranty of any kind.