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Retire early? OK, but delaying it yields big financial gains

Most people look forward to the day when they can retire and enjoy more leisure time. The timing of that depends on a number of factors, primarily how much they spend and how much they’ve set aside. For example, people whose investments were severely depleted by the recession will have to push their retirement further into the future.

 

But if you’re among the people who believe they can retire early, carefully think through your plans, according to a study by the Society of Actuaries. The study looked at a variety of retirement risk factors and concluded that, while decisions about when one can retire are crucial, most people don’t plan out those decisions.

Without doing a lot of research, pre-retirees often have trouble figuring this out. One of the biggest problems is they make assumptions about how much they’ll need to support their lifestyle for their life expectancy.

Here are other misconceptions:

<THINKING THAT DELAYING RETIREMENT WON’T MAKE MUCH DIFFERENCE

According to the actuarial study, when retirees/pre-retirees were asked what difference a three-year delay would make, almost half said it would not make them more financially secure. And among those still working, nearly 40 percent felt a delay would have no impact on future finances.

But, in fact, based on an economic study referenced in Bloomberg News, retiring two years and five months later than you planned is the equivalent of saving 10 percent more of your salary per year.

Delaying retirement is especially beneficial to low-income workers. According to the article, these people often receive a higher percentage of their post-retirement income from Social Security. And Social Security benefits increase substantially with retirement age.

For those with full Social Security benefits, the monthly payout is substantially higher at 70 than if you opted to retire at 62.

While delaying retirement until after 70 won’t net more in Social Security benefits, that’s not the case with 401k’s, which allow you to continue to increase your savings, depending on the kind of 401k and the ceiling amount.

<UNDERESTIMATING HOW LONG THEY’LL LIVE

According to the actuarial study, the typical retiree has a planning horizon of just five years; pre-retirees plan just 10 years out.

A shockingly low number – 7 percent of retirees and 13 percent of pre-retirees – look 20 years or more into the future when making important financial decisions. Even fewer respondents have plans to account for their life expectancies.

<UNDERESTIMATING THE COST

OF HEALTH CARE

One mistake, especially when looking to retire before 65, is greatly underestimating the cost of health care.

At 65, Medicare takes most of that burden off the table, but before that, health care insurance costs can be half of a retiree’s monthly fixed expenses. This is one of the best reasons to delay retirement until at least 65.

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Regardless of your income level and whether or not you plan an early retirement, you need to plan carefully to maintain your lifestyle for 20 or 30 years or more.

Researchers refer to this planning challenge as longevity risk, or the risk that someone can outlive his or her retirement income.

You’ve worked hard and deserve a comfortable retirement. Don’t let misconceptions and lack of planning keep you from getting there.

Timothy West is a wealth adviser with Tompkins Financial Advisors based in Wyomissing. He can be reached at twest@tompkinsfinancial.com.

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