By Alan Becker
Delaying retirement has become common for many Americans, either because they saved too little or they just want to continue working because they enjoy it.
Others go in the opposite direction. They retire early – sometimes out of choice but often because their health or the economy forces it.
While early retirement might sound appealing, it can be a struggle for those who don’t have sufficient income to pay their bills. That is why if you are weighing the pros and cons of early retirement, you need to get a good handle on your potential sources of income.
You may find you lack what you need – an especially unnerving conclusion if early retirement isn’t really a choice.
But don’t despair just yet. It’s also possible you have more income options than you realize. Those can be broken down into the categories of bridge income, fixed income, guaranteed income, and speculative income.
Let’s take a look at each to see whether they fit into your situation – and possibly your early retirement plans.
Bridge income. To support yourself in early retirement, you may need to tap into your assets sooner than planned – essentially bridging the gap until your other expected retirement income sources kick in. Fortunately there are ways to do that without incurring penalties for early withdrawal. For example, if you retire before you’re eligible for Social Security and Medicare, you can withdraw money from your traditional IRA before age 59½ without paying the 10 percent penalty. That’s because of something called the 72(t) provision. Similarly, the Rule of 55 allows you to withdraw money from your 401(k) or 403(b) without penalty if you are between ages 55 and 59½ and have been fired, laid off, or quit your job. (This applies only to the retirement plan sponsored by your most recent employer, not an older plan from a previous employer. Also, while you avoid penalties with these strategies, you still have to pay taxes on those withdrawals.)
Fixed income. One example of fixed income is real estate rentals. Certainly, there are downsides to being a landlord, but those who manage it right and carefully screen tenants may find this can provide a reliable income. Owning rental properties can come with tax advantages. Beyond that, the property’s value typically appreciates in a strong market, making it a potential long-term investment. If need be, you can sell it later in life to pay for such expenses as health or long-term care costs. If you don’t like the idea of handling upkeep and dealing with tenants yourself, you could hire a property management company, but that of course adds to your expenses. Another situation to be aware of is that during COVID-19 some states put a temporary ban on evictions for tenants who meet certain criteria, which could make it hard to collect on rent in those situations.
Guaranteed income. It’s important in retirement to have some income that arrives each month, regardless of what’s happening in the market. The most common source of guaranteed retirement income is Social Security. For those considering early retirement, it’s worth knowing you can begin drawing Social Security as early as age 62. But there’s a caveat. If you claim the benefit before you reach full retirement age (between 66 to 67 for most people), your monthly benefit is reduced and that reduction is for life.
Another source of retirement income some people still have is a pension. If you have one, determine whether it provides a reduced benefit (or any benefit at all) to your spouse after you die. If not, you may want to weigh whether to take a lump-sum payment rather than your regular payout, if that choice is offered.
Finally, an annuity – either fixed or indexed – can provide you with a monthly check as well. Some annuities do come with fees and various rules and limitations, and you also want to research the claims-paying ability of the insurance carriers being considered. So study them carefully before making a decision. A properly licensed financial professional can help you figure out what’s best for you and your circumstances as you make that decision.
Speculative income. One of the risks of retiring early is that you are even likelier than the average person to outlive your savings. That means you may want to keep at least a portion of your money in the market so it can grow. Yes, that does mean you could experience market volatility, but it’s worth remembering that historically, after significant market drops, the market has strong recoveries. Still, you and your financial professional should take steps to minimize your risk exposure.
Finally, it’s worth noting that with retirement comes extra time, and how you use that time could make a difference in your financial situation. Maybe you could take on a part-time job to pull in extra cash. Perhaps a favorite hobby could turn into a money-making venture.
Or possibly you just need to be cautious about becoming bored and filling that extra time with too many vacation trips or shopping sprees, spending money you really can’t afford to spend.
Even with careful planning, early retirement can still be difficult for some people. If that’s the case with you, you may need to adjust your lifestyle accordingly.
Regardless, though, it’s important in retirement – early or otherwise – to have an assortment of income sources. Many times the best retirement plans combine three of the aforementioned strategies if not all four. With the right amount of diversity in your portfolio, you may be able to live well in early retirement now, while still growing a nest egg that will see you through your later years.