One of our senior editors declared recently that he plans to retire at 55 — although he’s now just north of 30. I’m not sure how serious he is, and I have no idea what his financial situation is at this point, but here was my advice:
Unless you hit the lottery or a jackpot in Vegas, bad idea!
My colleague says his desire to retire so young is generational, with me representing the older, stodgy guys who want to hold out as long as possible, and he the younger impetuous rebels looking to loosen ties that bind as early as possible.
Here are 4 reasons Jeff (oops) — and anyone else out there thinking the same thing — might want to alter such plans:
1. According to the Social Security Disability Resource Center, individuals may apply for Social Security benefits beginning at age 62, with some exceptions. So, first and foremost, my colleague won’t get a dime in Social Security for seven years after retiring at 55.
Worse, he’ll get the minimum allowed since he’s foregoing what could easily be another 15 years of growth in his payments. The longer you put off tapping Social Security benefits, the better off you can be because the payouts grow over time. Simple stuff, really.
2. I have to assume my colleague’s portfolio will provide him with a nice steam of monthly income, but if not, he may need to dip into his IRA and/or 401 (k) savings plans.
IRA and 401(k) withdrawal rules are different, but they both contain the same downside: penalties. IRA monies may be withdrawn at any time for any reason but are subject to a 10% penalty on the the value of the account up to age 59 1/2. Some waivers are possible, but you need to be sure to understand the rules.
The distributions for 401(k) plans are stricter, making the account a little less flexible and harder to avoid that early-payout penalty.
The point is the same: If you need to tap either account before you turn 59 1/2, you’ll pay the price in penalties. Why would you want to do that?
3. Instead of going over the fiscal cliff, Congress managed to hammer out a deal that allows for some pretty sweet estate tax legislation. In short, unless you earn $400,000 (individual) or $450,000 (family), the estate tax exemption is $5 million per individual, with taxes at 40% above those income thresholds.
Is their any better reason to keep working than continuing to increase an estate for your heirs?
4. Yes. My colleague is too bright to stop what he’s doing, and as long as you like your job, why stop? He can write until he either runs out of ideas or gets bored, both unlikely events.
No, I think most retirees would agree that keeping an active mind is the key to happiness. And as long as those paychecks keep coming, the retirement accounts will keep growing, and the need to tap into Social Security too soon is mitigated.
Hey, Jeff: reconsider, and spread the word: Plan to keep coming to work!