Retiring Early is Only Going to Get Harder


Photo by Tax Credits on Flickr

My neighbor retired from being a corrections officer at the age of 55. That was 30 years ago. He’s still retired and is doing well enough to maintain his lifestyle. However, after asking him how he put his retirement together, I was disappointed in my knowledge that it would be a path I could not follow.

He lives mostly off of his state pension and social security. Not a crazy recipe for those that retired 30 years ago, but they are hardly optimal for me today. The truth is, a lot has and is changing with regards to how people get retirement income and those changes will create challenges for those looking to retire early.


State Pension Changes

Private pensions are almost unheard of these days and government pensions are following in their wake. It isn’t a big surprise. State governments have long made promises that they could not keep to their employers. However, as pensions become more restrictive, it is important to note that early retirements are in the legislative crosshairs.

Just last week, the State of Washington passed a reform on state pensions which penalizes early retirement. For those retiring before 62, 55 and 50, the state progressively reduces pension benefits. If you plan to retire early from your State employment, you might need to consider making up for pension losses in your early retirement plan.

Social Security Changes

Just this year Canada changed the age for those looking to collect on the country’s equivalent social security program OAS. They added two years to the benefit age requirements going from age 65 to age 67. If Canada can increase retirement age, so can the US. Especially since raising retirement age is often used as a potential solution in Washington.

Two years probably doesn’t sound like much, but to a young professional starting out, it can be more than you think. Social security benefits are usually adjusted to inflation, so while annual benefits might be an annual benefit of $10-15 thousand today, it could be $40-50 thousand by the time you are retirement age. It’s a large potential loss for those who still have a long way to go for early retirement.

Increasing Taxes

There seems to be one thing both political parties agree on: something needs to be done with deficits, but that something is disconcerting for those seeking early retirement. Politicians on the left and right are talking about new tax structures to raise revenue. The good news is that no one is talking about raising income taxes on the middle class, but the bad news is that other tax raises are being considered.

Most of our retirement incomes are built around the income tax system. We pay income tax on interest and defer tax benefits on Roth IRA plans. However, what happens if several years down the road, government introduces a heavy new VAT, sales tax or carbon tax? Our retirement income which was once taxed through income taxes would now be subject to a second round of taxation be it consumption, production or carbon emissions.

It seems as though this blog’s job is getting more difficult, because retiring early is progressively getting harder.

Understand and Avoiding Student Loan Debt at Retirement Age

There was a frightening article for future retirees in the Washington Post last week. Some $35 billion in past due student loan debt is owed by those 60 and older. While anyone can fall behind in student loans, it’s important to understand how much student loan debt can ruin your retirement dreams and how those currently struggling found their way into their current predicament.

Sallie Mae Student Loan

Photo by jk5854

Still Paying Loans 30 Years Later!

The problem with tackling our debt is that there are so many loans to deal with. It’s not uncommon for someone to have credit card debt, student loans, a car payment and a mortgage. What debt is worse? What do you pay off first? Credit card debt has the highest interest, but student loans are unforgiveable.

There are those that are retirement age still paying for their education from decades ago and the biggest factor is that student loans are unforgivable. So regardless of what you can or do pay, the interest on student loans is going to accrue until you finally pay them off. Not to mention that government loans have multiple payment options that can extend terms of payment.

What you need to walk away understanding is that if your loan balance is not decreasing every month, you could be paying off the loans for the rest of your life.

Is College a Good Idea Late in Life?

One growing career trend over the last twenty years has been the extinction of lifetime employment. It’s left many seasoned employees out of work, late in life, with credentials lacking an advanced degree, certification or training. For many, the obvious step has been to get up to date on education. While going back to school might be your only viable option, you do need to weigh the risks of student loans.

The biggest thing to remember is that any amount you spend in loans needs to be offset by income. It requires you to take a serious look at what you might be earning after college, how long you want to be working and whether those gains are worth the costs. I hate to be the bearer of bad news, but if you need to go back to school in your late fifties just to retain the income you lost, that trip back to academia is probably not going to be worth the effort.

Picking up the College Tab for Your Grandchild

This really needs to be written across the top of any student loan promissory note:

“When you cosign, the debt is yours, not your progeny’s, and if you do assume payment on this debt, it’ll be a lot more than you thought!”

Here is how this story goes. Grandma cosigns on $20,000 for her gifted granddaughter thinking at worst, $20,000 is no worry. In this case Grandma has vastly underestimated the amount of money she is risking.

Think of it this way. A student can defer loans while interest accrues until they are done with college. This means that if your grandchild takes 6 years to graduate that $20,000 is already several thousand larger. What if your grandchild goes off to graduate school for 2 years? Now interest has accrued for 8 years and hasn’t once needed to make a payment. If the loans are government backed, there will be a 6 month grace period before loans are due.   Then there are several years of potential forbearance and creative payment plans like income-based and graduated that will keep you out of the loop and the loan balance growing.

It’s not out of line to believe you could be on the hook for $60,000 or more by the time the bank comes to you for payment.

Student loans are risky, but less so for young adults who have a long time to make up for them. If you are nearing retirement age, you should avoid student loans if you can and accept them with extreme caution if you can’t, because struggling with student loans once is all it takes to struggle with them forever.

About The Baby Boomers Already Flocking to Retirement

The persistence of our dragging economy has created a lot of concern for baby boomers and their retirement prospects. One concern is that the stock market crash has eaten up a lot of boomers retirement income and forced them to delay leaving the workforce. Another common belief is that boomers are temporarily leaving the workforce during the bad economy and plan to return once things turn around. However, a recent Metlife survey is offering a very different view of boomers and their exodus from the workforce.

Baby Boomers

More Boomers Are Retiring Than Expected

Contrary to the “boomers will be staying to rebuild stock investments” view or the “boomers will be back in a few years” theory, boomers are leaving the workforce en masse and many aren’t planning a return. In fact, the rate of departure, for those 65 and not coming back, has more than doubled in the last few years. In 2008, about 19% were fully retired compared to 45% in 2011.

One Quarter Retired Early for Health Reasons

Of the boomers already collecting social security, almost half retired earlier than planned. Of those, almost another half retired early for health reasons. While everyone hopes to enter retirement healthy, there is a large population of boomers forced into retirement due to illness and health complications. It’s a sobering reality for us younger folk and those in view of their fifties. Health considerations are a necessary consideration for our retirement plans.

One Quarter Retired Late for Budget Complications

If health concerns weren’t enough bad news for your retirement planning, one quarter of retired baby boomers retired later than planned, citing income requirements for day-to-day expenses. This statistic is harder to theorize about. If anything, I tend to think people have a rosy outlook on when they’ll be retiring in the first place. However, another likely culprit could be inflation. It’s easy to know that prices are going to increase over time, but it’s another issue to successfully save and cover those price increases. I’d suggest assuming that inflation will be slightly higher than you think; that might help get you to retirement at the age you plan.

Warm Fuzzy Feelings for Future Social Security Benefits

Nearly two-thirds of boomer retirees are confident in their social security benefits and that those entitlements will be sufficient for their lifetime. While this warm, fuzzy feeling could be naïve, it is a positive finding.

It could be that boomers are confident that politicians will not be seriously curtailing benefits. However, I’d like to think that it is because retirees have sufficient alternative savings to weather potential changes. Either way, boomer outlook on social security seems more solid than I would have expected.

While boomers are starting retirement confident, time will tell whether or not the latest retirement generation was ready to leave the workforce. Until then, learn from the successes and failures of the generations already in retirement and plan your savings to meet those contingencies.

Common Sources of Retirement Income

There is good news and bad news when it comes to finding income to fund your retirement. The good news is that you have a lot of options available. Perhaps more options than ever before.

The bad news is that most options come with risks and drawbacks. If you want to know how other people fund their retirement, these are the most common sources of income.

Older people

Photo By i.tokaris


How’s this for an employment perk? Work for a company for a long time and they pay a percentage of your income to you for the rest of your life. Pensions are still a great deal if you can find an employer that offers one. Although, relying on pension funding is very risky.

If your pension is funded by a business, the future of your pension is dependent on the success of that company. It used to be that most retirees lived off a pension, but today it is almost nonexistent. Most companies have either failed or cannot afford the financial burden of sustaining retirees. However, pensions for government employees are still common and relatively safe.

Social Security

For every paycheck that you earn, money is taken out for social security. Everyone who pays into the fund for a period of ten years is entitled to receive monthly benefits starting at age 62. Your benefits are based on a moving average of the income you earned throughout your tenure. Generally speaking, benefits are increased to match inflation each year.

Despite frequent talk about ending social security, the program is very popular and much more stable than Medicare. There is no guarantee against acts of congress, but social security is likely to continue for decades, even if some of the benefits change.

Your Home

One of the most common sources of wealth for seniors is in the equity of their home. Since home values tend to increase over time, you can think of principal payments in your mortgage as forced savings. Home value appreciation and you accumulated principal can be reclaimed as either a lump sum, if you sell or fixed monthly payments through a reverse mortgage.

However, claiming that wealth and turning it into income can be tricky when you retire. Selling your home takes time and while you might claim a large capital gain, switching to home renting will increase your living costs. The housing market is not always stable and you risk losing property values during recession years.

Financial Investment (Stocks and Bonds)

Thanks to numerous financial products like 401ks, IRAs and mutual funds, it’s easier than ever to buy stocks and bonds. The best part is that most of these products are diversified and offer good returns over the very long-term.

Income is earned from appreciation in stock price and ownership dividends. Over the course of the investment, these returns will pool into a massive nest egg. At retirement, you begin drawing out those earnings until you expire or run out of money.

If you’ve been in the stock market anytime in the last 5 years, you know that having a lot of retirement income in stocks and bonds can be very frustrating and even scary. You can retire one day with lots of retirement income and then lose half of it a few weeks into a major recession.


I’m sure you’ve heard this one before: “An annuity is a bad investment because you can earn more in the stock market!” However, with lots of baby boomers stuck waiting for the stock market to re-inflate their retirement accounts; I have a sneaking suspicion that annuities will make a comeback.

Annuities can be complicated because there are many different kinds. However, they are all based around a single concept. You make a large payment into the annuity and the annuity guarantees a fixed annual return. Let’s say you have a million dollar annuity with a 5% guaranteed payout. Then you’d get at least $50,000 every year.

Over the long-term, the stock market tends to do better than the 4 or 5% return from annuities. However, annuities offer predictability. It does you no good to have a large nest egg if you are waiting for the market to turn before you cash out.

Entrepreneurial Ventures

Given the lagging of middleclass wages, nonexistent pensions and the dramatic fluctuations in the stock market, I expect to see more people turning to entrepreneurial ventures as a source of retirement income.

Real estate rental is a common venture for this type of strategy. You can be as involved or absent as you want so long as you don’t mind paying property managers and have enough to buy a property. In exchange, you can take advantage of property appreciation and rent revenues.

Any side business can help you achieve your goals, and thanks to e-commerce it is much easier to find a market. However, you need to be cognizant to the fact that any business is a demand on your time. It’s not hard to overextend yourself if you also work a day job.

There are many options for finding retirement income. The important thing is to identify sources that you believe will meet your goals, and position your finances to take advantage of them. For example, I met someone who worked out three different government pensions (military pension, law enforcement pension and a teacher pension). That was his strategy and he now has a very comfortable retirement. Sadly, few workers ever stop and consider all the possibilities and are left with insufficient income to fund the lifestyle they want. It doesn’t have to be that way.

What sources of retirement income are you taking advantage of?