Early retirement? As the old saying goes, if you can get it, it’s a good job. But as a respected Harvard economist points out, so are many Americans getting by without saving enough.
Late-career Americans have faced a major challenge during the pandemic: Office life has been reduced to telecommuting and the stock market has boosted 401(k) accounts, with early retirement becoming one of the most searched terms on the Internet.
So why is this plan, in the words of economist Laurence Kotlikoff, “one of the worst money mistakes” you can make?
For starters, the market has since pulled back, wiping out many of the pandemic’s gains and waking many from dreams of early retirement.
But the reasons for Kotlikoff’s skepticism run deeper.
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Few things expose a person’s money habits like retirement planning. Aggressive, ritual savers who start early are rewarded with reliably growing account balances, reinvestment of dividends and increasing interest.
But the reality is that millions of Americans don’t have enough money set aside for a traditional retirement, let alone the early exits envisioned by the 50-plus crowd — and Kotlikoff says they’ll “regret it” if they don’t adjust their expectations or abandon the plan altogether. .
“We as a group are bad savers, making early retirement unaffordable,” Kotlikoff wrote in a guest column for CNBC. “Financially, it’s generally safer and smarter to retire later.”
It should be noted that Kotlikoff ends his argument by stating 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 different plans for their golden years.
How many people are really ready for this?
A recent survey by the Federal Reserve found that Americans have a median savings of $65,000 in retirement accounts. The average account value of older savers between the ages of 55 and 64 is about $134,000, well below what is required by rising life expectancies, remaining inflationary pressures and rising out-of-pocket health care costs.
Assessing health care costs correctly
A study conducted earlier this year by the Center for Retirement Research at Boston College found a significant disconnect in how future retirees perceive the effects of market volatility and longevity when calculating their post-work plans.
The report found that many overestimate the impact of market cycles and pay less attention to how long they will live and how that longevity will affect their finances. Unexpected health care costs—never mind long-term care—are significant expenses for retirement funds.
The study’s data, said author Wenliang Hou, “confirm the importance of longevity and market risk, emphasizing the need for lifetime income through either Social Security or private sector annuities. Finally, long-term care is also a significant risk that retirees face, but one they often underestimate.
Weak Social Security
There may be encouraging signs in the federal government’s basic social safety net. Social Security payments increase in 2023, and a number of rule changes will increase recipients waiting to tap into the system.
But Social Security is currently on a timer. Without changes at the federal level, economists estimate that the base fund that supports Social Security will shrink by 2034. Buyers could see less than 80 percent of the benefits they expected.
Economists have long warned against overreliance on Social Security, and many of them urge investors to build retirement plans that assume the program will disappear.
Kolitkoff’s top advice, like others when it comes to retirement or using Social Security benefits, is to wait and instead think about growing your savings and investments while you continue to work. The extra time will make your investments work harder and longer, and delaying Social Security benefits means a bigger monthly payment down the road.
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