Thinking of Joining the Great Resignation? Here’s What to Consider First.

Covid-19 has led workers to re-evaluate what’s important to them and what they want out of life. Many have concluded that work no longer fits into that picture, according to Northwestern Mutual’s 2021 Planning and Progress Study. The survey of 2,320 adults in March found that 11% of Americans now plan to retire at a younger age due to the pandemic.

The pandemic-fueled wave of early retirements concerns financial advisors, who worry that clients are becoming overconfident in their retirement security due to the strong stock market. Longer lifespans, rising healthcare costs, and inflation are among the reasons why many retirement savers should remain on the job a bit longer and build their assets, advisors say.

“I feel like I have this conversation every day,” said Chantel Bonneau, an advisor at Northwestern Mutual. “Unfortunately, I sometimes have to burst that bubble.”  

Dan Simon, retirement planning advisor at Daniel A. White & Associates, has had to dash some of his clients’ hopes too. “Sometimes we do have to be the bearer of bad news and say, ‘This isn’t going to work out unless you’re not planning on living past 75,’ ” he said.

If you’re considering stepping away from work and retiring early, here are six things to consider:

● Where will your income come from? Retirees younger than 59 1/2 face penalties for taking early distributions from 401(k) or individual retirement accounts, and they can’t claim Social Security benefits until age 62. Without a job, you’ll need income from rental properties, pensions, investment portfolios, or other sources, creating reliable cash flow, Northwestern Mutual’s Bonneau said.

“It’s important that a client consider their streams of income and their investible assets that don’t require a significant performance,” she said. “Don’t assume that since the market has averaged a certain return over the past 35 years that that’s what you can expect for the next 35 years.”

Clark Kendall, president of the wealth management firm Kendall Capital, said workers should consider whether they have enough liquid assets to delay claiming Social Security until age 70, which is when they’ll qualify for their highest monthly benefit. For each year after 62 that retirees delay claiming, their monthly benefits grow—increasing 8% annually after they hit their full retirement age—until maxing out at 70.

● Have you considered part-time work? Retirement planning advisor Simon said he often tells clients who are too young to retire but are suffering from burnout that they should consider a hybrid retirement, working part time at a less-stressful job. By earning some income, they’ll conserve more of their assets, he said.

“If they can find something they enjoy doing part time, maybe they can push back on collecting Social Security, and maybe that employer offers some medical benefits to them, so that allows them to defer drawing down on a 401(k) or an IRA,” he said.

● How will you get health coverage? Bonneau said several clients would like to retire early but are choosing to work until they become eligible for Medicare at age 65. Without employer-sponsored health insurance or coverage from a spouse’s job, early retirees may have to purchase individual policies that can cost thousands a month.

Younger retirees with enough income to live comfortably likely won’t qualify for Medicaid or subsidies from the Affordable Care Act that reduce the cost of individual health-insurance plans. 

“Medical insurance can be extremely expensive,” she said. “I’ve talked with several clients who appear to be in perfect shape for retirement, but the one missing piece is that they have six years until they qualify for Medicare. We talk about whether they’ll be able to set aside enough money and stomach the thought of paying such a large amount for private medical insurance.”

● Will your assets last 30 years or more? Simon said he asks all of his clients whether their parents are still alive, and many of them answer yes, even those in their late 60s. The question raises the issue of longevity risk, and whether early retirees risk the prospect of outliving their resources.

“People tell me that their biggest financial fear is running out of money in retirement, and obviously the earlier you retire, the greater the likelihood of that happening,” he said.

Healthy stock-market returns have allowed some workers to hit their “magic number,” the amount in assets they expect to need in retirement, Simon said. But by delaying retirement, growing their assets, and eliminating debt from mortgages, credit cards, and loans, they can better position themselves for a long retirement, he said.

● Can your plan withstand unexpected setbacks? When workers are projecting their annual costs in retirement, they should remember expenses such as home repairs, replacing a car, and healthcare costs such as long-term care, Bonneau said. According to Fidelity, the average 65-year-old retired couple in 2021 may need approximately $300,000 to cover healthcare expenses in retirement.

“If you need in-home care for several years, could your plan support that? Or are you going to leave yourself, your spouse, or your kids in a position that you didn’t intend to put them in?” Bonneau said.

● Have you planned for inflation? Kendall said workers might look at their investment account balances and calculate that they have enough assets to retire on a certain amount each month, say $10,000.

But while $10,000 might be sufficient now, it might not be enough to maintain a senior’s standard of living throughout a long retirement, particularly in a period of high inflation. If pension benefits aren’t indexed to inflation, then retirees will lose purchasing power over time, Kendall said.

He pointed to one client who began receiving a pension benefit of $3,000 a month almost three decades ago.

“When he retired, he was living fat, dumb, and happy, but $3,000 a month will barely pay rent today,” Kendall said. “If someone’s going to retire in 2021 at 50, we need to be thinking about what their expenses will be in 2031, 2041, and 2051. I just think people need to look at it with their eyes wide-open because there’s many variables that go into putting the keys on the table and retiring with confidence.”

As a hedge against inflation, Kendall said savers should maintain a diversified investment portfolio that includes stocks that are likely to rise with inflation such as Procter & Gamble (ticker: PG), Colgate-Palmolive (CL), Verizon (VZ), and Apple (AAPL), which provide essential consumer products and services. 

“I remind people that toilet paper, toothpaste, and cellphone bills are all going up, so I think that needs to be part of your portfolio to protect your long-term purchasing power,” he said. “I use those products as examples because everyone understands that we use them on a daily basis, and you do need that inflation-hedge type of investment within your portfolio because that’s where we spend money.” 

Write to editors@barrons.com