Online Extra: Don't Rush into Early Retirement

With this dream dashed by the bear market, rerun the numbers and lower your expectations

Two years ago, when the stock market was soaring, 401(k)'s were swelling and every kind of professional you can think of could reap a 30% salary increase just by switching jobs, early retirement seemed an attainable goal. All you had to do was invest that big job-hopping pay increase in a market that produced double-digit gains like clockwork, and you could start taking leisurely strolls down easy street at the ripe old age of, say, 55.

Suddenly, that script has been rewritten. Portfolios have sunk along with the technology stocks that juiced them up. Even though the market has recovered from this fall's most punishing lows, the Standard & Poor's 500-stock index is still down about 25% from its high 18 months ago. With the economy struggling, the possibility of more market declines seems all too real.


  These days, financial planners say they aren't talking individuals out of retiring early, but they aren't talking them into it, either. "In a healthy economy, people took early retirement and said: 'I will consult or collect my pension,'" says Jane King of Fairfield Financial Advisors in Wellesley, Mass. "With the downturn and the rise in unemployment, that's less likely."

In fact, King says she's now sitting down with clients who intended to retire early -- and rerunning the numbers. One piece of advice she's dispensing for 2002: If your employment situation is looking shaky, it might make sense to wait and see if your company will dangle buyout offers. It would be painful to leave your job, only to learn a month later that your colleagues are getting a year's salary as incentive to pack up and move on.

The wait-and-see approach makes sense for other reasons, too. Though you don't need the wealth of Bill Gates to retire early, you'll still require upwards of $3 million to pack it in at age 55 and fund a lifestyle that costs $100,000 a year, financial planners say. You might be able to get by on $2 million if you're willing to do some consulting on the side or cut back on your spending in tough times, says Robert Kreitler, a New Haven (Conn.) financial planner.

Such estimates are based, first of all, on life expectancy. When it comes to retirement planning, you should count on being around until age 95. If you quit your job at 55, you'll need to fund 40 years of living expenses. These estimates also assume that your retirement stash is invested in a conservative mix of stocks and bonds. Depending on a person's age and risk tolerance, that mix should safely generate an average return of 6%.


  "If you're really going to retire early, you need to have about 40% of your money in bonds," says Kreitler. "If you have a large proportion in the stock market and you hit a few bad years, it can destroy you." Many early retirees these days want to keep more of their assets in the market, hoping for growth, which Kreitler advises against. Given the markets' recent troubles, "they're listening more," he says.

The remaining part of the equation is how much money you can draw from your savings each year, usually via a combination of collecting interest from the fixed-income portion and selling off some of your stocks. Ideally, you should withdraw no more than 5% of your total stash annually. That way, if you get a return of 6% or better on your investments, your retirement kitty will actually grow, which will help you keep pace with inflation (and make up for the inevitable down years). "We really don't like to go higher than 5% until Social Security kicks in," says Ross Levin, president of Accredited Investors in Edina, Minn.

Retire early, and it could be awhile before you want to count on Social Security. You can start drawing it as early as age 62, but you'll get a reduced amount each month for starting before you've reached what the government terms "your full retirement age" -- 67 for people born after 1960, and 65 to 67 for everyone else.

Surprised you have to wait until 67 to collect the full amount? This change was legislated in 1983 but just started affecting people who turn 62 this year. If your retirement age is 67, and you retire at 62, your payments will be about 30% less than if you had waited. Administrators at your local Social Security office can help you calculate whether you're better off waiting.

The Web has numerous resources to help you calculate how much money you need to retire, including those at BusinessWeek Online's Personal Finance Planning. If you aren't on track to accumulate what you need, here are some ways to make up the difference:

Take advantage of the new tax laws' catch-up provisions. Although a recent survey found that fewer than one in four 401(k)-plan participants realize it, changes in the tax law that take effect in 2002 allow people to save more for retirement. "The new opportunities for savings have basically been lost in the news," says Catherine Collinson, senior vice-president of Transamerica Retirement Services, which conducted the survey. In 2002, you can contribute up to $11,000 to your 401(k), vs. a maximum of $10,500 in 2001. The contribution cap rises by $1,000 a year through 2006.

Put more into an IRA. Those contributions rise from $2,000 this year, to $3,000 for 2002 to 2004, and $4,000 for 2005 to 2007, up to $5,000 in 2008. Thanks to the new provisions, 401(k) plan participants age 50 and older can make additional contributions (beyond the new higher limits for everyone), of $1,000 in 2002, $2,000 in 2003, and so on, up to $5,000 in 2006.

Explore your options for working during retirement. If you're a seasoned professional with skills that are in demand, you may have little trouble finding part-time or contract work that will stretch your pension money. As Levin puts it, if you can earn just $10,000 a year as a consultant, that's the equivalent of having $200,000 in investment assets with a 5% return. "We're finding that a lot more people are working after retirement," he says. "They're working not so much for money as for the meaning."

Scale back your lifestyle. Many workers are already trimming spending to offset losses in their retirement portfolios, says Collinson.

Buy long-term-care insurance. You might feel comfortable retiring with less if you have insurance to cover your long-term-care needs. Even though you're still hale enough to sail the Mediterranean or trek through Nepal, you don't want to have to worry that you won't be able to afford decent care later in life.

According to Ron Roge, a certified financial planner with R.W. Roge & Co. in Bohemia, N.Y., most people inquire about long-term-care insurance, but only 5% end up buying it. True, it's expensive -- some $1,500 a year and up. "But we generally try to counsel our clients to consider it in their budget," Roge says. "It's unbelievable what health care can cost."

Don't bet the farm on aggressive investing. Resist the temptation to plow the bulk of your savings into risky, high-return investments to goose your retirement account. It might seem reasonable for a 52-year-old with $850,000 in savings to plan on investing $50,000 a year for three more years, earning 10% a year, and retiring at age 55 with $1.3 million. If she continued to earn 10% a year for 20 years, her portfolio would grow even as she withdrew $100,000 a year.

But consider this: If her investments yielded a more sober 6% annual return, retiring at 52 would mean that she would go broke around her 75th birthday. And that's barring major catastrophes such as a serious illness. "If the rate of return were 10%, you would be in Fat City," says King. "But after what happened to the Nasdaq [in 2001], we aren't seeing Fat City. None of us is cocky anymore."

The bottom line is that going into 2002, and probably for several years thereafter, quitting your job and living off your investments won't seem as much fun -- or as safe -- as it once did. At the moment, in fact, when it comes to planning an early retirement, tempering your expectations is one of the most important moves you can make.

By Amey Stone and Eric Wahlgren

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