An investor who expects 5 percent growth over a 10-year period would need to save $7,500 annually to grow $250,000 to $500,000, Scott says.
“If their employer has any sort of matching component to their retirement plan, it makes sense to take advantage of the ‘free money’ to leverage their savings rate,” he says.
Clarissa Hobson, a CFP professional with Carnick and Kubik in Colorado Springs, Colorado, urges our investor to put aside more — about $10,000 per year — and also assumes a slightly higher annual return of 6 percent, to build up savings of about $580,000.
Michael Kitces, a CFP professional and director of planning research at the Pinnacle Advisory Group in Columbia, Maryland, is the most optimistic of our trio.
He says it is reasonable to expect a 7 percent return on a well-balanced portfolio. Over a decade, that would double the value of the portfolio, transforming $250,000 into nearly $500,000.
“This goal is actually quite within reach, even without any contributions,” says Kitces, who publishes “The Kitces Report.”
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Prepare for retiree health costs
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Most people are not eligible for Medicare until age 65, so those who retire at 62 probably will have to contend with health care costs.
“Health care is certainly a wild card in retirement planning,” Scott says, noting the ongoing questions about possible changes to Medicare.
“The best way to prepare for uncertainty is to plan conservatively,” he says. That means saving money outside of retirement accounts to cover health costs.
But Kitces says those who have lower incomes in retirement than they had during their working years may qualify for Obamacare tax credits that reduce the cost of health insurance — “potentially quite significantly.”
Hobson advises soon-to-be retirees to assume that health insurance costs will grow 5-7 percent a year.
And, she encourages retirees to estimate the total annual costs for Medicare — Part B, D and supplements.
“I think around $4,500 per person annually in today’s dollars is reasonable,” she says. “These costs also need to be increased for inflation.”
If you plan to rely on tax-deferred savings in early retirement, keep in mind that you have less saved than your monthly retirement statement would indicate.
“For example, $500,000 in an IRA or 401(k) plan does not equal $500,000 in after-tax, spendable funds,” says Scott, of Sunrise Advisors. Every time money is withdrawn from a tax-deferred account, taxes are owed.
“It is quite shocking how quickly assets are spent down when a tax liability is incurred every time someone needs to replace an air-conditioning unit, buy a car or pay their mortgage,” Scott says.
He says it’s better for the hypothetical retiree to have the option of drawing on tax-deferred and after-tax accounts. Hobson agrees.
“If the $250,000 is in a company retirement plan, he should also save in a taxable account to hedge his bets somewhat against future tax rates,” she says.
Another solution: Invest within a Roth IRA or Roth 401(k) because money in these vehicles grows tax-free and is withdrawn tax-free.
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Avoid Social Security missteps
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If you can retire early without depending on Social Security, you’ll avert the potential mistake of reducing your overall benefits. Hobson urges our retiree to wait until the full retirement age — 66 or 67, depending on year of birth — before tapping benefits.
“And it may make sense to wait even longer than that,” she says.
Social Security missteps also top Kitces’ list of worries. He says retirees who work part time need to be aware of the earnings test for Social Security benefits. They’re withheld for retirees who earn too much money in any given year before their full retirement age.
“This isn’t necessarily a bad thing,” Kitces says. “Social Security benefits that are delayed due to the earnings test do lead to higher benefits later.”
However, if your part-time income is too modest to fully support you, even if it is substantial enough to trigger the earnings test, you might need to tap your portfolio a little more — and a little sooner — than expected.
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Consider working part time
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Consulting work or other part-time job lets early retirees earn some extra cash while building up their Social Security benefits.
“Retirement doesn’t have to be an all-or-none situation,” says Kitces, of Pinnacle Advisory Group.
Earning a little income on the side allows you to keep your portfolio growing without having to tap it.
Hobson, of Carnick and Kubik, sounds the alarm about withdrawing 4 percent from your portfolio annually, saying it “may not be advisable, depending on market conditions.”
The combination of market losses and withdrawals can decimate your savings. Retirees can protect themselves by positioning their portfolio conservatively or waiting until the market recovers before taking withdrawals.
A financial planning professional can help design a portfolio for capital preservation with some room for growth.