Early retirement takes careful financial strategies

Planning on early retirement in this economy may make for sweaty palms. If retiring early is being contemplated, there are several items to consider when making plans.

Who is retiring early?

Rod Miller, a certified life underwriter and chartered financial consultant with Piatchek & Associates Inc., said early retirees are from a broad spectrum.

Along with those from downsizing companies and former business owners, Miller mentioned "government employees, including military personnel who are leaving after 20 years of service (and) farmers, or more frequently the farmer's children who have no interest in farming and are selling the farm to developers.

"We're seeing more professionals such as physicians, accountants, attorneys and upper management hanging up their hat," Miller said. "Several have done well during their career and have gotten tired of the daily grind or don't like the direction their companies or professions are going."

Mike Morris, president of both Morris Financial Group and of the Ozarks Chapter of the Society of Financial Service Professionals, finds people opting for early retirement now are generally around age 60.

Many early retirees Morris encounters are from downsizing industries that are eliminating older employees.

However, not everybody is ready to hit the retirement path.

Jerry Brierly, chartered financial consultant with Brierly Financial Services Inc., said he sees people extending retirement dates. "Due to the uncertainty in the economy right now, a lot of people are reluctant to give up jobs," Brierly said.

Those who Brierly finds opting for early retirement are largely business owners selling out a business. "People retiring early are ones who have a good distribution from the sale of a business, but those are basically the only ones that are retiring early. Very few are doing that," Brierly said.

Morris said the recent stock market slide has forced many to delay retirement.

"Many planning on retiring in January 2003 were fully invested in equities over the past two years; they may have lost 50 percent of their retirement funds," Morris said.

The combination of terrorism, possible war with Iraq and corporate mistrust raises concerns about what the future might hold, said Dennis Heim, certified financial planner and co-owner of Heim & Young Securities.

"People are thinking maybe they can't afford early retirement now. There are fewer people retiring early in order to give the economy a chance to recover," Heim said.

Advance planning

To help accumulate necessary retirement funds, people need to plan, preferably at least five years before the planned date of retirement.

"First and foremost is early and proper planning," Miller said. "While more people today enjoy company-sponsored retirement plans, it's hard for many to focus on retirement at an early age. After all, there are other concerns, such as raising a family, education, new homes or taking care of one's parents. But playing catch-up is a tough proposition, due to limited funds with which to build the nest egg, or because the magic of compound interest is lost."

"More assets" are what Brierly said is necessary for early retirement, because the assets have to cover a longer period of time. "You can't count on assets growing at a certain rate; we've kind of pulled back on what we think those assets will earn."

Common ground

"People need to sit down with their spouse or significant other and decide what they expect from retirement," Miller said. "All too often, a husband and wife will have entirely different visions of what they expect."

Early retirees also need a higher income until they are eligible for Social Security, Morris said.

"It comes down to numbers. How much income are you going to need to be able to take early retirement?" Morris said. "What assets do you have to help generate that income? What's the best investment alternatives available to reach those objectives? How can we tie in a specific plan?"

Health insurance is another big issue.

Brierly said those opting for early retirement need to make sure their health insurance needs are taken care of because that's a very expensive item in a monthly budget.

Also, they should think about "whether or not they have long-term care insurance for nursing home coverage," Brierly said.

Funding for long-term care may also need to be arranged for the aging parents of the person who is planning for retirement, Heim said.

Tax liability

Another key component of financial planning is knowing the tax liability of the money.

"They need to look at the source of the retirement income. If it comes from financial assets, how can that be done to minimize tax liability?" Heim said.

It's wise to estimate high on the amount of income that they might need for a comfortable retirement and assume a more "conservative rate of return," Heim said.

Said Brierly: "Ninety-nine percent of people coming in have no concept of what it's going to take to retire The magic phrase is standard of living. As a planner you have to focus on that. We can't make assumptions. How much are they really spending? What are their needs and objectives? Do they plan to travel? To give gifts to their grandkids? Buy a vacation home someplace? All of these things cost a lot of money."