Take Your Place and Make It

Take Your Place and Make It ...

By Michael Lynch, CFP

The idea of early retirement, according to a Harvard professor, is one of the worst money mistakesheres why youll regret it, blaring a masterfully crafted clickbait headline.

I couldn''t help but clicked.

Michael Lynch

Lawrence J. Kotlikoff, a prominent economist and personal finance author and author, has worked for over ten years.

Early retirement is not just a decision to take the longest vacation of their lives, but a few of the biggest money errors that they will regret, according to him. The truth is that early retirement is generally far safer and far smarter to retire later.

Kotlikoff makes a familiar case in this article. He notes the average American''s modest retirement and notes a significant increase in annual income owing to delaying Social Security.

His briefing is engaging. It reflects the conventional wisdom on retirement in America. Yet I cannot buy in. The decision to leave full-time pay leave is almost universally beneficial.

I deleted the excerpt and contemplated our disconnect. Why was it that surprise? A month and a few rereads later, it struck me. The key words were right there at the top of Kotlikoffs'' piece: regret, as a group, and safer.

Lets start with regret. Kotlikoff worries that people will be reluctant to retire early and ending up a few dollars short. That may be a mistake. Yet, there might be a decade to put your portfolio in place, only to find yourself among half of those who quit needing any money prior to average life expectancy.

What if the article headline had been blared, making too long is something youll likely regret, experts argue. The most beneficial way to ensure you have years of financial freedom is to call it quits as soon as possible.

I often ask individuals to take a moment and recall the things they regretted the most. I suspect it is now water under the bridge and often a funny story. I have a few people. I then ask people to think about a thing they regretted not doing, a shot they did not. The room mood sours and smiles turn upside down. This is the asymmetry of regret.

There are two ways to be right when faced with a retirement decision. You can retire and enjoy it, and therefore be right. You may continue to work, live a long life, and have extra years of income a critical role in your advanced years. However, you will be right.

Alternativally, you may retire early or at least from a job that you might have kept, and which if not like the new freedom, may eventually be short of money. Of course, you wreak havoc on yourself.

So, as you grow accustomed to the grindstone, you may become aware that your funds are unspent. That''s comparable to trading in a car with new brakes, fresh tires, and a full tank of gasoline with no compensation. Now there''s a lot of sadness.

The endlessly wreaking retirement experts concentrate only on one type of error and one type of regret. For the risk-averse, the exact kinds of people who flock to tenured academics, government administrations, policy think tanks, and the media, this may be correct. For many others, it misses the point completely.

The next benefit from the academics'' focus on aggregate data rather than individual reality. Much of the meager average savings of Americans is made, with no reference to the variability. Many households are statistical zeros. They have never used money and never will, for many reasons. Others simply refuse to delay gratification and invest.

This might or may not be a pressing public policy issue in a liber society. It shouldnt be a personal concern for people who have a high retirement fund of six or seven figures, capable of providing income. These individuals will also have Social Security on deck and perhaps a pension or two.

The perpetually broke are certainly not the audience reading this article or CNBC websites where Kotlikoff rang his warning bell. Theres always a consensus that those who are retiring are in danger, and the chances of winning your last dollar are, unfortunately, low. (Megan Brenan, a real retiree, compared to the previous year, according to an in-depth survey of actual retirees.)

The most thorough examination of American household finances is the Federal Reserve''s Consumer Finance Survey (SCF) which covers our income, assets, liabilities, and even insurance. It provides a more complex and happier picture of personal finance and retirement readiness than the straight average of retirement plans. The median net worth of Americans aged 65 to 74 is $1.27 million. (Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin

Combine this with the typical spending requirements of Americans. The Federal Reserve Survey shows a median income for Americans aged 65 to 74 $50,000 per year. The consumer Expenditure Survey, conducted in 2021, gives insight into how American households lived between 1946 and 1964. (U.S. Bureau of Labor Statistics, Consumer Expenditures-2000, www.bls.gov/cex/)

This study set dives deep into consumption statistics. Two-person households over the age of 55 spend roughly $55,000 at the target.

This level of spending might seem low to coastal and urban professionals who write about retirement. However, it puts the shockingly low aggregate savings numbers in perspective. Suddenly, a $3,200 monthly in tax-free Social Security, along with a paid-off house, and $250,000 in retirement investments, cover the spending needs of a significant portion of retirees. It also explains why only Americans spend down their assets in retirement.

The issue is framing. Most Americans are divided: Six- and seven-figure income professionals. Social Security is progressive, and income taxes are extremely so. It just doesn''t take multi-millions of investments to fund the average retirement. It might, however, take millions to fund yours.

It''s easy to consider retirement as a binary option. Many people will work and retire completely. It''s a light switch. Retirement in this regard is risky, as it entails walking away from a steady paycheck that can never be replaced.

Many of my clients receive their last paycheck, agree on an income strategy for retirement funds, and book the winter in Florida or South Carolina. Others, however, will retire from the 5-day, 40-week week, and 50-week year to work part-time, often in the field they left.

An early retirees risk of poverty has been reduced by a substantial amount of human capital. As we age, we become more valuable and have greater leverage as we age. They are not separated from each other in both cases. The mistake, if it is one, is not irreparable.

This ability to earn is a vital security net. In retirement, a little earning goes a long way. Social Security provides a floor below which retirees cant fall. Then there are the accumulated funds that in most years will earn more than a persons withdrawal.

Readers of Retirement Daily will be familiar with the 4% withdrawal guidelines. Combined with this approach to retirement accumulation and income generation, $1 million will be required to generate $40,000 of annual income that they can anticipate to inflate to match increases in the cost of living.

These numbers are often depressing, with some individuals considering that even the 4% percent withdrawal rate is too high. This survey, from another perspective, highlights the huge value of even part-time work kept in reserve. A part-time job bringing in $30,000 a year is the equivalent of $750,000 of capital. Most retirees are highly skilled, therefore generating this sum annually is not difficult.

Some individuals expressly base their retirement plans on getting an inheritance. These are all motifs, from not knowing how much mom and dad have, to loving ones parents and not wanting to face the inevitable, to the fact that their money, they worked hard for it, and they have every right to spend it.

The wealth of individuals, not corporations, but government budgets, and insurance companies, are gaining ground. The use of 401(k)s and IRAs as a dominant retirement system means retirement income is derived from mounds of money saved by individuals. (median) or $977,000 (mean) The Federal Reserve estimates a net worth of Americans over 75 at $254,000 (median) or $977,000 (mean)

Work provides many non-monetary benefits such as human interaction, fulfilling, meaningful tasks, and structure to the day, week, and even year. I suspect this is true for most intellectual earners. We get paid for having fun.

Despite the negative, work is a grind and the pay sucks. Physical jobs, such as the heavy construction field in which I was growing, wear people out physically. Not everyone can work until age 70 or even 65. Even cushy tasks require us to leave home in hot weather, request time off for family meetings, and push household chores to the weekends. Would you rather spend time with Martha at the office listening to her grandkids'' tales?

According to a recent study by the Center for Retirement Research at Boston College, Americans work to live rather than work. (Andrew G. Biggs, Anqi Chen, and Alicia H. Munnell, How Do Households Adjust Their Earnings, Savings, and Consumption After Children Leave? November 2021) These researchers examined how empty nesters slowed their income and earnings, and compared their retirement savings. Instead, they reduced their hours and took more time back when they no longer need to support

The benefits of leaving paid work outweigh the risks. Many individuals still have pensions that make leaving possible. Others have large investment balances from years of diligent investing. For others, a less expensive lifestyle can be supported with Social Security and a cash side hustle.

The latter is likely to be the clickbait nature of the news business that drives these retirement crisis articles. If it bleeds, it leads. People are concerned about a mistake, and these stories fuel fear.

This does not explain why we do not see similar stories about the half of people who died before their life expectancy and therefore worked far longer than necessary. Perhaps it is because these folks are difficult to pin down for interviews and do so poorly on camera.

One thing that matters to you is your family. It doesn''t matter how much the average American your age has saved for retirement. Its not a decision how many people retire long term. The only thing you need to know about your stashed rate is how much you have used, and what other resources pensions, Social Security, part-time income, and spousal income you can count on.

Once you have enough, youre financially independent even if youre 60. Quit that job and do what you want. Thats the safest way for you to maximize the time you spent retired. There is no doubt that youll regret it.

About the author: Michael Lynch, CFP

Securities and investment advisory services and financial planning services are offered by qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is only for general informational purposes, does not purport to be complete or to cover any situation, and should not be classified as legal, tax, or accounting advice. Clients should consult with their legal, tax, and accounting advisors as appropriate.

You may also like: