New York Times December 26, 2004 INVESTING
Want to Retire Early, It May Take Some Work By J. ALEX TARQUINIO
Photo:
YDIA POSNER was not considering retirement last year when Verizon offered her a buyout package. "I always felt like I would work forever, so this was a very emotional decision for me," said Mrs. Posner, who was employed as a technical writer. "I drove my husband and children crazy for six weeks talking about it, until my kids finally said, 'Mom, you worked for 31 years, you deserve this.' "
Mrs. Posner was 56 when she retired in 2003. She is among the thousands of employees who have decided to call it quits in recent years after being offered buyout packages, which many companies have been turning to as an alternative to involuntary layoffs during cost cutting. Many other workers are quitting their jobs years before they qualify for Social Security payments, without the incentive of a buyout.
Workers considering early retirement should crunch the numbers first, financial planners say, to make sure that they will have enough income - typically about 70 to 80 percent of their preretirement earnings. They should also consider how they are going to cover their health care. Some buyout offers that are geared toward encouraging early retirement will offer medical insurance until Medicare kicks in at age 65, and might also sweeten employee pensions.
A smart financial planner will help clients decide how much money they can safely spend, as well as how much income they are likely to generate after retirement. People often think that expenses will decline as they halt their commutes and end purchases of business attire. But they might also want to spend more on travel and entertainment. "For different people, the lifestyle choices are obviously quite different," said Lewis Altfest, a financial planner in New York.
One rule of thumb, Mr. Altfest said, is that 65-year-old retirees can withdraw 4 percent a year from their portfolios - including after-tax investment returns and principal - with a high probability of not outliving their assets. This model assumes an asset allocation of 75 percent equities, which is a bit more than he likes. He recommends 60 percent equities and 40 percent fixed income for a typical retiree's portfolio.
When clients do not have enough money saved to generate the income that they will need to supplement social security and a pension, Mr. Altfest asks if they would consider selling their homes and moving somewhere cheaper. By doing this, money that is tied up in the home can be used for investment, and daily expenses are often lower. "Virtually any city that's not L.A. or San Francisco or Boston or New York will cost about 15 percent less," he said.
Early retirement requires an even tougher decision process, said Gary Schatsky, a financial planner in New York. Not only will clients have fewer years to save for retirement, they will have more years to draw down on their assets, Mr. Schatsky said.
"This is one of the biggest financial decisions you can ever make," Mr. Schatsky said. "People often don't view their job as an asset, but job security, and a healthy benefits package, are extremely valuable in today's economy."
Of course, not everyone who retires early is leaving a plum job. Some people stop working because the nature of their job - or their entire industry - changes so much that they no longer take pleasure in the work. Evan Lenk was
47 when he decided four years ago that 22 years as a manufacturer's representative for ladies' handbags was enough. "I wasn't having fun at my job anymore, and my income was diminishing, so I decided to quit the industry," he said.Mr. Lenk is not looking for full-time employment. "I have trouble using the 'R' word, retired, so I tell people that I'm in a midlife lifestyle change," he said. He and his wife, Diane, who is 56, have no children. "That's a major factor that we're able to do this," he said.
Although he is years away from being able to tap his retirement accounts without tax penalties, his wife still works, and they earn income from investments they made with money raised from selling a summer cottage in the Berkshires and auctioning off hundreds of antiques that they had collected over the years.
Mr. Lenk worked as an independent contractor and his wife manages a doctor's office; neither will receive a traditional pension. So when Mr. Lenk considered that he might stop working, he asked his financial advisor whether he could afford to do so.
"Early retirement is even scarier without a really good pension," said Lee Rosenberg, the Lenks' financial planner, who has an office in Jericho, N.Y. Mr. Rosenberg suggested that the couple diversify their portfolio to cut risk. The Lenks are also thinking of using their long-time hobby of antiquing to earn a little extra money in retirement.
While the success they had selling their personal antiques may bode well, a recent poll indicated that many retirees could discover that their hobbies are less lucrative than they had hoped. In the telephone survey, commissioned by UBS Financial and conducted by Gallup, 47 percent of full-time employees said that they would like to pursue a hobby as a way to make money after retirement, but only 13 percent of current retirees said that they were able to do so.
Mr. Schatsky said he told clients who hoped to make money in that way to take all of their vacation time at once, or negotiate an unpaid leave, and put their plan into action. That way, the client can determine if a hobby is likely to pay off, while preserving the ability to step back to a full-time job.
Even with pensions and Social Security, some retirees choose to work part time. Larry and Nancy Jankner, who both retired at 59, receive traditional defined-benefit pensions, and Mr. Jankner, who is now 64, has started receiving Social Security checks. Yet Mr. Jankner, a former reference librarian for the Brooklyn Public Library, currently works about 20 hours a week for programs at the library that provide services to older users. Mrs. Jankner, who is now 61 and retired from a 20-year career as a public school teacher, is a consultant to an early-intervention program for young children.
THE two of them bring in a total of about $1,500 a month from their part-time jobs. Mrs. Jankner said the extra income helped them to enjoy some frills - such as dining out or going to the theater - without having to dip into their I.R.A.'s.
Altogether, from pensions, Social Security and part-time work, the Jankners bring in about 80 percent of the income they earned before retirement. They earned a total of about $100,000 while they were both employed full time, putting $10,000 a year into retirement accounts. Their income from all sources now is about $72,000. They paid off the mortgage on their house in Brooklyn before Mr. Jankner retired in 1999, lowering their monthly expenses.
The Jankners probably wouldn't have considered early retirement if it hadn't been for their pensions and retirement health care benefits. On the other hand, Mrs. Posner could take early retirement, in part, because her husband was still working. She decided to opt out of Verizon's traditional defined-benefit pension plan, instead taking the value of her pension in a lump sum and moving the money into an I.R.A.
While traditional pension plans often outperform individually invested portfolios, there are some advantages to converting a pension into a lump sum payment, a common option in buyout packages. One benefit is that children can inherit any money that's left in an I.R.A., Mr. Altfest said. And while a carefully invested portfolio can rise with inflation, corporate pensions usually do not. "Over 30 years, the value of the dollar is going to shrink," he said.