Get out Early
How to do it? Save like crazy and be open to new possibilities.
By Catherine Siskos
From Kiplinger's Personal Finance magazine, March 2004
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Larry and Kris Ferstenou were only in their mid twenties when they set an ambitious goal: save a million dollars so they could both retire when Larry turned 50. Larry's father had died suddenly at age 52, and the Ferstenous wanted to enjoy a long retirement -- together.
By 1993, when they were still in their early forties, the Ferstenous had met almost half of their savings target. But "we were working six days a week just killing ourselves, and it wasn't worth it," says Larry, then a rehabilitation counselor for people forced to find a new line of work because of injuries or health problems. So Larry and Kris, who was a self-employed accounting consultant, took the plunge and quit.
Without the benefit of pensions, stock options or a timely inheritance, the Ferstenous retired the old-fashioned way -- by socking away their money. During their nearly 20 years in the work force, their combined annual income averaged just under $50,000, but they still managed to save about 30% of it. They started with certificates of deposit, which paid 10% to 13% back in the 1970s and '80s, and they moved into stocks in the '90s. Fortuitously, the couple shifted a chunk of their money into bonds and REITs before the market crashed. Today they are living comfortably, mostly on income from a diversified portfolio that has increased to about $750,000.
"Early retirees are often super savers who put away at least one-third of their income," says John Wasik, author of Retire Early and Live the Life You Want Now (Owl Books, $14). Like the Ferstenous, they typically have no children, own their home outright, never carry credit-card balances and have a long history of living more simply than their income would allow, leaving them plenty of money to squirrel away.
But if you're in your fifties and still doling out money for college bills -- or if the bear market has put a significant bite in your retirement portfolio -- that doesn't mean you have to abandon your dream of an early retirement. You just have to redefine what you mean by retire.
"Retirement as we know it is gone," says Roger Herman, CEO of the Herman Group, a consulting firm that specializes in workplace trends. "People continue working because they want to be productive or because they need the money." The Ferstenous themselves are a case in point. Larry, a lean and fit 53-year-old who hikes about 30 miles a week in the canyons near his home in Ivins, Utah, is promoting a book he has written about the couple's savings strategies, You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich (American Book Publishing, $22). Kris, 51, makes about $10,000 a year working as an accounting consultant on short-term projects. The couple's combined earnings, including investment income, total about $31,000.
Today's early retirees aren't just dabbling in the work force to fill time or earn a little extra cash. With perhaps decades still ahead of them, they're increasingly taking advantage of this new stage in life to start entirely different careers or businesses. A study by the outplacement firm Challenger, Gray & Christmas found that people age 55 and older account for the largest number of self-employed consultants and entrepreneurs.
When Howard Stone retired in his early sixties after a long career in international advertising and sales, "it was like being in God's waiting room," says Stone, now 68. So he took a course in how to become a "life coach" and now specializes in helping retirees figure out what to do with the rest of their lives. His annual earnings dropped drastically, from $125,000 to $30,000, but he could rely on supplemental income from investments and his life was more rewarding. Now he and his wife, Marika, maintain a retirement Web site, www.2young2retire.com.
Write your ticket
Starting a second career solves a number of problems for early retirees. It lets them cut back on jobs with long hours and high stress, while providing cash to pay for health insurance and make up for savings shortfalls. A 2002 study by the Congressional Research Service found that 75% of adults ages 55 to 64 had $56,000 or less in retirement savings -- not nearly enough to provide an income stream equal to 70% to 80% of preretirement salary, the standard that financial planners typically recommend. And because Americans are living longer and healthier lives, they're at greater risk of outliving their savings. About half of today's 65-year-olds will live to be 92.
In addition to a shortfall in savings, rules for collecting social security can also be a deterrent to early retirement. Although you're eligible to draw benefits as early as age 62, people who retire that young today will get a check that's 24% smaller than if they waited until full retirement age -- 65 and ten months for someone turning 62 this year, rising to 66 for people born between 1943 and 1954. (If you were born after 1959, you won't reach full retirement age until 67, and drawing social security at 62 will mean a 30% reduction in benefits.) With the actuarial reduction, you'd still probably receive the same amount in benefits over your lifetime, but that doesn't help if you need income right away.
Drawing social security benefits early while working part-time doesn't pay if you exceed the $11,640 earnings limit for 2004. For every $2 you earn above that maximum, you'll lose $1 in benefits. If you need to earn more than the limit to retire early, it's better to take on a new job and forgo benefits until you reach full retirement age.
People who would like to quit early but need an infusion of cash to make it feasible can expect help from an unexpected source -- their former employer. Companies are increasingly likely to rehire retirees because they're reluctant to let experienced workers go. Some 77 million baby-boomers account for 60% of today's work force. When they begin retiring in droves in 2011, there won't be enough younger workers to replace them, leading to critical worker shortages in nearly every occupation, from airline pilots to engineers, predicts Anne Hyde, president of the Hyde Group, a consulting firm. By comparison, says Hyde, the tight labor market of 1999, when unemployment dipped to 4.1%, "will look like a picnic."
As a result, baby-boomers will have unprecedented job opportunities and will be in a unique position to balance work and leisure. They'll be able to write their own ticket for flexible part-time schedules, move into less stressful jobs or turn hobbies into second careers if they choose.
Bob Turner chose all three. Three days a week, Turner, 64, helps design electronic systems at the Mitre Corp., his full-time employer before he "retired" five years ago. The rest of the week he runs Turner Photography, his hobby-turned-business, shooting weddings, kids or the local ballet company near his home in Acton, Mass. "I moved from a pressure-cooker job managing people and projects to being more of a mentor and adviser," says Turner, a 37-year company veteran.
If your employer offers a phased retirement program and you'd like to work part-time but have not reached normal retirement age, you'll have to retire completely in order to be eligible to collect a pension. After that, depending on company policy, your former employer may be willing to rehire you in a matter of days or months.
Switching to part-time status before you're fully retired, however, could have a negative effect on your retirement income. Companies sometimes weigh the final three to five years of earnings more heavily when determining the size of your pension. If you have dropped to part-time status and are earning half your former salary, for example, your pension could be significantly reduced.
Healthy solutions
As a part-time worker for Mitre, Turner qualifies for another benefit that's worth its weight in gold for early retirees: He's eligible for health benefits, for which Mitre pays half the premium. Labor experts predict that more companies will use health insurance to attract older workers like Turner, who are too young to qualify for medicare and are increasingly unable to get retiree medical benefits through their former employers. Only 12% of private employers offered health insurance to retirees under age 65 in 2000, down from 22% in 1997, and the high cost of individual plans often makes early retirement prohibitively expensive.
But even here, help is on the way. Starting this year, workers under 65 can open health savings accounts (HSAs) to cut their taxes while they accumulate tax-free money for out-of-pocket medical expenses. HSAs are open to those who enroll in an individual or employer-sponsored health plan with a high deductible of at least $1,000 a year for individuals and $2,000 for families. Each year you can contribute the amount of the deductible -- up to $2,600 for singles and $5,150 for families -- to your HSA, and you can kick in an extra $500 in 2004 if you were born before 1950. HSA contributions are tax-deductible, and withdrawals for medical expenses are tax-free. Unused balances can be rolled over from year to year (for more on setting up an HSA, see "Help With Health Insurance Bills").
HSAs can be a boon for early retirees who qualify for tax breaks if they buy a high-deductible policy. Younger workers planning for an early retirement can also take advantage of HSAs with a high-deductible policy.
Aside from socking money away and continuing to earn income after you officially quit, there's another way to make early retirement financially viable: cut your expenses. When the Ferstenous retired a decade ago, they netted $175,000 from the sale of their house in California and paid $120,000 for a three-bedroom house in Utah. The move to Utah slashed their insurance premiums, and also reduced both their property taxes and utility bills. Their living expenses total about $22,000 a year, covered mostly by investment income.
Still, old habits just won't die. Of the $10,000 Kris earns in a typical year, most of it goes into a SIMPLE IRA.
--Reporter: Joan Goldwasser