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Early retirement a challenge

The earlier your retirement age, the trickier it gets to ensure your nest egg will last. More years in retirement mean more opportunities for plans to go awry.

By HELEN HUNTLEY

© St. Petersburg Times, published May 6, 2001


Think you'd like to retire early? Be prepared to challenge your assumptions and change your ways.

"Almost everybody needs to start doing something differently," said William Arnone, author of Ernst & Young's Retirement Planning Guide and a partner in the accounting and consulting firm's New York office.

Accumulating an adequate retirement nest egg starts with careful planning no matter when you expect to retire. But the earlier your retirement age, the trickier it gets. More years in retirement mean more opportunities for plans to go awry.

"Retiring early is not as easy at it sounds because there are so many things along the way that will be unpredictable," Tampa financial planner Laura Waller said. Retirement plans rely on assumptions, including the rate of inflation, the return you will earn on investments, how much money you will spend and how long you will live. Guess wrong and you could find yourself going back to work.

"Generally, retirees tend to spend more than they think they will in the first few years of retirement because they want to travel," said Philip Springer, editor of the Retirement Letter newsletter. "It would be a big mistake to just assume that you have enough to retire without doing some of the work ahead of time estimating expenses."

On the income side, it is crucial to keep investment expectations reasonable. For a balanced portfolio, an 8 percent investment return and a 4 percent to 5 percent withdrawal rate are safer and far more modest than what many investors expect.

"Anybody who's retiring in their 50s and thinking of drawing down more than 5 percent of their portfolio (each year) to support themselves is only setting themselves up to go back to work at some point in the future," Clearwater financial planner V. Raymond Ferrara said.

Some retirees who were betting heavily on technology stocks already have gone back to work, brought back to reality by the Nasdaq Stock Market's devastating nose dive. To avoid portfolio devastation, many financial planners say money you will need in the next three years shouldn't be in stocks at all.

The point of retirement projections is to come up with a reasonably accurate measurement of the gap between expected expenses and expected income from pensions, Social Security and current savings.

"For almost everyone there's a gap," Arnone said.

To close it, he offers four options: Save more, invest more aggressively to earn a better return, lower your standard of living in retirement or delay retirement. Those are choices many people don't like.

"People are groping for fantasies," he said. They dream of winning the lottery, inheriting wealth or being offered a generous incentive package to retire.

He said it is part of his job to "burst those bubbles."

Financial planner Waller of Laura Waller Advisors said people who want the freedom to retire early should aim to cut debt and learn to say no to adult children seeking financial help.

"Make sure you always look on your retirement plan assets as sacred," she said. "Don't borrow from your 401(k) to buy a car or house. You've got to keep that pot of money separate and keep it growing."

Ferrara of ProVise Management Group said workers aiming for early retirement need to think about how much they will have to pay for health insurance and how they will handle extraordinary expenses such as children in college or aging parents who might need help.

Non-financial issues also should be considered. Waller said changing jobs or switching to part-time work may be a better solution for many people.

"Most of our identity, especially for baby boomers, comes from our work," she said. "I hear a lot of people saying, "I can retire early and do a lot of volunteer work,' but I don't know how realistic that always is."

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