Consumer Reports’ Money Mistakes 2

Yesterday I recounted a great story in Consumer Reports called “12 Money Mistakes That Could Cost You $1,000,000”? A million bucks within your grasp! The two that stick out are the ones that carry the biggest bang for the buck. I started with investing too conservatively during retirement and today we move on to the elephant in the room for most pre-retirees: Retiring before you need to.

Whenever people come in to discuss various investment strategies to enhance retirement portfolio returns, I like to remind them that they control the two most important variables of retirement planning: retirement date and spending needs. I know that it’s hard to accept this, but it is more important when and how you retire than whether you have a four or five-star rated mutual fund in your portfolio.

The first hurdle is reaching your full Social Security retirement age so that you can maximize your benefits and qualify for Medicare. If you are planning to retire prior to that time and grabbing a smaller Social Security check, remember that by doing so, you will permanently reduce your (and your non-working spouse’s) retirement benefits. And if you are not eligible to be in the Medicare program, you may have the additional cost of individual health insurance. Some have pointed out to me that if they die early, then early SS is worth it. Call me crazy, but somehow premature death does not seem like a prize.

Perhaps of greater importance than the simple math associated with Social Security, is when you retire early you are foregoing your income during what may be some of your highest earning years. And of course without that income, you will start dipping into your savings and investments. Consumer Reports tried to quantify the early retirement decision by analyzing a hypothetical $54,592 (the median U.S. household income for 62-year olds). Assuming Mr. Early- Retirement stopped working at the beginning of 2008 at 62 and started to collect SS, his reduced benefits and private health insurance, plus his four years of lost income (including 4% annual raises) cost him approximately $237,000-$309,000.
Need I point out that it is very difficult to earn hundreds of thousands of dollars on a risk-free basis? Given the amount of time and energy that everyone spends on contemplating retirement, one of the easiest solutions may be the one you don’t want to hear: keep working!