How can you make early retirement happen?

Retiring early is perhaps the No. 1 goal of millions. Achieving that goal, however, is rarely possible in the absence of good old-fashioned planning. So what are the elements of a sound retire-early plan?

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Annuities have gotten mixed reviews from the financial community, with some praising their unique attributes while others point to high costs and confusing provisions. Yet even though you can find all sorts of complicated annuities that are open to criticism from skeptical financial planners, theres a much simpler type of annuity that can actually give older Americans the exact protection they need when they need it -- and often at a cost they can afford. Lets take a closer look at the product that one study discovered could have a significant role in saving your retirement finances from potential disaster.

Replacing the private pension
A recent study from the National Institute on Retirement Security For decades in the 20th century, many workers relied on pension plans from their employers to make ends meet during their retirement years. These pension plans featured predictable, reliable streams of monthly income that would last as long as a worker -- and in some case, the workers spouse -- survived. Retirees didnt have to do anything to manage the investments that backed up those pension payments. Instead, it was up to the employer to make sure it could afford to pay those benefits -- and if it couldnt, the company would have to pony up additional money of its own in order to make up the difference.

More recently, though, many private pensions have disappeared. That has left people with a funding gap in their retirement, and the move toward 401(k) plans has taken the emphasis away from creating monthly income and replaced it with the need to build up large nest eggs to finance a retirement that can often last as long as 30 years or more.

The logical product to replace private pensions is the annuity. More specifically, immediate annuities pay monthly streams of income to the annuity holder, allowing you to trade an upfront premium payment for the right to receive checks for the rest of your life. Yet the problem with immediate annuities is that theyre relatively expensive, especially when interest rates are below long-term historical levels. In other words, youd have to save so much to buy an immediate annuity that would meet your needs that few people can expect to succeed.

Enter the longevity annuity
The reason why immediate annuities are so expensive is that they start paying out income right away. Yet theres another insurance product that the study refers to as a longevity annuity that works a little differently. And, because it does, it isnt nearly as expensive in providing the coverage that many retirees need.

The longevity annuity, also known as a deferred income annuity, differs from a standard immediate annuity in that it doesnt start making income payments right away. Instead, you can set up the longevity annuity to start paying monthly income years or even decades into the future, with many people choosing to trigger payouts beginning in their 80s. After the payments start, they can continue for the persons lifetime, just as with a regular annuity.

Theres a big trade-off with a longevity annuity. On one hand, the odds are higher that youll never collect a single penny under a longevity annuity, because if you die before you reach the triggering age, then the premium you paid wont necessarily result in any payoff at all. Yet because that risk is built into the price, longevity annuities cost a lot less than regular immediate annuities, and the potential reward is therefore larger than with a longevity annuity.

Still, one reason to embrace longevity annuities is that they leave other retirement assets available for other use. By breaking out a big portion of your income needs after you reach a key age, such as 80, you can take the remainder of your retirement savings to focus on your financial needs earlier in retirement. That can allow you to be more aggressive either in spending down your assets or in investing your savings to produce even better long-term returns.

Annuities have earned a bad reputation in some quarters, as the commissions that insurance providers pay to those who sell these products can sometimes lead to inappropriate use. For many, though, considering a longevity annuity is a smart move that can help you avoid the very real risk of running out of money late in your retirement years.

Planning to work longer to bolster your retirement finances?

It can make a big difference, but it is tough to pull off. Half of all retirees leave the workforce earlier than planned due to a health problem or job loss.

Blue collar workers with physically demanding jobs are most susceptible to early retirement, according to conventional wisdom. New research confirms that, but it also shows at least one type of early-retirement risk is spread much more widely across job types than previously thought.

These findings serve as a reminder that while working longer is a worthy aspiration, it is not a reliable financial plan. They also underscore a fallacy in the policy debate about raising eligibility ages for Social Security and Medicare.

Researchers at the Center for Retirement Research developed a "susceptibility index" for early retirement that ranks 400 occupations on a 1-100 scale (100 is highest risk). They did it by cross-analyzing the federal Occupational Information Network database and the Health and Retirement Study, a long-running University of Michigan research project on Americans over age 50. The susceptibility index looks at the abilities required to do a job and measures the likelihood that those skills will decline with age.

The index does not measure the risk of early retirement due to job loss or other factors, such as the need to care for a family member. Instead, it looks at cognitive, psychomotor, physical and sensory abilities required to do various jobs. The key finding: highly educated professionals can be as susceptible to early retirement risk as a steelworker or truck driver.

"Almost every occupation has one ability that would be expected to decline with age," says Anek Belbase, research project manager at CRR and a co-author of the report.

The occupations least at risk are those where verbal skills are key. "These also are jobs where people rely on social skills, which tend to be constant or improve with age," Belbase says. The group includes sales representatives (index ranking: 4), judges and magistrates (5), receptionists (6) and bookkeepers (10).


If your job requires a high level of cognitive skill, you might be at greater risk, depending on the type of cognitive skill needed. "Crystallized" cognitive ability, or knowledge, tends to accumulate with age and boosts your odds of functioning well at older ages. But "fluid" cognitive ability, which includes things such as episodic memory and reaction time to new information, tends to decline with age."A CEO mostly makes decisions using crystallized knowledge, but fluid intelligence does decline with age, and that is very important for some types of decision making," Belbase says. Still, CEOs scored just 21 on the index, far lower than designers (63), dentists (67) and photographers (71).On the high end of the susceptibility scale are automotive service technicians and mechanics (100), electricians (96), detectives (83) and iron and steelworkers (98).

CRR's findings underscore the substantial risks to a financial plan of relying on extra years of work.

An unplanned early retirement requires stretching savings over more years, with fewer years of saving at high income levels just before retirement. Early retirement also can mean early filing for Social Security benefits, which reduces annual income substantially for the rest of a retiree's lifetime. And if early retirement comes before you qualify for Medicare (at age 65), the cost of health insurance can rise substantially.

The scattering of risk across occupations also has important public policy implications. Proponents of boosting eligibility ages for Social Security and Medicare argue that we can all delay claiming these benefits because we are all working longer these days. But it would create unnecessary, unpredictable retirement outcomes for millions of Americans.

How to know your own susceptibility number? Belbase's index has not been published in its final form, and there is no online tool yet that can show an occupation's susceptibility. Belbase's research will be published sometime in the next 12 months, along with downloadable charts of the index rankings.

"If you want to assess your chances of being able to work as long as you want, simply talk to older workers in your field," he suggests. "If you can't find any, that means you should probably have a backup plan."

By the way, reporters and news analysts, I am pleased to say, scored a 37, so count on me to stick around here for a while.

The discussion of health care costs should be part of any retirement plan.

A recent study by the Employee Benefit Research Institute demonstrates just how important a topic it is. The EBRI projected that in 2014, men and women who wanted a 90 percent chance of having enough money to cover out-of-pocket health care expenses in retirement would need to have saved $116,000 and $131,000 respectively by age 65. Of workers in their 50s and 60s, only 42 percent have saved in excess of $100,000.

Given these numbers, maybe we need a different way of looking at funding health care. The EBRI has a suggestion for doing so as well. It suggests identifying recurring versus the non-recurring expenses. Recurring expenses are the more standard elements of health care whereas non-recurring are those that are harder to predict.

Recurring services include such things as doctor visits, prescription drugs and dentist visits. Costs in this category tend to remain consistent during the retirement years. With this consistency comes the ability to calculate the average cost. The EBRI did so and says on average the out-of-pocket expense for individuals age 65 and older is $1,885 annually. With a 2 percent inflation rate, a 3 percent return and a life expectancy of 90 years, one would need $40,798 at age 65 to cover recurring costs at this level.

Non-recurring expenses include items such as outpatient surgery, overnight hospital and nursing home stays. These costs tend to increase with age and are less predictable.

The average out-of pocket expenses for nursing home stays are estimated at $8,902 in the 65-to-74 age group, $16,948 for the 75-to-84 age group and $24,185 for individuals age 85 and older. The ability to predict the needs for these services is largely unknown.

Adding to the costs outlined in the EBRI survey is the underlying insurance. Medicare begins at age 65 and is comprised of several different facets that quickly become alphabet soup. Part A is free and covers basic needs, such as inpatient care in hospitals.

Part B has premiums that vary based on income and covers medically necessary and preventive services. The majority of people pay $104.90 per month for Part B with surcharges for upper income retirees.

Part D covers prescription drugs, which averages $33 per month, with various premium levels depending on plan coverage, as well as additional surcharges for higher income individuals.

Lastly, Medicare does not cover everything that is typically needed for comprehensive health insurance, such as foreign travel. Often a supplemental policy (also called Medigap) is suggested to provide broader coverage. These costs vary widely between insurer and the plan features, but the average is $183 per month. The average of these three insurance components total $320.90 per month or $3,850.80 annually.

All of these figures illustrate that the cost of health care in retirement is expensive, and it needs to be incorporated into your planning. Inflation will drive costs up over time because historically health care has increased faster than core inflation. The best way to deal with health care costs is to start planning early. The cost is largely determined by an individuals health, insurance coverage and the age they retire. So, exercising and eating healthy are great preventive measures that are often overlooked. But consider some other possibilities such as part-time employment that provides health insurance coverage during the early retirement years.

If you currently use health care services infrequently, consider using a Health Savings Account in conjunction with a High Deductible Health Plan. It might be a wise choice that allows tax-advantaged savings for future health care expenses.

Marc A. Hebert, MS, CFP, is a senior member of the wealth management and financial planning firm The Harbor Group of Bedford and is the firms president. Email questions to Marc at This email address is being protected from spambots. You need JavaScript enabled to view it.. Your question and his response might appear in a future column.

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