Retiring during a pandemic

-- | 13/10/2020

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Christine Benz: Hi. I'm Christine Benz for Morningstar. Amid the pandemic, workers age 55 and above have experienced some of the highest rates of job loss, and some of them may be mulling an early retirement. Joining me to discuss some considerations to bear in mind in this situation is Maria Bruno. She's director of U.S. Wealth Planning Research for Vanguard, and she's also a Certified Financial Planner. Maria, thank you so much for being here.

Maria Bruno: Hi, Christine. Thanks for having me.

Benz: Let's get into considerations that people who might find themselves at this juncture, maybe they've been displaced from a job and they've really started to think about whether they should retire early. You say a first consideration should be thinking through what retirement looks like. Let's talk about that.

Bruno: That's a first start. For some individuals, they may have been planning for this, so they have their retirement planned out, what they want to do. But for others that may be in a situation where it's an early forced retirement, they're looking at this saying, "Well, I don't know what to do." Right? They really haven't thought through this. So, the first thing is really to think about, What does retirement mean to you? And I always say that if you're married or if you have a partner, make sure you sit down and talk through that. Because oftentimes what we find is that not both parties in the relationship agree on the timing of that and the definition of retirement. So, first understand what your retirement goal is. From there, then you can go into the planning piece of it.

Benz: So, let's discuss some of the financial-planning dimensions. One of the huge ones is healthcare expenses. How you will cover them if you're outside of the confines of an employer-provided plan. How should people think through this?

Bruno: Right. So, the first step would be first look at what your expenses are going to be broadly, right? Look at discretionary versus nondiscretionary expenses. Nondiscretionary--those things like healthcare, utilities, insurance, like those types of things--day to day, and if you break that out, then you can get a better sense of what the expenses are. The big number is often healthcare, because if you are retiring pre-Medicare, you need to make sure that you understand what your options are with healthcare and then the associated costs with that. So, if your employer offers some type of employer-sponsored retirement benefits, then that's a terrific source. Most likely you're going to incur some costs with that. If not, then, you probably need to go out on the open market, in the open exchange, then and look at private insurance.

So, some of the research that we've done on looking at private insurance, it can be costly, for instance, for somebody who's 64 in a Silver plan, that can be almost double what Medicare costs. So, you just want to really understand what these costs look like. It's important to note, though, that this isn't necessarily an all-in new cost. Many of us have either been paying our health insurance during our working years or our employer's been paying part of that. So, I think you need to understand, What am I looking at in total healthcare costs? What are my options? What am I going to cost? And then also what is the incremental? Because I may have been paying for this through my employer plan during my working years. But understanding what the options are and the cost is critical. Also, once you reach age 65, it's just as important to understand the Medicare plan choices and the costs associated with that, and either supplemental or part D plans as well.

Benz: Look forward, look at how your healthcare costs may change over time. 

Moving over to the financial plan, to the investment plan, and the investment portfolio and its viability to see if you have enough, how would you suggest people approach that question? It seems like the gold standard would be: Get some advice, seek out a financial planner. But the old guidelines, like the 4% guideline for retirement portfolio withdrawals has been getting a lot more scrutiny in terms of whether it's still viable, especially given how low bond yields are today. What does Vanguard think about that issue?

Bruno: That's the evergreen question. How much can I spend from my portfolio? So, when you're forced with the situation, it really makes sense to work with someone to look at your individual situation. We have spending rules of thumb. You mentioned the 4% spending rule. We can look at these spending rules. And again, they're often predicated on looking at a couple of levers. One is, what is your asset allocation? So, for someone who's a balanced investor of, say, split between 50% stocks, 50% bonds in a diversified portfolio over a 30-year time horizon. If you run the numbers on it, about 4% is a reasonable starting point. The tough part with that is you need to really look at what the initial conditions look like. So, we're really in a stress environment right now. When you look at the markets and the economy and the next couple of years can be very difficult. So you need to be really prudent and monitor that, especially over the next couple of years because the early spending is so critical. So, you want to take a look at this on an individualized basis, but I think you can look at these spending rules of thumb as a guideline, but really the key is--and we've done some research on this as well--the guideline is really to have flexibility around that. So, in those down markets you want to pair that back to give you a little bit more flexibility than later throughout retirement. 

The other thing I will add is if you are retiring on the early side, your retirement horizon may not be 30 years. It may actually be longer than that. So, if it's a 4% spending rule, for instance, or thereabouts, you really want to pare that back and maybe need to be closer to 3% and not 4%. But the spending rules of thumb really are meant for long-term sufficiency, but you really need to look at it on the closer level year to year, just to understand what the impacts of the current market and economic conditions mean for you.

Benz: And people's sources of cash flow may change throughout retirement, which brings me to my next question about Social Security. People who are younger than their full retirement age do take a haircut for Social Security benefits. Do you have any guidance on how people should approach Social Security planning if they're early retirees, in terms of understanding the trade-offs of claiming early versus potentially lower lifetime benefits?

Bruno: That's a really good question, because we all know if you look at the value of Social Security benefits, the sage advice is, defer, defer, defer, right? Defer to age 70 if you can, because you get the maximum lifetime benefits over your life. And while that's great, you have many situations where retirees need that money to live off of. Or they're looking at deferring Social Security and spending their portfolio assets and understanding that interplay there. If you do take benefits prior to your full retirement age, the benefits will be reduced. So, you could be looking at a haircut of up to 30% on your benefits that are permanent if you take Social Security early. That doesn't mean that you shouldn't do it. It's just understanding what that trade-off is.

If you are an early retiree and you take benefits early, and then you start working again, for instance, you might be subject to the earnings tests. So your benefit actually may get pared back. So, that's another thing to think through. I will say, for low-income earners, Social Security will likely be a greater income replacement. Whereas high-income earners, it's a smaller percentage of their income needs. And those individuals will be more reliant on their investment income to fill that gap. So, there are some trade-offs there in terms of looking at Social Security claiming as well as drawing from your portfolio.

Benz: And you mentioned married couples, Maria, before. And I think it's important also to note that the Social Security planning should be as a couple, right? Because there are some implications for the decisions that you make that would have implications for your spouse.

Bruno: Absolutely. So, earnings history is important there as well as age. We do have information on Vanguard.com. We have a primer on Social Security claiming strategies. But you do have flexibility if you're a married couple, and there's also spousal benefits there. So, as a spouse, you have the consideration of, Is my spousal benefit greater? Or is the payout on my earnings history greater? So there is some homework there, and the dollars can really add up. So, it's important to do the homework on that before you actually pull the trigger.

Benz: Maria, it's always great to get your insights. Thank you so much for being here.

Bruno: Thank you, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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