You're Fired! The Unplanned Early Retirement

Not all retirees aspire to early retirement. Some have early retirement thrust upon them. A 1997 survey in the US found that 44% of current retirees had retired earlier than they had planned and some of the reasons are as follows:

•  65% cited changes at their company, including downsizing and bankruptcy .
•  41% responded that health considerations played a role in the decision.
•  62% pointed to strong personal fortunes: they made it in life and chose to retire early, although it was not the original plan.

Such statistics should serve as a warning to all retirement savers that things do not always proceed according to plans, sometimes for the better, but usually for the worse

Should You Take That Early Retirement Offer?

Sometimes firms attempt to trim their payrolls by offering early retirement packages. Whether or not you should accept such an offer depends on a number of factors:

•  Were you considering early retirement before you received the offer?
•  Would you be able to find other work?
•  Have you already done considerable retirement savings?
•  How attractive is the financial package?
•  How will accepting the offer affect your provident fund benefits?
•  Are you likely to be laid off under less favourable terms if you decline the offer?

The economic crisis of 1997 has dealt a severe blow to the lively hoods of many “white collar” workers. Being laid off is not a pleasant experience and finding new employment when you are in your early 50s can be even harder especially in a recession. Life is full of surprises. There are ups and downs and it's common to fall down once in a while but it's how quickly one gets up again that matters. To help soften the blow of early retirement, you must save and invest aggressively, and be careful not to overspend during the early years of retirement. Working part time during retirement is one possible solution. But before throwing in the towel , here are a few tips that you should consider.

Curtailed Savings Opportunities

Perhaps the biggest difficulty involved with early retirement is that it leaves savers with less time to save. People who work until the traditional retirement age of 65 and avoid long spells of unemployment along the way are likely to have careers at 40 to 45 years in length. That long career is the best weapon most retirement savers have. For example, let's say you begin your career at age 22 and retire at 65. With 43 years to work with, a consistent saver can amass a decent amount of money without too much effort. If you put aside just Baht 10,000 a month in tax-exempted investment funds such as Retirement Mutual Funds (RMF) or Long-Term Equity Funds (LTF) with a 10% annual rate of return, you will have roughly Baht 71.2 mm when retirement rolls around at age 65. By contrast, if you follow the same saving plan, but retire at age 55, you will have only Baht 26.8 mm. That's almost 3 times less. The effect of 10% compound return over 10 years can be a pretty powerful tool for retirement savers. (Chart1)

Giving Up Prime Earning Years

The fact that early retirement means fewer savings years is not even the worst part of the story. Also a concern is which years are lost. By using the previous example, by assuming that you save Baht 10,000 a month for 43 years, but few people save a set amount each year over the course of their careers. It is much more likely that people's best salaries will be from ages 45 to 65, due to accumulated skills, seniority and promotions. Therefore, most people, save relatively small amounts early in their careers due to other financial constraints, but progressively larger amounts later on as their salaries and incomes rise. The best savings time of all often comes very late in working life, usually from ages 55 to 65, when most people are finished raising families and paying education bills. So early retirees are not just losing earnings and savings, but they are probably losing 5 or 10 years of their highest savings potential years.

Increased Need for Savings

Early retirees will need to save more, considerably more in fact, than those who work until age 65 or later. This is the only way to make up for the shorter career and to finance a longer retirement. For example, two 45-years old (Mr. A and B)each determine that they can get by on Baht 100,000 a month at today's prices in retirement and they expect to live until 90 years of age. A would like to retire at 55 while B will work until he's 65; both have already saved Baht 6 mm.for retirement by age 45. By assuming 4% inflation rate, 9% annual return prior to retirement and 7% during retirement, B, who wishes to retire at 65, will need to put aside only Baht 20,000 a month to pay for retirement. But A, the early retiree at the age of 55, will need to save nearly Baht 127,000 a month to fund the same retirement savings. (Chart2)

Early Retirement and Provident Fund Benefits

It is not just your private retirement savings that are likely to be reduced by early retirement, other major sources of retirement income such as registered provident funds, RMFs and LTFs also tend to shrink for early retirees. The key benchmark to watch out for is 55 years of age . By law, if you retire before the age of 55, your employer can not grant you an “early retirement” status and your provident fund and RMF lump sum shall not be tax exempted. Moreover, your entitlement shall not be fully vested. It is the worst of both worlds if you choose to throw in the towel before the age of 55.

Early Retirement: Lifestyle and Expenses

Would be early retirees need to consider what they will do with themselves once they are retired. Thirty plus years is a long time to be doing nothing; you might get bored and many of your friends will still be working away. The other factor to take into consideration is living expenses. Experts generally agree that retirees can expect their expenses to drop to perhaps 60-80% of their pre-retirement levels. But that does not apply to 55-year-olds who still remain healthy and energetic for years to come and that usually means more expenses when your life is nothing but leisure time. The biggest key to early retirement is doing the advance planning so that you know you have enough to live on. The following steps can improve your odds of success in planning:

•  Trim Pre-retirement Budget. Your best chance to amass the funds you will need for early retirement is to make saving your top priority, not something to do when there's money left over. This might mean forgoing the new BMW or flat-screen TV. If you are not willing to make the sacrifices, then early retirement might not be a realistic goal.

•  Invest Aggressively-even into retirement. Retirement is when you stop saving from your earnings and start earning from your savings. Therefore, you better make sure that your savings are working as hard as possible. Once again, inflation is your biggest enemy. If you retire at age 55, even a relatively modest 3% rate of inflation will reduce the purchasing power of your money by roughly 60% by the time you reach age 85. Should inflation run at 4% rate, your purchasing power would be reduced by around 70% . A run of truly high inflation of say 5% or more, which is becoming quite real, could devastate an early retiree's savings.

The biggest mistake of early retirees is to invest too conservatively too soon. Many people feel that they must get rid of their stock holdings once they retired. But quite the contrary, an aggressive portfolio mix will deliver the best returns over time. Over a period of 30 years, the difference between a 7% annual return typical from a bond fund and the 10% rate of return that might be expected from a stock fund is significant. A Baht 400,000 investment in a bond fund producing 7% annual average returns would grow to Baht 3 mm. over the 30 years period from age 55 to 85. But an equity fund with a 10% annual average return would leave the investor with Baht 7 mm. Meanwhile, 30 years or even as few as 15 years should be more than enough to ride out short-term stock market fluctuations. While a typical 65-year-old retiree might have only 40-60% of his or her portfolio in stocks, a 55-year-old retiree should probably have 50% to 70% in such aggressive investments.

•  Part-time Job . Finding a job at the age of 55 is never going to be easy but a part-time job may be easier. It's true that part-time jobs don't pay as well but at least you might be able to delay withdrawing funds from your existing savings and that might be enough to make your early retirement plans successful. Some early retirees find that they can make a decent living acting as consultants and sharing the expertise they have accumulated. Other retirees take advantage of these years to try their hand at the new careers they always wanted. Whatever the part time job, better to take this step now rather than be forced into it later in your retirement, when you find out that your savings are disappearing faster than you had planned, or that your skills might be obsolete or you might be too old to work.