The Painful Cost of Early Retirement
“Mike,” my friend said in a panic…
“I thought I had enough money saved for retirement, but I can barely make ends meet!”
I feel awful for my friend, but he made two critical but all-too-common retirement mistakes. Mistakes I’ve seen destroy thousands of retirement dreams.
This is very important, so let’s get right to it.
Where My Friend Went Wrong
Mistake #1: Retiring Too Early. I get it; the idea of kicking back, enjoying your golden years and ticking off your bucket list sounds like heaven.
“I wanted to retire young enough to be able to travel the world,” said my friend, who quit his job and started collecting Social Security the month he turned 62.
My friend isn’t alone in his misery either. According to the Social Security Administration, a whopping 34% of Americans start taking Social Security at age 62.
Moreover, 57% of Americans start collecting Social Security before they reach their “full retirement” age, which the Social Security Administration defines as 66 years old (and a few months).
Unfortunately, that’s the first mistake millions of Americans make: collecting benefits too early.
Yes, you could start collecting Social Security as early as 62 years of age. But if you do the size of your monthly check will be significantly smaller than if you wait until you hit 65.
Delaying — up to age 70 — can make your Social Security check substantially larger.
When you start collecting your benefits is an important matter.
Not only will delaying your retirement allow you to collect a larger Social Security check — much, much larger — you’ll accomplish several other critical goals, such as puffing up the value of your 401(k), postponing 401(k) withdrawals and being able to use your wage income to pay down debt.
You’ll also be able to take advantage of your employer-sponsored health insurance for longer instead of paying for health insurance out of your own pocket.
Unless you have saved a small mountain of money already, the most costly mistake you can make is retiring too early like my friend did.
Are You Underinvested?
Mistake #2: Investing Too Conservatively. I said that my friend made two mistakes. One was retiring too early and the other was investing so conservatively that he doomed himself to a woefully inadequate income from his savings.
The average savings account pays a paltry 1.68% today, and you get a little more than 2% on 1-year CDs.
Who can live on that?
Certainly not my friend.
The reality is that most of us will enjoy 15–20 years of retirement, which means that you need to think like a long-term investor instead of a short-term saver.
The ideal vehicle to fund your retirement is high-quality dividend-paying stocks.
Not only can you double, triple or even quadruple the measly yields that banks pay, but you’ll regularly enjoy dividend increases as well as capital appreciation from stocks in your dividend-paying portfolio.
Sure, the stock market will always gyrate, but the combination of dividends and capital appreciation is how to make your retirement years “golden.”
And you won’t have to call me in a panic, like my struggling friend.
Here’s to growing your wealth,
Chief Income Expert