Retiring Early, Part Two

Before digging into the topic for this post, I forgot to mention in the first post on retiring early (regarding the availability of healthcare insurance) that the fact that Alea is a registered nurse also helps with our health care costs.  A few years back, out of the blue I had an acute kidney infection.  The doctor told me that if Alea had not been a nurse (I was so sick that she was with me when I saw him) that I would have been admitted to the hospital on the spot.  Instead, I was sent home with a heavy duty antibiotic and the immediate crisis was over the next day.  So needless to say, that saved us a bunch of money, as no hospital stay in the U.S. is cheap.

Part two of this story is about the effects of current monetary policy on our retirement income.  I'm no expert on any of this and have no formal education or credentials in this area, so please do your own math and make your own decisions on these matters (or check with your financial advisor).  I'm simply laying out why, in my view, retiring early makes potentially much more sense now than it did, for instance, in my parent's era.

This is a tale mostly about inflation and Social Security.  Inflation drives wages up (or vice versa), and your wage income is used to calculate your Social Security benefits.  For most people, Social Security is their main source of retirement income.  For us, additional retirement income will come to us in the form of two small pensions.  Inflation also eats away at those pensions, since they are based upon the wages that we were earning more than a decade ago when we left the employers who offered those pensions.  Fortunately for us, inflation has been low for many years now and looks like it will remain that way for most or all of the time between now and when we turn 65.  So we are very fortunate that thus far inflation has had a fairly modest effect on our two pensions.

There's definitely some inflation out there, and most of us feel it at the grocery store and, until recently, the gas pump.  But government-defined inflation is very low, thanks chiefly to the availability of cheap money caused by massive investment in government securities, mainly by China.  And it has been that way for quite a while, so the effect of inflation on our future retirement income has been modest - that income has declined in real value, but by far less than we had been expecting. 

During most of my career, wages usually increased by 3-5% per year or more, and my future social security benefits were based upon these ever increasing wages.  But that reality has changed for most people - in the past several years wages have stagnated and it looks as though they may stay that way for at least a few more years.  If you are nearing retirement age and your wages have stayed the same or dropped, then for the most part your future Social Security benefits won't have increased (this is dependent upon several factors, but will be the case for most people).  So if your wages will be about the same in five years as they are today, working longer probably won't mean that you will get much more retirement pay from Social Security.   So there's not much incentive to stay in the workforce, if you can afford not to work until you have access to one or more sources of retirement income.  After all, someone else will get the job that you had, so there should be no decrease in the amount of money going into the Social Security Trust Fund to fund all of our retirements.  And if the person that gets your old job is fairly young, then they'll spend a higher percentage of their wages on goods and services than you would, leading to increased demand for even more workers who would also contribute to Social Security.

Of course I'm not saying that you should start drawing Social Security early (if you are eligible), as those payments are reduced by something like 7-8% for every year that you claim benefits before your normal retirement age.  There is a whole other series of things to consider in determining whether that might make sense for you, and you'll need to sort that out on your own.  But if you are able to quit working today and live off another source of income until you get to (or at least closer to) full retirement age, then your Social Security benefit will be about what it would have been if you had kept working (assuming that wages remain depressed over that time and inflation remains low).  On the other hand, if your income is continuing to rise while everyone else's has stagnated, your future Social Security benefits will likely increase for every year that scenario holds true, so for you there would be a financial disincentive to retiring early (if so, we hope that you are having lots of fun at your job).  And if inflation gets out of hand, it pays for nearly everyone to keep working as long as they can, especially since more retirement incomes now have caps on cost of living adjustments.  

So, in a nutshell, our retiring early will probably have a fairly minimal effect on our future retirement income from Social Security.  And the effect on our pensions will be somewhat more significant, but far less than has been the case historically.  If you are hanging around the workforce solely in the hopes of "maxing out" Social Security, there may not be nearly as much financial benefit as has historically been the case.  That is, unless very significant inflation occurs in the period between now and when you reach full retirement age.  That scenario is a risk, and as such needs to be weighed in your own risk-benefit analysis for determining the best time for you to retire.  For us, Social Security and our small pensions are not our only sources of future income, so the risk for us currently looks to be acceptable, since our other retirement assets appear to be sufficient to allay any fears of other foreseeable risks, such as outliving our savings or a possible future cut in Social Security benefits.  We'll discuss those other assets in a later part of this post.