Retirement could come sooner than you think, so prepare

NEW YORK — American workers expect to retire at a median age of 65, according to a 2023 survey from the Employee Benefit Research Institute, or EBRI. But the actual median age for retirement is 62, the survey found.

That may not seem like a big gap, but if you retire three years earlier than planned, that’s three fewer years of savings and three more years of retirement to fund.

This could happen for all sorts of reasons: You (or your partner or your parents) could get sick or disabled, there could be changes at your company, or you could simply burn out on the job. Forty-six percent of retirees exit the workforce sooner than they had planned, according to the EBRI survey, and of those, 35 percent say they did so due to a hardship (like health issues or disability).

With this in mind, it’s helpful to prepare financially for an earlier retirement, even if you plan to work forever. Here are some moves that will help:

Save aggressively

The more you can save now, the less you’ll be pressed if you can’t work as long as you’d like. Be realistic about how much you’ll need to maintain the lifestyle you want.

Ashley Folkes, a certified financial planner in Hoover, Alabama, has clients testdrive living on less for a month or two to see what it might be like in retirement. “A lot of them realize that they really can’t get by, or they don’t want to have to lower their standard of living to that degree,” he says. “It reinforces the fact that they need to save more money now.”

Once you’re 50 or older, you can make catch-up contributions to your retirement accounts. In 2024, you can contribute an extra $7,500 to your 401(k) and an extra $1,000 to a traditional or Roth IRA. If you’re 55 or older, you can also put an extra $1,000 into a health savings account, or HSA, if you have access to one.

Avoid lifestyle creep

If you bump up spending every time you get a raise, you’re making it more expensive to maintain your lifestyle later. Rather than buying a bigger house, consider paying off your mortgage instead, says Michael Hausknost, a CFP in Long Beach, California.

Folkes notes that clients expand their spending to match their new paycheck but don’t boost their savings rate accordingly. “You’ve got to show them they’ve got to live off about 40 percent of this inflated lifestyle,” he says.

Include health care

Unless you’ve got retirement health benefits or a spouse who’s still working, retiring before 65 means paying for your own health insurance until you’re eligible for Medicare. This can be done, but you should account for it in your savings plan.

Donnie Lagrange, a CFP in Dallas, estimates that a couple should expect to spend at least $15,000 a year on a health insurance policy that covers both of them before age 65. If someone retires early without taking this expense into account, he says, “it can really drain the portfolio.”

Retirement over college

Don’t skimp on retirement savings in favor of funding your child’s education. You can finance college — but you’re on your own for your golden years.

Folkes has worked with clients who want to retire at a certain age but pull six-figure amounts out of their portfolios to pay for college for their children. “I’ve had to have those tough conversations with clients,” he says. “That’s a big chunk of money for a lot of people, plus the fact that it doesn’t have the ability to compound over the years.”

Run the numbers

If you’re guessing whether you’ll have enough money if you have to leave the workforce earlier than planned, get a checkup from a financial professional to be sure. You might be OK saving 10 percent a year, or you might find that you should be putting away 20 percent (or more) a year, plus trimming expenses.