One in six people now aim to retire before 55

The traditional age of 65 is too long to wait to retire for more than 17% of Americans, according to a report released Tuesday by consumer research firm Hearts & Wallets.

Instead, that slice of the population pegs 55 as a more reasonable goal — though few are likely to attain complete retirement by then, as a result of insufficient savings, high housing costs and the drag of debt.

For years, the proportion of people who plan to retire younger has been increasing, with 18% of people citing 59 in 2020, up from 11% who said so 2018, Hearts & Wallets found. Last year, the firm separately asked for the first time about retiring before 55, and 17.3% of people said they aspired to that, while 39% said they plan to retire before 65.

Of the roughly 70 million U.S. households with primary breadwinners younger than 55, 11.5 million are planning to retire by that age, according to the report. Half of those people are under 35.

Simultaneously, more people end up working past 65. Last year, 38% of retirees said they retired at 65 or older, up from 23% in 2015, the firm found.

“More and more people are saying, ‘I will work as long as I can,’” said Laura Varas, CEO of Hearts & Wallets. “Those two phenomena, although they seem like a conundrum, are not incompatible.”

The Covid-19 era has made people realize that there are circumstances beyond their control affecting when they retire, such as health changes or layoffs, Varas said. That has made people think about the need to be less dependent on their employment for income, she said.

“It’s scary to see so many people lose their jobs so quickly,” she said.

But some will be more prepared for unexpected retirement than others. Those who aspire to retire by 55 have a lower level of overall debt and a higher multiple of income saved, the firm found. But less than one in five households planning to retire before 55 is saving at least 15% of their income, Varas said.

On average, people direct 43% of their spending to housing and utilities, making that the largest expenditure category. Reducing costs in that area, potentially by downsizing or relocating to a place with lower real estate values, is the biggest way for most people to cut down on spending and make retirement more attainable, Varas said.

“The challenge for advisers and for advice programs in general is that very few of them are incorporating trade-offs between real estate and investible assets,” she said. “That’s the single biggest trade-off that’s going to affect this equation.”

Further, about a quarter of households carry student loan debt, either for their educations or for their children’s or grandchildren’s. That percentage is consistent among people thinking about retiring before 55, but the average amount they owe is lower, according to Hearts & Wallets.

Nonetheless, three-quarters of people planning such early retirements don’t have at least a full year of income saved. Stopping work altogether without at least five times an assets-to-income ratio is often ill-advised, Varas said.

The report is based on survey data from August from more than 5,900 households, as well as ongoing database information from Hearts & Wallets.

TWO RETIREMENTS

Retiring before 65 requires special consideration for the years between the actual retirement and 65, said Randy Bruns, founder of Model Wealth.

“We’ve had multiple clients approach us with this goal. Early on, we made the mistake of assuming there would be some magical rule of thumb like a 4% rule that would need to drop to a 2-or-3-percent rule to account for a longer retirement,” Bruns wrote in an email. “But we later found it better to simply isolate the early years of retirement (ages 55 to 65) and solve for their cost independent of their 'normal' retirement years (age 65-plus).”

For example, there are considerations around private health insurance before people become eligible for Medicare, he noted.

FINANCIAL MATTERS ASIDE

The pandemic has made some clients more focused on the philanthropic abilities they might have when they retire, and that has made some eager to retire sooner, said Michael Simmons, director of financial planning at Transitions Wealth Management.

But stopping work is not just a financial matter, and clients should consider the emotional and social facets of such a decision, he said.

“There are additional challenges retirees face that often they have neither considered nor planned for,” Simmons wrote in an email. “How will they fill their day? How will they react to not having the same contact with co-workers they may have been friends with for years? How will they now measure their success?”

One retiree, Patricia Hausknost, 66, planned to become financially independent early and aggressively saved and paid down debt. She and her husband, who retired at 56, now teach at UCLA and are open to more lecturing opportunities in the future, she said.

“Most people who can financially retire usually don’t know what they would do with themselves,” Hausknost wrote.

Another adviser, Liz Windisch of Aspen Wealth Management, said she has noticed more millennials seeking a higher level of financial independence before 50.

“That is, retire from corporate America by 50 and then work for themselves or for a charitable organization after that,” Windisch wrote in an email. “And they definitely can do it if they start early enough.”

A WAY TO PASS THE TIME

Often, those seeking early retirement are engineers or medical doctors who own their practices, and they almost always have a strong interest in other activities, said Juan HernandezAriano, director at WealthCreate Finanical.

“We’ve found a very high correlation between hobbies and early retirement,” he wrote in an email. “I’ve seen that engineers are much more prepared financially but more hesitant. At the same time, physicians-entrepreneurs tend to be more decided to retire early but less prepared.”

About a quarter of clients who want to retire early have difficult doing so, but that can be addressed by adding a few years to their planned retirement age, he said.