Iowa State University

Inside Iowa State
July 26, 1996

Retirement planning: Some hard truths about early retirement

With the extension of early and phased retirement programs through June 2002 for Iowa State employees, this may be a good time to look at the idea of retiring early.

Most workers expect to retire before they turn 65. On average nationally, workers figure they'll call it a career at age 61 -- and many expect to be roaming golf courses, traveling to see grandchildren and exploring museums long before that. There are three things you might consider before you make your plans.

1. If you're 35 and plan to retire at age 65, you've got 30 years to save. But what if you want to hit the links at 55? In that case, you have 20 years to save. What's more, you are cutting out the period when your money is working hardest for you. The 10-year period between ages 55 and 65 makes a huge difference to most investments and accumulations. When you retire at 55 and give up 10 years of investment accumulation, you may be giving up the ability to replace your current salary. If beginning at age 35 you save $500/month at an 8 percent annual return for 30 years, it will grow to $296,000. But if you leave the money on account until age 65, it will grow to more than $640,000. If you continued to work during this period of time and contribute to your retirement fund, the amount will be much greater.

2. Beginning to withdraw a lifetime income at age 55 rather than age 65 will mean a significantly decreased income. At 4 percent annual inflation rate with a fixed pension over 24 years, you will reduce your purchasing power as much as 50 percent. Inflation will creep up on you and significantly affect your fixed income in retirement.

3. If you're counting on Social Security to help you retire early, think twice. Although currently you can start taking payments at age 62 rather than waiting until age 65, your payments will be reduced by 20 percent for life. That could cost you and your spouse as much as $4,200 a year if your lifetime earnings qualify you for the maximum Social Security earnings base.

You don't need to give up your dream of retiring early, but you do need start early and plan well. Understanding TIAA/CREF, how each account grows differently and what the payout differences are now may help you reach your goal of retiring early.

For more information, contact the Retirement Information and Planning Office, 4-3830.
Submitted by: Ann Molison

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