MANILA - Most people expect to retire between 60 to 65 years old, but secretly wish they could do so earlier. The thought of early retirement brings with it thoughts of endless vacations, freedom from stress, and being able to reap the fruits of your years of labor.
Realistically, many of us will not be in a good financial position to retire early. If you were not able to build up your pension or retirement packages, and if you do not have enough savings to take you through the next few decades, then it will be difficult to retire without sufficient savings.
Early retirement will be harder to do if you still have dependents relying on you for their basic needs such as schooling for kids and medication assistance for loved ones.
On the other side of the coin, there are also folks who have sufficiently built up a nest egg that allow them to toy with the idea of going on early retirement. These lucky folks probably have adult children who no longer need their support. Of course, there are also those who are thinking of retirement simply because they are too tired of the daily stress from work and have made a decision to improve their lives.
Depending on your individual status, retiring early may or may not be advantageous. Let’s look at the pros and cons to help you arrive at a sound decision:
Tax incentives. If you have worked for a certain number of years and have reached the age of 50, you may be entitled to a tax-free retirement package. Check the company policy on this, This is an enormous savings that can go up to over 32% -- a huge sum that you can certainly enjoy. However, before you apply for retirement on this premise, make a quick check with your accountant just to make sure that you meet all requirements to avail yourself of tax incentives.
Greater purchasing power. If you retire early and get the funds as a lump sum, your money will be worth more in terms of buying power today compared to getting it in the future. That’s because inflation can erode the value of your money. When you opt for early retirement, you are able to enjoy the present value of your money, which gives you more bang for the buck.
Less work-related expenses. When you retire, you will be free from work-related expenses that add up. This includes transportation costs, daily meals, mobile dues, and even payment for services that you have to delegate to others while you are at work. Sometimes, working also brings up your health-related costs. Combined together, these expenses somehow add up.
A windfall if you opt to rejoin the workforce. Some people who go on early retirement decide to go back to work after a few years into retirement. This is like having the best of both worlds – having your pension money and having income from your new job.
Recently, there have been moves in Congress to remove age restrictions, which should be good news for retirees who can once again bring their expertise to the workplace.
Less cash flow. Retiring early means that your cash flow will be more limited compared to how it was when you were still employed. While there might be less work-related expenses now that you no longer have to go to the office, and while you have retirement funds, you can still expect a slowdown in cash flow on the whole. This means you will have to manage your day-to-day expenses better.
Loss of benefits. Many employees provide their workers with important benefits such as health insurance which will no longer be available once you opt for retirement. If you do not have personal health insurance and you fall ill, then you will be paying for all these out of your own retirement money.
Less retirement funds. Let’s face it, retiring early means you will get less money. The sooner you begin drawing on your retirement funds, the smaller they will be. If you opt to draw your pension at age 55, they will be less in absolute amount than if you begin to draw them at age 65. Before finalizing your decision, ask your accountant to help you compute how much you will get if you choose to retire at a certain age.
Living it down. Because you don’t know how long your retirement funds will last, you need to be more circumspect with your expenses. If you retire at age 50 but live to be 85, you will need to finance your needs for the next 35 years out of the funds you get today, which may not be possible unless you embrace a simpler lifestyle.
While the prospect of retiring seems appealing for somebody who has been in the workforce for more than 20 years, you should also be realistic. You may be dreaming of spending your “retirement years” at your vacation house by the beach, but reality will come crashing in when the bills starting piling up and you don’t have enough funds to pay for it.
Whatever your decision, make sure it’s a choice you can live with and will serve you well until your twilight years.
Grow Your Money is an editorial partnership between news.abs-cbn.com and Citi Philippines to promote financial education and provide helpful information to Filipinos on how to better manage their personal finances.
Visit www.citibank.com.ph for more information.