What to do about an income shortage after retiring early?

A recent Vanguard research paper stated that almost double the project number of Americans retired during the pandemic. I have seen this in my practice.  Many did not want to return to the office on a full time basis, and others valued the time they spent at home with friends and family and made the decision to retire earlier than they had originally planned.  For those clients with significant assets, early retirement is manageable, particularly if they were invested in the proper asset allocation and have enough short term reserves to tide them through this market downturn.  Those clients with less assets may need to address shortfalls during retirement.

Those clients that can't return to work, and still may not have enough income to support their lifestyle may need to consider some other options. Vanguard models use a 79% income replacement ratio, so they assume that you need approximately 79% of your income for living expenses in retirement. If an expected replacement ratio in this range allows for significant discretionary spending, they may be able to finance their retirement with a lower spending level. The old rule of thumb was to allow withdrawals of 4% from the portfolio. In times of inflation and lower returns, some clients may need to adjust this down to 3%. 

The Vanguard study indicated that about 80% of Americans aged 65 and older are homeowners, and housing wealth accounts for 40% of their net worth. Many homeowners can tap into this wealth by moving to less expensive housing, or by moving to a new location with a lower cost of living. Like any financial plan, it will constantly change based on changes in the client's circumstances.  It is important to work with your financial advisor to make sure the plan you made last year is still valid in light of higher inflation and lower market returns. 

About the Author

Patti Hughes is a Chicago Fee-Only Financial Planner.  Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions.  She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.