Early Retirement Years

The transition from working to retirement can be a difficult one for individuals to navigate.  After having spent so much of your life working, moving to a mindset of retirement can create a whirlwind of emotions.  In the midst of dealing with those emotions comes a more practical matter.  How can you make sure that your retirement savings last for your entire lifetime?

As you approach retirement, a number of questions may pop into your mind.  Can you retire early, or do you need to continue working until the “normal” retirement age?  How much can you safely take out of your retirement accounts without facing the risk of running out of money?  If you don’t need money from your retirement accounts, can you put off withdrawing from them indefinitely?  Finally, how should Social Security fit in with your retirement goals?  We’ll attempt to answer all these questions.

Part-time Work

It may sound contradictory, but one of the best financial decisions you can make when you retire is to continue working.  There are a number of benefits to finding a part-time job even after you decide that your years of working full-time are behind you.  Receiving earnings from a part-time job means that you can delay spending down your retirement accounts, giving them more time to potentially grow. An extra three to five years — especially if it coincides with a rising market — can have a tremendously powerful impact on the sustainability of your portfolio.

In addition to delaying spending from your retirement accounts, continuing to work part-time can also have benefits when it comes to Social Security.  Every year you work improves your earnings history, which can increase the amount of Social Security you receive. Further, part-time earnings may allow you to delay taking Social Security benefits, which increase by 8% every year past your full retirement age, up to age 70.  For a more detailed look at how Social Security should fit into your retirement plans, see the following section on Social Security.

Finally, part-time work may offer access to employer benefits, such as health insurance and contributing to tax-efficient employer sponsored plans like 401(k)s — not to mention getting the employer match, which is literally free money.  The longer you can put off drawing from your retirement savings, the longer it will last.  For an added benefit of continuing to work during normal retirement age, see the section on Required Minimum Distributions (RMDs).

Social Security

The current “full retirement age” for Social Security is 67, meaning that if you wait until you are 67 to start collecting your Social Security benefits, you will receive the full benefit amount.  However, you can start receiving benefits as early as age 62.  For each month you start receiving benefits before full retirement age, your benefits will be reduced by approximately 0.5%.  That means that if you sign up for Social Security as soon as you turn 62, you will only receive about 70% of the full benefit.

However, if you delay receiving your Social Security benefits as soon as you reach full retirement age, your benefits will increase.  For each month you delay receiving benefits, your monthly payments will increase by 2/3 of 1%, or about 8% annually, up until age 70 (there is no added benefit once you turn 70).

When the Social Security Act was signed into law in 1935, it wasn’t meant to be the only source of income during a person’s retirement.  It was seen as a safety net to keep the elderly from becoming destitute.  However, as guaranteed company pensions gave way to 401(k) plans and Individual Retirement Accounts (IRAs), for a period of time Social Security became thought of as a “guaranteed” retirement plan that ought to cover all retirement expenses.

January 1940 saw the first payment of monthly Social Security benefits.  One of the first individuals to receive a monthly Social Security check was Ida May Fuller, who worked for three years during the initial rollout of the program before retiring in November 1939.  The total amount in taxes collected on her salary was $24.75, and during her lifetime she received $22,888.92 in Social Security benefits.  That obviously wasn’t sustainable.

While a number of changes have been made to the program over the years (particularly measures to shore up its sustainability), under current law, the Social Security trust fund can’t have a negative balance.  While it can send out more than it takes in during any year, it can only do so if it has accumulated the necessary surplus in the Social Security trust fund.

Because of the current fertility rate, aging population, and increased life expectancy since the Social Security program was first established, major changes are set to occur over the next decade.  In 2003, the Social Security Board of Trustees reported that benefits were expected to be payable on a timely basis until 2042, when the trust fund reserves were projected to become exhausted.  By 2009, that year had been revised to 2037.  As of 2024, the trust fund reserves are projected to be exhausted in 2035.  So, what will happen once reserves are gone?

Unless the law changes, the Social Security program won’t go away, but scheduled benefits would need to be cut to match revenues.  It is estimated that benefits would initially be cut by 17% if nothing else is done.  So, when we talk about the “full benefit amount” or benefits increasing by delaying collecting from Social Security, it’s important to keep in mind that changes are looming on the horizon.

Withdrawal Rates

How much can you withdraw from your retirement account every year without running out of money?  For years, there was something known as the “4% Rule.”  The idea was that retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust the dollar amount for inflation each subsequent year.  According to the 4% Rule, this should lead to you not outliving your money for 30 years.

The 4% Rule is a simple rule of thumb as opposed to a hard and fast rule for retirement income. It assumed a portfolio that was 60% invested in stocks and 40% in bonds.  While the 4% rule can provide a helpful starting point for retirement planning, it’s not a one-size-fits-all solution. Factors such as market fluctuations, medical expenses, and personal tax rates must be considered when determining a safe withdrawal rate.

Many factors influence the safe withdrawal rate such as risk tolerance, tax rates, the tax status of your portfolio (i.e., the ratio of tax-deferred assets to taxable assets to tax-free assets) and inflation, among others.  The 4% Rule also assumes that the stock and bond market produce their historical average returns.  However, life isn’t predictable.  If the market performs poorly, or unexpected expenses arise, that can throw a wrench into the 4% Rule.  During a time when the stock market is doing well, withdrawing more than 4% might be perfectly fine.

Does that mean that the 4% Rule is worthless?  No.  It can be a starting point, but you will need to look at your particular situation and adjust accordingly.  If you’re fortunate enough that you don’t need to dip into your retirement accounts when you first retire, be aware that there will reach a point where you will be forced to, as explained in the next section.

Required Minimum Distributions (RMDs) 

If you have a retirement plan, you will be required to withdraw money from it eventually (whether you want to or not).  Money you put into the plan was tax-deferred, and the IRS won’t allow you delay paying taxes on it indefinitely.  Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your tax-deferred retirement accounts each year. In general, you must start taking withdrawals from an IRA and retirement plan accounts like a 401(k) when you reach age 73 (the age was raised from 72 to 73 starting in 2023 and will rise to age 75 in 2033).  Note that a Roth IRA, which you have already paid taxes on, is exempt from the RMD requirement.

Generally, an RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes.  That will determine the minimum amount that you must withdraw from the retirement plan, although you can always withdraw more than that amount (and pay more taxes accordingly).

What happens if you fail to take your RMD?  The penalty for that is not light.  At one time, if an account owner failed to withdraw the full amount of the RMD by the due date, the amount not withdrawn was subject to a 50% excise tax. The SECURE 2.0 Act dropped the excise tax rate to 25%.  It’s possible that the IRS will reduce that to 10% if the RMD is timely corrected within two years.  This excise tax is on top of the income tax that you will have to pay when the money is withdrawn.

What if you are required to take an RMD, but you don’t need the money?  Is there a way to avoid paying taxes on the RMD?  If you’re philanthropically inclined, the answer is yes.  A Qualified Charitable Distribution (QCD) allows individuals who are 70 ½ or older to donate up to $110,000 (in 2025) from their retirement plan to charity tax-free each year.  The QCD should be paid directly from the retirement plan to an eligible charitable organization, and it will count towards your RMD.  While a QCD is not deductible as a charitable contribution on your taxes, it allows you to fulfill your RMD requirement (up to the amount donated) while also not having to pay taxes on the RMD.

There is one other way to avoid taking an RMD.  Any funds inside your current employer’s retirement plan will escape RMDs as long as you remain actively employed.  Funds in an inactive 401(k) from a former employer would still be subject to required minimum distributions, but this can be avoided if the inactive accounts are consolidated with your current employer’s 401(k) account (assuming the employer accepts rollovers). 

How to Get Started

Any time you’re facing a mountain of financial decisions, it’s important to have someone who can help you cut through the jungle and set up a clear path.  A professional financial adviser can help keep track of your financial situation and give you clear, objective advice to ensure that your financial goals are met.  Find someone that you’re comfortable with and let them help guide you on your financial journey. 

About Chase Investment Counsel

Chase Investment Counsel is a family and employee-owned boutique wealth management firm that offers personalized investment services. Our clients include career professionals, those nearing or in retirement, and families experiencing financial transitions such as generational wealth transfer, widowhood, divorce, or sale of a business. Chase’s active, disciplined investment management team is focused on selecting individual stocks and bonds targeted at each investor’s specific financial goals and risk tolerance. Established in 1957 in Charlottesville, VA, Chase Investment Counsel manages more than $400 million in assets.