As an educator, you'll likely reap the rewards of shepherding a new generation of children. But no matter how rewarding the job, it can also take a lot out of you. You might just feel like you can't make it to age 60 or 65 and maintain the same level of commitment.
Perhaps you're thinking an early retirement would be nice. An essential step in determining whether an early retirement is possible involves crunching the numbers and considering factors such as retirement assets and desired lifestyle.
Consider the "How Much" Factors
How much do you expect to have in guaranteed monthly retirement income? When figuring this amount, include payments from all sources such as your CalSTRS or CalPERS pension plan and Social Security (if you are eligible). Keep in mind that, if you do qualify for Social Security and you begin receiving payments as early as allowed (age 62), those payments will be only a percentage of the payment you would receive if you waited until full retirement age (67 for those born after 1960).
How much will you spend? Financial planners recommend estimating that your retirement expenses will be about 80% of those you had before retirement. But you might spend 100%. Think about the standard of living and lifestyle you want in retirement and how much you will need to maintain it. To learn more, use the Projected Retirement Expense Calculator.
How much will you have accumulated by retirement? To calculate total assets, include balances of your 403(b) and or 457 plans, and any personal investments such as IRAs. Your account balance will have to help fill the gap between your monthly defined benefit pension payment, other income and your projected retirement expenses.
How much will inflation affect your portfolio? Early retirement means your money will have to last longer. You should factor in the effect rising prices will have on your buying power. Living on a fixed income that doesn't keep pace with inflation can leave retirees short on funds. The "How Long Will My 403 (b) or 457 Plan Savings Last" calculator can give you an idea of how long your savings could last in retirement.
How to Escape Penalties
If you withdraw from your 403(b) plan before age 59½, you may incur a 10% penalty on that amount, as well as the taxes you have to pay regardless.* Taking a lump-sum distribution may also hold significant tax consequences. You may be able to avoid the 10% early withdrawal penalty and the tax hit of a lump-sum distribution with a number of strategies:
Roll the funds into an IRA to preserve your money’s ability to grow tax-deferred.
Purchase an annuity. You can choose a fixed annuity, with a set payment guaranteed by the issuing insurance company, or a variable annuity, with payments dependent on the performance of the underlying investments.
Are You Emotionally Ready?
For many educators, work provides a sense of purpose and a social network. If you plan to retire early, think carefully about how you want to spend your time. Unless you have hobbies, volunteer work, friends and family sufficient to provide fulfillment, you may want to spend some time figuring out what you plan to do in retirement.
If early retirement is part of your plan, it's important to consider all of the factors. Make it part of the formula to contribute as much as you can, up to allowable maximums, to your 403(b) and/or 457 plan.
* 10% penalty does not apply to 457 plans.