Question: “I am 40 and want to retire before I’m 60. I have six years of state service right now and I can retire at 30 years with full benefits regardless of my age then. I also have the option to purchase seven years of government service with a hefty price tag. I have $12,000 in a retirement account that I could use towards the service purchase.
I just started a new position with a higher salary and I have no emergency fund saved. I have my retirement account with my current employer, another from a previous employer and some stocks that have taken a big hit in this current economy. The precise price to buy back service is tied to my last 12 months of salary. Waiting a year to purchase service would add an additional $10,000 to the cost, but the monthly payment would reduce my ability to save and invest. Is there any hope of retiring early or is it too late? Do I need an adviser to help me?”
Answer: Retiring before 60 might be possible, but that depends on many factors not addressed in your question. And yes, an adviser likely could be helpful in your situation. You can use this free tool from our partner SmartAsset to match you to an adviser, as well as sites like CFP Board and NAPFA.
“Knowing the cost of buying down the government service, how much you’re currently saving for retirement, what the employer match may be, if you’re in a two-income household and what your mortgage and credit card balances are would be a good start,” says Richard Haskell, associate dean and director of academic programs at Western Governors University’s School of Business in Utah.
Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.
With six years of service already, buying seven additional years could let you reach full pension benefits around age 57 instead of 64. “The tradeoff is that buying service credits today locks in a lower price but strains your current accumulated resources,” says Erica Grundza, a certified financial planner at Betterment. ”Also, withdrawals from your retirement account before age 59 ½ could trigger taxes and penalties, making your net payout lower than expected.”
Furthermore, don’t fixate on a particular age at which to retire, and “instead, focus on the benefits and assets you need to accumulate to support yourself without risking running out of money. Assets and benefits would be my marker as opposed to some arbitrary age,” says Gil Baumgarten, founder of Segment Wealth Management in Houston.
And “I have some concerns about your individual stock positions that have taken a so-called big hit while the stock market is at new highs from which you should be benefitting. I think you should reconsider your diversification and buy broad market index funds, instead of owning individual stocks that can have such a large bearing on your future,” says Baumgarten.
For the time being, focus on building at least three months of expenses in an emergency fund and creating a personal budget before committing to the buyback. “Once your savings are stable, the buyback could be worth it if your pension offers an increased guaranteed lifetime benefit,” says Grundza. “I recommend getting clarification on this and also assessing how much the projected pension benefit will offset anticipated living expenses in retirement. Ideally, you’ll want to explore alternative options for liquidity to purchase the credits in the event taking the withdrawal from your retirement fund is expected to yield less than the purchase price of the credits. With consistent savings and careful planning, you might still be on track to retire before 60.”
Do you need a financial adviser to help?
An adviser likely would be a big help to you, pros tell us. While retiring early might sound alluring, you’ll want to be sure you have a plan before you do it. “At the age of 40, you might think 60 is old, but if you’re healthy and active now, you’re likely to realize why so many say 70 is the new 50,” says Haskell. “You’re smart to get serious about your financial future at this point and you have enough time to prepare. Take advantage of the next 20 years, you may have a lot more life in front of you than you think.”
Talk to a qualified adviser in your area who focuses on helping people like you. “They can help you sort through the details, calculate your needs, estimate your expected Social Security income and discuss your options, including how to build enough short-term savings or emergency fund to safeguard your finances before retirement. Most will do so free of charge in the hope of developing a long-term client relationship with someone in your position,” says Haskell.
Working with a CFP who offers hourly or project-based services is probably the best option for you. With an hourly adviser you can target specific questions without the burden or cost of an ongoing relationship. Hourly advisers tend to charge between $200 and $500 per hour and can be used for as few or as many hours as needed. Project-based advisers cost anywhere from $1,500 to $7,500 depending on the scope of work and can help you come up with a plan that suits your needs and appetite for risk. CFPs complete extensive education requirements, pass exams, perform thousands of hours of work-related experience and adhere to a fiduciary duty, meaning they’re required to put your best interests ahead of their own. You can use this free tool from our partner SmartAsset to match you to an adviser, as well as sites like CFP Board and NAPFA.
Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.
Questions edited for brevity and clarity. By emailing your questions to The Advicer, you agree to have them published anonymously on MarketWatch; they may appear anonymously in other media and platforms.