Personal Finance
Early retirement comes as a surprise for many workers, study finds
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Lost years ‘absolutely critical’ for retirement security
Unplanned early retirements can have severe financial implications for retirees, according to Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies.
“Many people may not even realize how severe the consequences can be and how absolutely critical those extra five or 10 years in the workforce can be in terms of achieving retirement security,” Collinson said.
If those new retirees take Social Security benefits before their full retirement age — which is 66 to 67, depending on date of birth — they take permanently reduced benefits. The median age for claiming Social Security benefits is age 64, according to EBRI. Retirees stand to get the biggest Social Security benefits if they wait until age 70.
Retirees who stop working at age 62 miss out financially in other ways.
They may lose five years of income, assuming they intended to retire at their full retirement age of 67, Collinson said.
They may also lose potential employer sponsored retirement benefits and additional credits towards their Social Security work history.
They’re also missing out on growth of their savings and investments, assuming they would have left those untapped if they kept working.
Plus, they have to pay for health insurance before Medicare eligibility age of 65, which can be expensive, Collinson said.
Reset financial goals after an early retirement
Individuals who are forced into early retirement may not have a lot of financial flexibility. But they should sit down and come up with a financial plan, which can help assess their risks of running out of money in the future, Collinson said.
If possible, newly retired individuals should try to give themselves time to pause and reset their financial goals, said Ted Jenkin, a certified financial planner and the CEO and founder of oXYGen Financial, a financial advisory and wealth management firm based in Atlanta.
When they do evaluate their finances, they should consider whether it would be advantageous to move, including where taxes may be lower; carefully review the rules that come with COBRA or other health insurance plans; and take a look at any unused perks that may be available to them, like credit card rewards, said Jenkin, who is also a member of the CNBC FA Council.
Still-employed pre-retirees should also take note and take steps now to try to extend their working years, Collinson said.
By keeping good health habits, making sure their job skills up to date and relevant and continuing to build their professional networks, workers may avoid unforeseen early retirements, she said.
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Actively managed exchange-traded funds are a growing trend in the investment space.
To that point, investors have pulled money from active mutual funds and sought out actively managed ETFs in recent years. Investors yanked about $2.2 trillion from active mutual funds from 2019 through October 2024, according to Morningstar data. At the same time, they added about $603 billion to active ETFs.
Active ETFs had positive annual inflows from 2019 through 2023 and are on pace for positive inflows in 2024, according to Morningstar. Meanwhile, active mutual funds lost money in all but one year (2021); they shed $344 billion in the first 10 months of 2024.
“We see [active ETFs] as the growth engine of active management,” said Bryan Armour, director of passive strategies research for North America at Morningstar. While acknowledg
“It’s still in the early innings,” he said. “But it’s been a bright spot in an otherwise cloudy market.”
At a high level, mutual funds and ETFs are similar.
They are legal structures that hold investor assets. But investors have gravitated toward ETFs in recent years due to cost benefits they generally enjoy relative to mutual funds, experts said.
Why fees matter
Fund managers who use active management are actively selecting stocks, bonds or other securities that they expect to outperform a market benchmark.
This active management generally costs more than passive investing.
Passive investing, used in index funds, doesn’t require as much hands-on work from money managers, who basically replicate the returns of a market benchmark like the S&P 500 U.S. stock index. Their fees are generally lower as a result.
Active mutual funds and ETFs had an average asset-weighted expense ratio of 0.59% in 2023, versus 0.11% for index funds, according to Morningstar data.
Data shows that active managers tend to perform worse over the long term than their peer index funds, after accounting for fees.
About 85% of large-cap active mutual funds underperformed the S&P 500 over the past 10 years, for example, according to data from S&P Global.
As a result, passive funds have attracted more annual investor money than active funds for the past nine years, according to Morningstar.
“It’s been a rough couple decades for actively managed mutual funds,” said Jared Woodard, an investment and ETF strategist at Bank of America Securities.
But, for investors who prefer active management — especially in more niche corners of the investment market — active ETFs often have a cost advantage versus active mutual funds, experts said.
That’s mostly by virtue of lower fees and tax efficiency, experts said.
ETFs generally carry lower fund fees than mutual fund counterparts, and generate annual tax bills for investors with much less frequency, Armour said.
In 2023, 4% of ETFs distributed capital gains to investors versus 65% of mutual funds, he said.
Such cost advantages have helped lift ETFs overall. ETF market share relative to mutual fund assets has more than doubled over the past decade.
That said, active ETFs represent just 8% of overall ETF assets and 35% of annual ETF inflows, Armour said.
“They are a tiny portion of active net assets but growing rapidly at a time when active mutual funds have seen pretty significant outflows,” he said. “So, it is a big story.”
Converting mutual funds to ETFs
In fact, many money managers have converted their active mutual funds into ETFs, following a 2019 rule from the Securities and Exchange Commission that allowed for such activity, experts said.
So far, 121 active mutual funds have become active ETFs, according to a Nov. 18 Bank of America Securities research note.
Such conversions “can stem the tide of outflows and attract new capital,” according to the Bank of America note. “Two years before converting, the average fund saw $150 [million] in outflows. After converting, the average fund gained $500 [million] of inflows.”
That said, there are caveats for investors.
For one, investors who want an active ETF are unlikely to have access to one within their workplace retirement plan, Armour said.
ETFs, unlike mutual funds, are unable to close to new investors, Armour said.
This may put investors at a disadvantage in ETFs with certain “super niche, concentrated” investment strategies, because money managers may not be able to execute the strategy as well as the ETF gets more investors, he said.
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It’s no secret that homeowners often have higher net-worth than renters. But while renters face unique affordability challenges, there are still steps they can take to improve their financial standing.
In 2022, the typical renter in the U.S. had a median net worth of $10,400, according to a new report by the Aspen Institute. That’s a record high — even though it represents less than 3% of the nearly $400,000 net worth of homeowners.
Renters generally go through financial challenges like lower income, higher debt, fewer savings balances and lower rates of asset ownership, the report noted.
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Yet, the wealth gap is not solely due to equity. Median home equity, at $200,000, accounts for only slightly more than half of homeowners’ median net worth, suggesting that an owner’s wealth derives from other assets, the Aspen Institute found.
Across income levels, renters are less likely than homeowners to own assets including cars, retirement accounts and securities, among others, the report found. Renters who do hold such assets tend to have lower median values compared to homeowners.
Tenants can begin to build wealth by paying off outstanding debt, increasing their income and savings, and assessing if and when a home purchase makes sense, according to experts.
Here are some of the financial challenges renter households face by income, according to the Aspen Institute, and ways they can build wealth.
Renters who earn less than $25,000 a year
As of 2022, more than one-fourth of all renter households made under $25,000 a year, the Aspen Institute found.
Renter households in this income group are more likely to be “cost burdened,” or have to spend a significant share of their income on housing and utilities, said Janneke Ratcliffe, vice president of housing finance policy at the Urban Institute in Washington, D.C. That makes it challenging for them to cover other essentials, let alone build wealth.
“If you’re relying on any kind of benefits, as soon as you achieve a certain level of income or savings, you get kicked off,” said Ratcliffe.
A hypothetical family in this category “first needs financial stability to meet the precondition for wealth building,” the Aspen report notes.
“They need routinely positive cash flow — through higher income, lower expenses, or both — more savings and personal resources, and increased access to benefits that will support increased stability,” the report notes.
Tackling any high-rate debt can be a smart move, said Clifford Cornell, a certified financial planner and associate financial advisor at Bone Fide Wealth in New York City. A credit card balance eats away any progress you make in terms of savings, he said.
“It’s incredibly toxic, and it can absolutely destroy a financial situation for somebody if you let that accrue,” Cornell said.
Given that housing expenses can be the biggest budget line item, be thoughtful about where you live, said Shaun Williams, private wealth advisor and partner at Paragon Capital Management in Denver, the No. 38 firm on CNBC’s 2024 Financial Advisor 100 List.
You might have better job prospects and increase your income by living in a different area or state, he said.
“Trying to move where there’s better opportunities and lower costs is a key element there,” Williams said.
Renters who make $50,000 to $75,000 a year
In 2022, roughly 18% of all renter households earned between $50,000 to $75,000 annually, according to the report.
A hypothetical family in this income bracket “has some baseline financial security, though increased cash flow through higher income and/or reduced debt servicing could enable a stronger position,” according to the report.
Renters in this income bracket can monitor their cash flow to find opportunities to save money each month, said Cornell: “After all expenses are paid, what is left over?”
A “great spot to be” in is finding ways to save around 5% to 10% of your income while also looking for ways to increase your earnings, said Williams.
“That’s the place where you start saving a little bit,” he said.
Renters who make $100,000 or more a year
About 20% of all renter households in 2022 made more than $100,000 a year, per the Aspen Institute.
While this cohort of renters has the strongest financial picture, they may choose to rent instead of buy for a variety of reasons, experts say.
In some places, it’s less expensive to rent than to own. Even though tenants may pay renter’s insurance, utilities and applicable amenity fees, landlords typically cover the unit’s maintenance and property taxes.
For homeowners, “your mortgage is the absolute minimum that you will be spending every month,” Cornell said.
While these renters aren’t building home equity, they can focus on building their investments and savings, experts say.
For example, say your hypothetical mortgage payment is $2,500 while your rent is $2,000, Williams said. A mortgage payment will put $500 “into a savings account called your house,” he said.
If you rent, take the $500 difference and save it into a retirement account. This way, you’re still saving money and it may grow faster than real estate, Williams said.
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