How to Wreck Your Retirement Plan

​By Brad Thomason, CPA
 
 
November is national Long-Term Care Awareness Month.  From time to time I have conversations with people who have a parent that needs care, and they are thinking about retiring early to be the caregiver.
 
Today’s post will be short, because I don’t need a lot of space to cover this one.
 
When a person is working, there are often five key things going on which contribute to a better financial position in retirement:
 
1. The current paychecks pay this year’s bills
2. Contributions to the 401(k) or similar continue to be funded
3. Employer matching contributions continue
4. The portfolio capital is left alone to compound for another year
5. The total number of years that the retirement savings will have to ultimately pay for is reduced by one year
 
When a person retires early, all five of these things stop.
 
Why the person retires does not matter, financially speaking.  Whether you have a fantastic reason (like love for a family member) or no reason at all, the dollars are impacted the same.
 
When a person retires early they are essentially giving their retirement savings a bigger job to do (cover more years’ worth of bills), and demanding that it be done with fewer resources (due primarily to forfeited future investment returns).  It’s tough to see how that could be a step in the right direction.
 
Please be careful if you are contemplating the DIY approach to helping a family member with a care situation.  The costs are likely to be much larger than what they appear on the surface to be. 
 
That’s true even before you get into the quality-of-life costs, by the way.  Which are by no means insignificant, in their own right.  Caring for another person can be demanding and stressful – so much so that it could negatively impact your own health.
 
Again, please be careful if you are facing this situation, and appreciate the fact that you are dealing with something that has the ability to do damage to your financial security, by hitting at many different aspects all at once.  Being the primary caregiver is probably the wrong answer, even if at first look it appears to be the right one.