Can you retire now?

If you're under full retirement age, you might want to think twice before calling it a career. Here are a few reasons why.

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By Walter Updegrave, Money Magazine senior editor

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

NEW YORK (Money) -- Question: I'm 63 and my employer has eliminated my health insurance and dramatically cut my pay. If I retire now, I'll get about $1,300 a month in Social Security, plus I can collect another $2,000 a month by investing my $310,000 in savings in an immediate annuity with lifetime payments. All in all, I should have about the same income I have now. So I figure why work without health insurance when I can retire and not have health insurance? Do you think my plan makes sense? --Bill P., Martins Ferry, Ohio

Answer: Sorry, but I think you need to reconsider your plan, as I believe it has a few potentially dangerous flaws in it.

To begin with, you're apparently assuming that you will forego health insurance until you reach age 65 and qualify for Medicare. That's not a good idea.

It's no secret that the older we get, the more medical issues we're likely to face. Maybe you'll be the happy exception, one of those hale and hearty types who rarely sees the inside of a doctor's office.

But do you really want to chance going without coverage for two years? If you develop a significant health problem -- or have an accident of some sort -- your treatment options probably won't be as good if you lack insurance and you could find yourself overwhelmed by medical bills.

Another chink in your plan concerns that immediate annuity you plan to buy. Generally, I think plain-vanilla immediate annuities can be an excellent way to turn money in a 401(k), IRA or other savings into reliable income payments for life.

But you don't want to put all your savings into such an annuity. The reason is that once you buy an immediate annuity, you usually give up access to your principal in return for the guaranteed lifetime payments. (There are immediate annuities that allow you some access to your principal, but it's usually pretty restricted and reduces the size of your payments.) So if you've plowed all your money into an annuity, you'll have less flexibility to deal with emergencies or unexpected expenses, especially if you need to come up with a large chunk of cash.

That's why I typically recommend that people who want the security of lifetime payments from an immediate annuity devote only a portion of their savings to the annuity, and keep the rest in a diversified portfolio of stocks and bonds (or stock funds and bond funds) that can provide both liquidity and long-term growth as a hedge against inflation.

Finally, I'd note that by collecting Social Security now instead of at your "normal retirement age" -- which in your case is 66 -- you will be locking yourself into payments for the rest of your life that are substantially lower than what you might get by waiting a few years.

The case for staying employed

So what do I recommend instead of your plan?

First, I think you ought to keep working. Whether you do that at your current job or move to a new one, it's your best shot at regaining, and being able to pay for, the health insurance you need until Medicare kicks in.

If you stay at your present job, you first ought to see whether you qualify for continuing coverage under COBRA. Although COBRA is designed primarily as a way for people who've lost their jobs to stay insured under their old plan for time, there are other circumstances under which you might qualify. For example, you may still be a candidate for COBRA if you lost your coverage because the number of hours you work has fallen below the minimum level your company requires for health insurance.

Whether you would also qualify for the discounted COBRA premiums that are part of this year's stimulus bill is hard to say, as the COBRA subsidies are meant for people who were involuntarily terminated from their job. Still, there's enough murkiness about the rules governing COBRA and the subsidy that you ought to at least call the Employee Benefits Security Administration's consumer hotline (866-444-3272) to see if you can somehow squeeze in under the rules.

Even if you qualify for COBRA, however, that coverage generally lasts no longer than 18 months. So sooner or later (sooner if COBRA isn't an option for you) you'll likely need to come up with new health insurance coverage.

One way to do that is to buy a private policy. Granted, that can be very expensive, but you may be able to keep costs down by looking for high-deductible coverage at sites like eHealthInsurance.com.

If you can't find affordable private insurance because of a pre-existing condition or some other reason, you may be able to find an alternative type of coverage, ranging from short-term policies to high-risk pools.

And while the latest employment report shows this is hardly a good time to be looking for work (as if we needed such confirmation), it's worth a shot to see if you can land a new job that provides health benefits and, possibly, higher pay than you're now getting. Sites that cater to older employment seekers like RetirementJobs.com and RetiredBrains are a good place to begin that search.

Staying employed has other advantages as well. You can postpone collecting Social Security and thus boost the size of your monthly check for life. The amount of the increase will depend on how much you earn while you're still employed, but by waiting until age 65, for example, you might be able to get more than $1,500 a month instead of the $1,300 you mentioned and if you hold off until 66, your benefit could climb to $1,700 or so. (For a more accurate estimate, see the social security administration Web site.)

The longer you work, the longer you can also put off tapping your nest egg, which means you'll be less likely to run through your savings early in retirement.

If you do decide to put some (but remember, not all) of your money in an immediate annuity, you might get a larger income by holding off until, since, all else equal, you'll get a larger payment the older you are when you buy the annuity. For example, a 63-year-old who puts $100,000 into an immediate annuity today would get roughly $660 compared with $700 a month for life for someone who's 66 and $775 a month for a 70-year-old.

Who knows, maybe you'll luck out and do just fine retiring at 63 without health insurance. But I think you can boost the odds of having a better life today and in the future if you stay employed even for just a few more years. To top of page

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