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The perils of early retirement; Texas couple is now in financial jeopardy as monthly expenses exceed income by $676

Many workers dream of retiring on their own terms instead of being forced off the job by the economy or bad times at their employer.

William Kingsley did just that, retiring last July after more than 25 years as a civilian procurement officer in the U.S Army.

It was the earliest he could retire and receive a full pension.

"I wanted my freedom," said Kingsley, 56, who lives with his wife, Luchia, in Garland, Texas.

His move may have given him more emotional peace of mind, but it also opened up a financial can of worms for the Kingsleys.

When they applied for a Money Makeover sponsored by The Dallas Morning News and the Financial Planning Association, they said their goal was to manage their expenses well. But by retiring at such an early age, he put their goal of having enough money for retirement in jeopardy, said certified financial planner Patrick Dougherty.

"His mistake was retiring early," said Dougherty of Dougherty Wealth Management in Plano, Texas.

When Kingsley retired, he had $65,233 in taxable accounts such as savings and checking account and a brokerage account. He had an additional $77,314 in tax-deferred investments, which consist entirely of the Thrift Savings Plan, a retirement savings and investment plan for federal employees.

They receive $3,833 in monthly pension benefits for a total annual income of $45,996. That's the sole source of income for him and Luchia.

Their mortgage is the only debt they have, but their monthly expenses still exceed their income by $676.

In working with the Kingsleys, Dougherty assigned a life expectancy of 75 years for William and 80 years for Luchia, who's 46 and not working.

By retiring at age 56, Kingsley "missed out on not only salary increases, which would have substantially raised his pension amount, but he also has to fund nine more years in retirement than had he waited" to retire at age 65, Dougherty said.

"If he retired at 65 and his life expectancy is 75 years old, he would have had to worry about funding 10 years in retirement, but since he retired at 56, he's had to fund out of savings and pensions 19 years instead of 10," he said. "It's kind of a double whammy."

As a result, the couple is pulling money out of their savings and is running an annual deficit of $8,112. Neither currently receives Social Security benefits.

"You currently do not have sufficient income to fund your lifestyle needs," Dougherty told the Kingsleys. "After reviewing your current expenses, it is apparent that you have implemented and follow a disciplined conservative household budget in all areas. Since there is no improvement to be made in the expenses side of your balance sheet, you may want to consider returning to either full or part-time employment until your mortgage is paid off."

They should also stop making extra payments on their mortgage, he said.

The Kingsleys have 28 more years to pay on their 30-year mortgage.

The Kingsleys are far from alone in falling short of retirement funds.

Depending largely on age and income, between 4 percent and 14 percent of Americans who otherwise would have had adequate income to cover basic expenses in retirement became "at risk" of running short because of the housing and financial crisis of 2008-09, according to the Employee Benefit Research Institute, a nonpartisan organization that studies workplace issues.

Workers considering retiring early need to do a thorough analysis of what their retirement expenses will be and how long they expect to live, Dougherty said.

"Find out if you indeed have the assets to retire comfortably," he said.

Dougherty advises clients to ignore the common rule of thumb that says retirees can fund their expenses with 80 percent of their pre-retirement incomes.

"Make sure you're funding 100 percent of your current expenses, not 80 percent," he said. "I'd rather you have too much money when you die than not enough."

Dougherty said he recommends a higher percentage because of the expenses that accompany retirement.

"Because of the uncertainty of health care costs, and because people tend to spend more when they have free time, I recommend 100 percent," he said. "I believe that we will all pay more for health care in the future."

The Kingsleys also should spend time shoring up their finances, he said.

"They're both young enough to go back to work full time," Dougherty said. "In 10 years, he may not be able to work."

He recommended that they consider long-term care coverage.

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