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Consider the Downside of Early Retirement

Early retirement seems like a great opportunity to spend more time with family, travel and pursue hobbies but, it’s not without significant drawbacks.  Retirement results in a significant adjustment from contributing to your portfolio to pulling money from your nest egg.  The typical retirement age is around 65 and the average life expectancy is 85.  According to the Social Security Administration, a quarter of those who reach 65 will live beyond age 90.  If you retire at 65, you will need to cover expenses for at least 20 to 25 years, increasing to 30-35 years if you retire at 55.

One of the biggest concerns in retirement is outliving your money.  Before considering early retirement, calculate how much will be needed to meet your desired lifestyle, including inflation and unexpected expenses.   Keep in mind that early retirement results in a double whammy – you start drawing from your portfolio and you stop saving and contributing sooner.

When you retire early, you will need to purchase health insurance and you won’t be eligible for Medicare until age 65.  The cost of medical insurance and additional out of pocket medical expenses can be significant. Be sure you include these in your retirement expense projections.  

Additionally, if you take distributions from your IRA or 401k plan before age 59 ½ you may be faced with early withdrawal penalties of 10%, there are a few exceptions that allow penalty free withdrawals at 55.  A penalty of 10% will have a significant impact on your portfolio. If you’re planning for early retirement, build up a non-retirement fund to avoid the 10% penalty in the early years of retirement.

Many who retire early take Social Security benefits at age 62.  This has a significant negative impact on future earnings.  At age 62, you will experience a 25% reduction in benefits from what you would receive at your full retirement age.  Additionally, when you stop working you stop increasing the average income from which Social Security is calculated.  Early retirement may also negatively impact income from a private pension, if you take it before age 65.

Aside from the financial impact of retiring early, consider the social and emotional consequences of retirement.  Initially, you may enjoy the extra free time and flexibility to travel and enjoy your hobbies but after a few years you may need more substance.   Working provides a sense of purpose, accomplishment, pride and social stimulation.  Plan out your retirement to engage in challenging and meaningful activities.  After a few years, many retirees, experience a lack of fulfillment, loss of identity, social isolation and insecurity.   This can be especially true of early retirees because friends and colleagues are still working.  Engage in activities that provide purpose, meaning and self esteem in retirement.

To gain some of the benefits of early retirement without as many of the drawbacks, seek out a job with greater flexibility or consider transitioning into retirement gradually.