Are you ready to retire earlier than anticipated? The dream of leaving the workforce earlier in life may have hidden pitfalls. Here’s what you need to know.
Many Americans plan to retire early, depending on your profession, early retirement may be as young as 65. A healthy savings portfolio and debt-free living can potentially give you a solid retirement platform. The opportunity to spend decades of your life in leisure pushes you even closer to taking the plunge. Like any choice in life, early retirement involves trade-offs.
For what you gain in rest and relaxation, you pay in opportunity costs. As you evaluate your financial stance for an early retirement, how will these pros and cons weigh in on your final decision? Pros of retiring early include health benefits, opportunities to travel, or starting a new career or business venture. Cons of retiring early include the strain on savings, due to increased expenses and smaller Social Security benefits, and a depressing effect on mental health.
Let’s dive a little deeper...
Pros of Early Retirement
Putting the brakes on your full-time career doesn’t mean slowing down completely. More retirees than ever are working throughout their retirement. Many take on part-time jobs in a completely new field while others stay sharp with consulting roles in their native industry.
Early retirement affords you the opportunity to work because you want to work, not because of financial obligations. Your fresh start may lie in a new industry or with a new educational degree. In either case, personal accomplishment becomes the motivator, not the compensation.
- Investing time in family and personal relationships
If you’re in the position for an early retirement, chances are your hard work will cost you time away from loved ones and family. Retiring in your early fifties may allow you to spend more time with your family and better parent children throughout their teens and early adulthood. You can reconnect with a spouse who ran the household while you pulled long hours at the office. Investing extra time in loved ones pays dividends for the entire household.
- The opportunity to travel
What is a retirement plan that doesn’t include at least some form of travel? Whether your vacation style involves calming beaches or active adventure, both time and opportunity abound. An early retirement often comes with good health, agility and stamina. Adventure-based vacations and bucket list experiences such as rock climbing, extended hiking, white water rafting and more are approachable – and potentially safer – at an earlier age.
Cons of Early Retirement
Unfortunately, early retirement isn't for everyone. In fact, it isn't for most people. Just 11 percent of today's workers plan to retire before age 60, according to anEmployee Benefit Research Institute (EBRI) survey.
There are key aspects of an earlier retirement that shouldn’t be overlooked. For instance, Medicare coverage doesn’t kick in until age 65. If you’re approaching retirement age in good health, you’re fortunate. However, you can’t forgo health insurance coverage without assuming serious risk to your nest egg. Few employers are providing post-retirement health plans. Even if you’ve been promised retirement coverage, continued coverage is not always guaranteed.
- Penalties for accessing funds early
Using tax-advantages accounts to save for retirement can be a smart move but tapping into those funds early can cost you. A 401(k) typically carries a 10% penalty for early withdrawals before the age of 59 ½. If you leave your company at age 55 or older, the IRS will allow you to make withdrawals penalty-free.
Those with traditional IRAs face a 10% withdrawal tax on distributions taken before the age of 59 ½ unless they agree to adjusted periodic payments based upon life expectancy. Similar 10% early withdrawal penalties may be applied to funds converted into a Roth IRA depending on the composition of the account. Know the costs associated with accessing your own money and how they affect your early retirement budget.
- Benefit Packages
Be aware that the earlier you access benefits packages the less benefit you’ll receive. The Social Security Administration will reduce your benefit for drawing benefits prior to the full retirement age of 67. Drawing early means you’ll forgo up to as much as about 30% of your benefits (or more if you’re drawing as a spouse).
Employer-paid pensions aren’t immune either. Civil servants face a 2% reduction per year for any retirement annuity payments (Civil Service Retirement System Annuity) drawn under the age of 55. Private pensions are typically designed to make full payments at the age of 65; earlier payment typically means a reduction in retirement payments.
- Sacrificing the Power of Compounding
Compound interest is a big deal in retirement income: any interest that you make on an invested amount will itself earn interest in the future. Say you invest $100 at 3% interest a year. That means that by the second year, you'll have $103 invested. Assuming interest remains the same, in the third year you'll have $106.09 and the year after that you'll have $109.27 and so on and so forth. But let's say you work 10 more years and retire at 65. The real growth comes from another 10 years’ worth of interest earned not only on all the principal you contributed but also the interest earned on the interest that has compounded for four decades.
For many of those who do take the plunge, the reality of an early retirement can turn out to be far different than the fantasy. An early retirement requires careful planning and professional help. Having a clear vision of your retirement needs can help you build a sturdy and personalized strategy.
No matter what your view, there are a number of questions and concerns that should be addressed to help you prepare for retirement living. For more information on how you can best prepare for retirement, contact the trusted financial advisors at Agemy Financial here today.