The Pros and Cons of Early Retirement

Are you one of the more than half of Americans who dreams of an early retirement? Perhaps you hope to leave the workforce before age 66-67 to spend time on hobbies, traveling and leisure activities. Or maybe you just want more quality time with family and loved ones. Whatever your motivation for exiting the workforce, it’s a momentous step, and one that should be weighed carefully.

Recent surveys reveal 43 percent of millennials expect to retire early, and most believe 61 is an ideal age for retirement. But how attainable are those goals from a financial perspective? Let’s take a closer look at the pros and cons of early retirement.

Benefits of an Early Retirement

Simply having a respite after decades of the daily grind of full-time work is a good enough reason to seek early retirement for many. Pursuing leisure activities can be beneficial for the mind and body, leading to less stress and overall improved health. And entertainment can be relatively cheap in the digital age, with plenty of streaming services and online content available, to offset any potential downtime or added expenses. Skipping traffic when the rest of the population is at work may also sound pretty nice.

Many early retirees choose to use this newfound time as an opportunity to travel: whether migrating to warmer climates during the coldest parts of the year, or taking vacations with no set return time. Others stay put to focus on family (seeing more of the kids and grandkids), and relationships.

Many early retirees choose not to leave the workforce altogether. Some start their own small businesses, others move on to part-time or consulting roles within their chosen fields, freeing them up for more leisure time without completely cutting off their income stream. Being in charge of your own schedule offers the flexibility to run errands and complete tasks when there is little traffic and few crowds.

The Cons of Early Retirement

The biggest drawback to early retirement is of course the loss of income. Many individuals plan carefully for this transition, paying off debt and ensuring that they have plenty of savings socked away. But they may not understand some of the financial penalties that can accompany early retirement:

• Those who retire at 62 can expect to lose up to 30 percent of their social security benefits, according to the Social Security Administration (SSA). (Conversely, if you retire later than the standard age – anywhere from 66-67 years, depending on your year of birth – the SSA will give you a retirement credit each year, adding to your income.)
• If you’re planning to withdraw from a 401K or IRA to fund your early retirement, remember that there will be penalties. Those withdrawing funds from a 401K before the age of 59 1/2 can expect the IRS to take 20 percent of the withdrawal amount in taxes. You can also expect to hand over an additional 10 percent in penalties to the IRS when you file your taxes.
• Those withdrawing from their IRAs before age 59 1/2 will also have to pay the 10-percent penalty, although there are exceptions for paying medical insurance premiums and for other hardships. 

Important questions to ask before losing that regular paycheck include:

• How accessible will your savings be on a regular basis?
• Will your retirement savings support a longer retirement?
• Will there be penalties for early withdrawals from retirement accounts?
• Can you afford a reduced social security benefit?

Even the healthiest of individuals must have a solid game plan in place for making sure their insurance and medical costs will be covered after they lose health coverage from their full-time employer. Medicare is designed for individuals who are 65 and older. Private insurance can be very expensive. Ask yourself:

• Is your income low enough to qualify for Medicaid, which provides health coverage to low-income individuals and families
• If not, can you afford private insurance? The average cost for an individual is $456 per month.
• Are you willing to forgo health insurance until you qualify for Medicare?

Finally, it may seem inconceivable to those who are currently strapped for time and working long hours, but many early retirees have reported boredom and even depression. This can be exacerbated if the people around you most are still working while you now have all the time in the world. The focus required for regular employment may also play a role in keeping you mentally sharp, contributing to overall health. Before making the transition to early retirement, be sure to evaluate what you plan to do with your time. Ask yourself:

• How will I spend my newfound time?
• Will I have a network of friends and family with the same availability as me?

While the potential pitfalls of early retirement are serious, long-term planning and strategizing are the keys to success. By setting the right goals for finances, healthcare and lifestyle, early retirement can be an achievable dream for many individuals.