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Why Early Retirement Is a Bad Idea

Investopedia logoInvestopedia 23-09-2016 Barbara Peck
© Provided by Investopedia

Some people consider “early retirement” to mean leaving the workforce at age 55. But most of us don’t. Unless you’re lucky enough to have a full pension and benefits that kick in at that age (say, if you worked in the military, or as a police officer or firefighter), you’ll probably need to work another decade to accrue enough money for a comfortable retirement. In that case, retirement at 62 would qualify as early. Of course, you may want to work even longer, just to keep your mind and body active and extend your life.

Should the idea of retiring early sound irresistible to you, think again. Here are some practical reasons not to take early retirement.

1. You may not have saved enough.

If you’re a typical baby boomer, you might have started your family late, and now that you’re nearing retirement age you may still have kids in college. You could also have aged parents who need help paying high medical bills or nursing-home fees. Maybe you have a high mortgage and credit card debt. If you’re planning to stay in your home and maintain your existing standard of living, you need to take a cold hard look at your expenses and the size of your nest egg.

2. You may outlast your savings.

An estimate of your life expectancy is listed on your Social Security statement, or you can get it by logging on to Social Security and entering your gender and year of birth. But your personal life expectancy might differ from that for a variety of reasons. Let’s say your family has a history of longevity, and you look after yourself – eating a healthy diet, getting plenty of exercise and taking your medications as prescribed. You have to factor that into how long your savings will  last.

You might want to wait till age 70, when you can collect your maximum Social Security benefit. According to Social Security, “About one in three 65-year-olds today will live to age 90, and more than one in seven will live to age 95.” Plus, the average monthly benefit for retirees in 2016 is $1,335 per month or $16,020 per year, notes Kathryn Hauer, CFP, author of Financial Advice for Blue Collar America. “That amount is not very far above the 2016 federal poverty line amount for one person of $11,880. For retirees with no savings and no pension, it would be tough to meet basic living expenses on Social Security income alone.” (For more, see Retirement Savings: How Much Is Enough?)

3. You’ll miss the work stress.

Sure, you’ll be escaping the daily grind, but stress can be a good thing. A report about a study at Stanford University highlighted some of the positive aspects: “Hormones released under stress help the body cope, sharpen cognitive functioning and speed up the brain.” What’s more, stress can “help people grow by developing mental toughness, new perspectives and greater connections with others.” Doesn’t that sound a lot better than crossword puzzles to keep the brain sharp? 

4. You might not be able to afford your bucket list.

The more you put away, the more you can pamper yourself in your retirement years. Sure, Cape Cod is nice, but what about going on safari in Tanzania? Taking a Caribbean cruise or sailing the Mediterranean? If you stay in the workforce, you could grow your 401(k) savings significantly – and then live out your dreams.

5. Your Social Security benefits will be diminished.

You probably already know that if you start collecting at the earliest opportunity, at age 62, you won’t receive everything you’re entitled to. Waiting till your full retirement age of 66 (67 for those born in 1960 and later) will get you about 32% more each monthwaiting till you’re 70 could mean that you collect more than 50% more than if you’d started at 62. (Read Tips On Delaying Social Security Benefits.)

But retiring early can affect the dollar value of your benefits in other ways. Your Social Security statement tells you what you can expect to receive at age 62, 66 (or 67) and 70. If you quit work before 62, those projected amounts may change. That’s because the amount is based on your 35 top-earning years. (And it’s worth remembering that generally, your later years will be your highest-earning years.) If you started late in the workforce, or didn’t work consistently – say, you took some years off to raise children, or you came to the United States partway through your career – you may not have hit the magic number of 35. The years you don’t work, or have reduced income, will be factored in to your benefits. So you may well lose money for every year you defer collecting. Talk to the Social Security Administration to get the details for your particular case. (For more, see Maximize Your Social Security Benefits.)

6. It may take a bite out of your spouse’s benefits.

Let’s say you’ve always earned more than your spouse. If you die first, the Social Security benefits you’re collecting will go to your surviving spouse for the rest of his or her life. (That’s after age 60, unless your spouse is caring for a child under the age of 16 or disabled – in which case, she'll get benefits sooner.) If you’ve started collecting before your full retirement age, you’ll be getting a lower amount – and that’s what your surviving spouse will then collect. "Early claiming results in lower benefits over longer lifetimes: lower benefits for the earner, lower spousal benefits and lower survivor benefits," says Charlotte A. Dougherty, CFP, Dougherty Associates, Cincinnati, Ohio.

7. An early retirement package might not fill your needs.

That golden (or silver) handshake could be less lucrative than it looks. Before you sign the offer, examine the details carefully. Is the amount enough to see you through? If you’ll need to tap into your 401(k) before you reach retirement age, be aware that there will be tax penalties. Is adequate medical coverage included? If you have to buy COBRA insurance until you’re eligible for Medicare, that won’t come cheap. Buying Affordable Care Act insurance through the health insurance marketplace may not be inexpensive either, depending on your financial situation. You'll probably need a financial professional to walk you through the options.

8. It’s hard to go back.

If you change your mind after you take early retirement and want to return to the workforce, it won’t be easy. Whether you quit your last job or were laid off, finding new employment when you’re over 50 can be a struggle. In December 2014, the U.S. Department of Labor put the average duration of unemployment for job seekers 55 and older at 54.3 weeks – more than eight weeks longer than a year earlier. If you do manage to snag a job, chances are it won’t pay as well as the one you left.

The Bottom Line

Clearly, there’s a lot to consider as you approach retirement. If you have questions (and you should!), just keep asking the experts: the Social Security Administration, tax consultants, financial professionals. And bear in mind this reassuring note from the Social Security website:

“If you are younger than full retirement age and if your earnings exceed certain dollar amounts, some of your benefit payments during the year will be withheld. This does not mean you must try to limit your earnings. If we withhold some of your benefits because you continue to work, we will pay you a higher monthly benefit amount when you reach your full retirement age.”

So that should give you something to look forward to – along with the not-having-to-work part and the bucket list.

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