In this article we will discuss the pros and cons of early retirement so you can feel confident that you are making the best choice
What Exactly Is Early Retirement?
Early retirement typically refers to scaling back on employment or ultimately leaving your job before a traditional retirement age of 65. Age 65 is often a common age to retire because this is when you become eligible to utilize Medicare as your primary form of health insurance.
Early retirement can be achieved through various strategies, including aggressive saving and investing, reducing living expenses, downsizing, and/or creating passive income streams. The typical goal of retiring early is to become financially independent, where your savings and investments generate enough income to cover your living expenses.
Understanding Recent Early Retirement Trends (and Predictions)
In recent years, the trend of early retirement has gained popularity, partly due to the rise of the FIRE (Financial Independence, Retire Early) movement. This movement encourages people to save a large portion of their income during their working years to achieve financial independence and retire early.
It is possible to assume that as American workers seek more work-life balance and flexibility, the trend of early retirement will continue to grow. Many individuals are attracted to the idea of retiring early to escape the daily grind and to have more time to pursue their hobbies or spend time with their loved ones.
5 Cons of Retiring Early
Can Be Bad for Health
One of the potential downsides of early retirement is the likelihood that your health would deteriorate without the structure and routine of an active work lifestyle and without the regular social interaction with your colleagues.
Your mental and physical health can slip if you retire early without a plan for regular exercise, hobbies and projects that bring meaning to your life, and social connections.
Diminished Social Security Benefits
Retiring early can also mean receiving reduced Social Security benefits if you are dependent on initiating your Social Security benefits before your full retirement age. In addition to the loss of income by electing an early benefit amount, the Social Security Administration calculates benefits based on your highest-earning years. This means that retiring early when you might have had future high income earning years might reduce your overall benefit regardless of what age you actually choose to draw.
Retirement Savings Has to Last Longer
Probably the most important risk to assess in planning an early retirement date is the fact that your retirement savings will need to potentially last longer. Retiring early means you may need to fund a more extended retirement period. Achieving this might mean a higher savings rate in your working years, reducing your current income and lifestyle.
Covering Your Own Health Insurance
Before reaching the age of 65 and qualifying for Medicare, early retirees need to secure their own health insurance, which can be expensive. It’s common to see health insurance premiums in excess of $1,000/month when purchased on the open market prior to Medicare eligibility. This of course is only the premium amount and therefore there are out of pocket costs, deductibles, and copays to plan for as well.
A well funded health savings account (HSA) can be a really valuable tool to cover health insurance premiums and other medical expenses in these gap years.
Decreased Daily Fulfillment
Work often provides a sense of purpose and structure. Without it, some early retirees may struggle with finding fulfillment in their daily lives. Engaging in hobbies, volunteer work, or part-time employment can help you maintain a sense of purpose.
It’s important for early retirees to plan for how they will spend their time to avoid feelings of boredom or lack of direction. We like to discuss the question “What are you retiring TO? Instead of what are you retiring FROM? It’s easy to picture not doing your job, but if you’ve spent your career identifying with your work, what will you be retiring TO?
5 Pros of Retiring Early
Reduced Stress and Improved Well-Being
One of the most significant benefits of early retirement is the potential for reduced stress. Leaving the workforce can eliminate the pressures of a demanding job, leading to a more relaxed and enjoyable lifestyle.
The health benefits of reduced stress can contribute to a longer, healthier life assuming that you’ve secured the financial aspects of your retirement and planned for social connection and activities that bring meaning and purpose.
Opportunity for Travel and Exploration
Early retirement offers the opportunity to travel and explore new places while you are still relatively young and healthy if you’ve saved enough to fund these activities. This can lead to enriching experiences and memories that might not be possible later in life if your health is declining while you travel.
We encourage early retirees to take advantage of their newfound freedom and to visit destinations they’ve always dreamed of in their working years.
More Time for Personal Pursuits and Hobbies
With more free time, early retirees can devote themselves to hobbies and activities they might not have had as much time for during their working years.
We’ve had clients become regular gigging musicians, start small businesses, volunteer for work with sports teams, etc. We typically encourage our clients to begin testing these activities out before they retire to get some momentum going.
Flexibility and Control Over Your Schedule
Retiring early can provide the ultimate flexibility to create your own schedule. Control over your time allows you to prioritize activities and experiences that matter most to you. Simply knowing that you have the freedom to choose how you spend your days can lead to a more balanced and enjoyable lifestyle.
Opportunity to Start Different Career or Side Hustle
Early retirement doesn’t have to mean stopping work altogether. Many early retirees begin their journey by starting a new career, business, or side hustle that they are passionate about. This can provide an additional income stream and a sense of purpose when transitioning into a new phase of life.
Determine if Early Retirement Is Right for You with Stage Ready Financial Planning
Consulting with a financial advisor or planner can help you create a retirement plan that aligns your resources with what really matters to you.
At Stage Ready Financial Planning, we work with our early retirement clients to paint a vivid picture of what their dream retirement looks like. We help our clients assess their current retirement savings, expenses, and potential sources of income to create a retirement income plan that reduces taxes and maximizes their ideal life.
Contact us today to start planning your ideal retirement!
FAQs
Is taking early retirement a good idea?
Early retirement can be a good idea if you are financially prepared and have a plan for staying active, engaged, and as healthy as possible. Early retirees need to ensure they have enough savings to last a longer retirement period, a clear plan for higher healthcare costs, and meaningful daily activities.
What is the downside of taking a pension early?
The downside of taking a pension early is the reduced income amount to you and your survivors. When building a retirement income plan, inflation has to be factored in. Even if a reduced pension benefit will create the income you need in the early years of retirement, it’s important to consider what will happen as your expenses go up over time. Will your pension increase at the same rate? Do you have enough savings to fill this gap as you age?
How early do most people retire?
Many early retirees leave the workforce in their late 50s or early 60s. Some individuals, particularly those following the FIRE movement, aim to retire in their 40s or even 30s. The decision to retire early really depends on your personal financial goals and the ability to maintain your desired lifestyle without employment income.