Pros and Cons of Early Retirement
Are you ready to take the dive into an early retirement? Depending on your profession, early retirement may be as young as age 55. A healthy savings portfolio and debt-free living can potentially give you a solid retirement platform. And, 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?
Pro: The Opportunity for a Fresh Start
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 becauseyou 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 compensation.
Pro: The Opportunity to Invest in Family & Personal Relationships
If you’re in the position for an early retirement, chances are your hard work 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.
Pro: The Opportunity to Travel…Actively
Whose retirement plan 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.
It’s easy to dream about the opportunities an early retirement offers. But, have you considered these costs?
Con: The Cost of Healthcare
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. Today, few employers are providing post-retirement health plans. The Small Business Council of America reports for businesses that offer health insurance for retirees, all retirees must be included. The employer pays a hefty percentage (often 50% or greater) of the annual premium. While the Early Retiree Reinsurance Program defined by the Affordable Care Act provides assistance for employers who cover retirees aged 55-64, the cost-prohibitive nature of offering benefits limits their availability. Even if you’ve been promised retirement coverage, continued coverage is not guaranteed.
Con: The Cost of Accessing Your Own Money
Using tax-sheltered accounts to save for retirement is 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. However 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.
Con: The Opportunity Cost of Your Benefits 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.
2017-41554 Exp. 05/19