While many Americans want to continue working even after they retire, others are opting for an early retirement. In the United States, 65 is considered retirement age, even though many people continue to work past this age. When people retire “early,” it means that they have stopped working prior to turning 65. In some cases, this happens when individuals face health problems, assume new family responsibilities, or lose their jobs. In other cases, individuals feel in control enough of their finances to quit their jobs early, a decision that comes with some benefits, as well as drawbacks. Individuals who want to retire early should consider the following factors prior to making a decision.
The benefits of an early retirement are fairly clear. Individuals have more free time to travel the world and pursue hobbies. When people retire early, they will likely have fewer health issues that will keep them from traveling frequently.
Reduction in Social Security Benefits
While these benefits can convince may people to stop working prior to age 65, several drawbacks to this decision exist. Financially, individuals will face smaller Social Security benefits, which can put stress on the work that their retirement savings must do. People get a lower benefit when they claim early. In fact, claiming this benefit as early as possible rather than at full retirement age can reduce monthly benefits by as much as 30 percent. This is more pressing when one considers that waiting past full retirement age can increase the payment by an additional 8 percent per year waited. The reduced payment can prove stressful considering that your savings need to last longer when you retire early since that money will need to last a higher number of years. This problem is compounded by the fact that early retirement means that you will no longer be contributing to a 401(k) and other retirement savings accounts.
Ability to Cover Health Care Costs
People who retire early face additional financial hurdles, such as the need to secure health care. While some companies may continue to cover former employees who retire early, many individuals will need to find their own health insurance coverage until they reach the age of 65, when Medicare will begin to cover them. While this issue may not sound like too much of a hurdle, insurance can easily cost double or triple what someone paid for a workplace plan since no other party is helping to cover the cost. Furthermore, the costs tend to rise over time since most people’s health worsens as they grow older. After the age of 55, it is not uncommon to pay as much as $1,000 per month for health coverage.
When deciding whether to retire early, people should examine whether they have sufficient savings to maintain their standard of living. They should aim to eliminate credit card debt in order to free up cash that can be used to cover expenses. Moreover, they should figure out whether they will be able to keep up their monthly debt payments once they are no longer working full time. In order to reduce their debt, people should attempt to pay off high-interest debt, which includes credit cards. In addition, they should try to pay off their mortgage ahead of retirement.
A Complex Decision
Individuals who are thinking about retiring early but are afraid of the consequences can opt for a sort of middle pathway that allows them to enjoy more free time while still generating some sort of income. For example, people may work with their employers to reduce their work hours through what is often called a “phased retirement.” Some employees are also now willing to let their employees work from home for part of the week or year, which gives people a better sense of what life will be like once they retire. Employees should also ensure that they take full advantage of their vacation days. By lumping the days together, individuals can take long trips without worrying about the money that they are spending.
Ultimately, the decision to retire early is a very complex one that also involves considerations other than money. Individuals must often weigh personal obligations with their goals and expectations. Of course, money factors into the equation, and individuals with a significant amount of savings and investments often have less stress and anxiety once they retire. For the most part, people should think of early retirement as moving to a new stage of their lives and have a plan in place to ensure that they have enough money to last them for the rest of their lives.