Want to Retire Early? Think Again

Some people consider “early retirement” to mean leaving the workforce at age 55, but most of us do not take this path. Unless you’re lucky enough to have a full pension and benefits that kick in that early—such as full military retirement or from work as a police officer or firefighter—you’ll probably need to work until at least age 67 to accrue enough money for a comfortable retirement.

Of course, you may want to work even longer, just to keep your mind and body active and possibly extend your life—or because you didn’t save as much as you find you’ll need. Here are eight reasons why retiring early may not be a good idea.

Not Enough Savings

If you’re a baby boomer, you might have started your family late, and now that you’re nearing retirement age, you may still have kids in college or just getting launched. You could also have elderly parents who need help paying high medical bills or nursing home fees. Maybe you still have a 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 before deciding whether to retire early.

Living Longer Than Expected

An estimate of your life expectancy is listed on your Social Security statement, or you can get it by logging on to the Social Security website and entering your gender and birth date. However, your personal life expectancy might differ 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.

According to the Social Security Administration, about one in three 65-year-olds today will live past age 90, and one in seven will live past age 95. The average monthly benefit for retirees in 2020 is $1,503, or $18,036 a year. For retirees with no savings and no pension, it may be hard to meet basic living expenses on Social Security income alone. Therefore, you might want to wait till age 70, when you can collect your maximum Social Security benefit.

Increased Mortality

A 2017 paper published in the Journal of Public Economics found a link between early retirement and mortality rates, especially among men. Around one-third of Americans start claiming Social Security benefits in their first month of eligibility when they turn 62.

The research conducted in the study showed that men could see a 20% increase in mortality risk by claiming benefits early and retiring.

Bye-Bye 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.

Reduced Social Security

You probably already know that if you start collecting at the earliest opportunity, at age 62, you won’t receive your full benefits. In fact, you’ll only receive about 70% of your benefits. 

For those who turned 62 in 2019, full retirement age is 66 and six months. For those who turn 62 in 2020, the full retirement age is 66 and eight months. The full retirement age is slated to increase by two months each year until it hits 67; for anyone born in 1960 or later, the full retirement age will be 67.

However, you don’t have to collect benefits at your full retirement age, and waiting means that you will earn a higher monthly benefit. If you delay your benefits until age 68, for instance, your monthly benefits will be 16% higher. If you delay your benefits until age 70, your monthly benefits will be 32% higher. 

Your Social Security statement tells you what you can expect to receive at age 62, 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 into your benefits. So be sure to talk to the Social Security Administration to get the details for your particular case.

Of course, if you can afford to and have amassed enough work credits, you don’t have to file early for Social Security even if you stop working early. Then, all you will be losing is your contributions for the years between you stop working and when you file. But losing years of higher income earnings, if you’ve been doing well at your work, could also lower your ultimate benefit. That also requires discussion with Social Security and doing some calculations.

Reduced Spousal Benefits

Let’s say you’ve always earned more than your spouse. If you die first, the Social Security benefits that you’re collecting will go to your surviving spouse for the rest of their life. That’s after age 62 unless your spouse is caring for a child who is under the age of 16 or disabled, in which case your spouse will 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, of Dougherty & Associates, in Cincinnati.

Unfulfilled Needs

That golden early retirement handshake with your employer 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 age 59½, be aware that there may be a 10% additional tax for early withdrawals. 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. What will happen to health insurance over the next few years is also much in doubt. You’ll probably need a financial professional (and maybe a crystal ball) to walk you through the options.

The Point of No Return

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. 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 and decide when to stop working. If you have questions (and you should), just keep asking the experts: Social Security Administration agents, tax consultants, and financial professionals.