Early retirement may seem like a dream. But in reality, leaving the workforce too soon may not be as attractive as it seems. There are plenty of downsides, and you need to consider them carefully.
Here are four of the big negatives associated with early retirement.
1. Your savings will need to sustain you longer
The earlier you retire, the sooner you need to start withdrawing from your retirement savings — and the greater the risk your money will run out too soon.
You’ll need to be very careful about how much you withdraw from your retirement accounts if you leave the workforce early — you’ll want to maintain a high principal balance to have enough interest income to live on.
While experts used to advise that you could safely withdraw 4% of your savings annually, there’s a significant danger of running out of money if you do this — and your withdrawal rate should likely be lower if you retire early.
This could mean early retirement leaves you scrimping, now and in the future — especially since it gives you less time to put money into tax-advantaged accounts.
2. You could reduce your Social Security income
Most people who retire need to claim Social Security to supplement their savings — especially if they don’t want to withdraw too much too soon.
But if you claim Social Security prior to full retirement age, your benefits will be reduced. And if you claim prior to 70, you’ll miss out on delayed retirement credits. The benefit reduction is based on how early you retire. If your full retirement age is 67 and you claim at 62, your checks will be 30% lower than they would’ve been had you waited.
Smaller Social Security checks will leave you even more reliant on savings, and you’ll have less guaranteed lifetime income. That could pose a problem if your savings run short later in your retirement.
3. You may need to shell out a fortune for healthcare costs
Medicare doesn’t start until you hit 65, so you’ll be forced to pay for private insurance if you retire prior to that age. This can be really expensive, especially if you keep your employer-provided coverage under COBRA.
Healthcare is expensive enough even when you retire after Medicare kicks in, so you’ll need savings both during your early retirement and in later years when your healthcare needs increase.
4. You could end up bored
For many people, work provides social interaction and mental challenges. If you leave the workforce early, you’ll have many more years to fill without the built-in activities that come with having a job.
Unless you have a clear idea of how you want to spend your time, you could end up bored, depressed, and longing for the purpose that work provided for you.
Think carefully about whether early retirement is right for you
You don’t want to end up struggling financially and spending your retirement years with nothing to do. So before you retire early, consider these potential downsides. If you have a lot of savings, a plan for healthcare costs, and clear goals for retirement, leaving work early may make sense for you. Otherwise, early retirement probably won’t be all that great.
