Weigh all the options.
Retiring is something most workers look forward to. Whether they want to travel the world, spend more time with family, or pick up a new hobby, the thought of having the freedom to do what fulfills them is a well-deserved reward after decades of working. There’s no one-age-fits-all number regarding when someone should retire, but there are implications to whatever choice you make — especially if you retire early.
If you’re considering an early retirement, here are some things you should know beforehand.
Your Social Security could be reduced
The amount of your Social Security benefits largely depends on how much you’ve earned through your career and when you decide to take benefits. You can begin claiming Social Security benefits as early as age 62, but your baseline amount — the amount of your monthly benefits at different ages — is based on your full retirement age (FRA). Social Security uses your birth year to determine your FRA:
| BIRTH YEAR | FULL RETIREMENT AGE | MONTHS BETWEEN AGE 62 AND FULL RETIREMENT AGE |
|---|---|---|
| 1943 to 1954 | 66 | 48 |
| 1955 | 66 and 2 months | 50 |
| 1956 | 66 and 4 months | 52 |
| 1957 | 66 and 6 months | 54 |
| 1958 | 66 and 8 months | 56 |
| 1959 | 66 and 10 months | 58 |
| 1960 or after | 67 | 60 |
DATA SOURCE: IRS.
Taking your Social Security benefits before your FRA will reduce them, depending on how far you are from your FRA. Benefits are reduced by 5/9 of 1% for each of the first 36 months you claim before your FRA. If you begin taking benefits more than 36 months before your FRA, any months over 36 will reduce your benefits by 5/12 of 1%.
If your FRA is 67 and you begin taking benefits at 62, they will be reduced by 30%. For 2023, the average monthly Social Security benefit will be $1,827. If you were eligible for the average payout and began taking benefits at age 62, your monthly benefits would be reduced by roughly $548. When you consider an average $548 monthly reduction over the 60 months between ages 62 and 67, it could cost you around $32,880 total.
Don’t forget about health insurance
One of the better perks of a job is often the health insurance offered. By subsidizing a lot of the cost of health insurance, employers relieve a big financial burden from their employees. The same can be said about Medicare, the United States’ health insurance program for people age 65 or older (with exceptions for some disabilities). Medicare doesn’t cover all medical expenses or most long-term care, but it can be a big financial assistance either way.
When many people retire, they transition from their employer’s insurance to Medicare, but unfortunately, if you retire before you’re eligible for Medicare, you could end up with a coverage gap. You could, of course, purchase your own health insurance, but it could be extremely costly — especially at older ages when healthcare expenses tend to increase because of the more comprehensive coverage people need.
For someone around age 60, the average monthly cost of a health insurance plan from the government marketplace (HealthCare.gov) is just under $1,000. Coming out of pocket for that is almost an additional $12,000 in yearly expenses.
You may miss the match
A 401(k) is a great way to save for retirement, especially if your employer matches your contributions. An early retirement takes away time you could be earning an employer match and could easily add up to tens of thousands of dollars, depending on how early you retire.
Let’s imagine you earn $100,000 annually, and your employer matches 5% of your contributions. If you contribute 5% ($5,000), that’s an extra $5,000 from your employer each year. The $5,000 alone probably won’t sway someone’s decision, but considering how much it could grow over time thanks to compound earnings, it becomes worth considering a bit more.
Do what makes you comfortable
If you’re considering an early retirement, chances are you’re not strapped for cash, and you’ve likely earned it. The intentions of this article aren’t to persuade you not to retire early but to emphasize the need to understand the totality of the decision.
Nobody knows you and your life better than you. There’s no universal “you shouldn’t retire early because of ____” situation that can be applied to every person’s life. It’s important to first make sure you’re aware of the financial implications, and then do what makes you comfortable.
