The Pros and Cons of Early Retirement
Early retirement is a dream for many workers. Who doesn't look forward to having the freedom to spend more time with family and friends, to travel the world or just enthusiastically pursue hobbies — all with a sound financial cushion? Like many dreams, however, retiring early comes with both pros and cons. Understanding the effects of early retirement can help you make the right decision for you and your family.
No More Job Responsibilities
The greatest benefit to retiring early may be that you no longer have work responsibilities. You won't have to wake up every morning to drive to work and deal with your boss or stress over job duties. In addition to greater peace of mind, this can even result in health benefits as you lower your overall stress level.
Time on Your Hands
Early retirement affords you the time to strengthen your relationships with friends and family, or to work on your personal passions. If you've always wanted to start a blog, build a house or learn a foreign language, now you'll have plenty of time to cultivate those pursuits. If you retire early, you're likely to have decades of time ahead of you to dig into your projects or hobbies.
No More Salary
The biggest negative to retiring early is the loss of your salary at a relatively young age. The earlier you retire, the longer you'll have to stretch your assets or income to cover your retirement years. You'll need a bigger nest egg if you retire early than if you work until age 65 or older.
Limits on Retirement Contributions
Many employers make contributions to their workers' retirement plans. If you retire early, you'll no longer benefit from that "free" money. If you have a 401(k), you won't be able to make any further tax-deferred contributions to the plan. With no earned income, you won't be able to contribute to an IRA.
Taxation of Retirement Distributions
If you're planning to use your retirement plans to pay for an early retirement, you might be in for a surprise. Even if you're retired, taking money from most IRAs before age 59 1/2 results in paying ordinary income tax on the distributions, as well as a 10 percent early withdrawal penalty. If you have a 401(k) plan, you may be able to access your funds at age 55, but you'll face the same 10 percent penalty if you take an earlier retirement.
Collecting Social Security
If you're looking forward to collecting Social Security in retirement, retiring early can put a kink in your plan. The earliest you can initiate Social Security payments is age 62, even if you retire at 40. You won't receive your maximum Social Security benefit until age 70. If you retire at 55, that translates to a 7- to 15-year wait for your benefits. Retiring early might also lower your benefits because your payments are based on your lifetime earnings.
Replacing Health Insurance Benefits
Some workers overlook their health needs when they choose to retire early. When you leave your job, you're likely to lose your employer-sponsored health insurance. You can enroll in Medicare at age 65, but if you retire early, you'll have to find your own insurance to cover your health needs until you hit the Medicare milestone.