There are many valid reasons for wanting to retire early. You might be tired of your current career after decades of effort, wanting to part ways before you burn out entirely, or you might be a youngster looking to get out of the workforce as early as possible. Either way, your dreams of retiring early may not be as relaxing or as financially beneficial to you as you might think.
Roughly 51 percent of Americans retire between the ages of 61 and 65, with another 13 percent sneaking out between ages 55 and 60, and 22 percent leaving between ages 66 and 74. If you're born before 1960, your full retirement age is 66, with that age rising to 67 if you're born after 1960.
So why is it a bad idea to start collecting benefits and get out of the workforce a few years early?
1. Lost Income
First, think about the income you'd be missing out on by not working--and this is especially important to consider if you're young and trying to retire early. Imagine you make $50,000 a year at age 40, and you're thinking about retiring, since your current investments could return a feasible $40,000 a year to you indefinitely (following the 4 percent rule with a principal of $1,000,000).
Even if you don't put any additional money aside for retirement, if you keep working, you can live off your primary income while your principal continues to grow. Assuming the average growth rate of the S&P 500 remains the same, your investment could double after just 7 years. Retiring at 47 is still retiring early, and you'd have $2,000,000 and $80,000 a year to play with instead. That's going to afford you a much higher-quality lifestyle, and more flexibility if you run into unplanned expenses or financial emergencies.
2. Outliving Your Savings
You also need to consider the possibility that you might outlive your savings, which is especially important if you don't have many investment assets. Considering the fact that one in three Americans has no retirement savings whatsoever, this is one of the most pressing concerns you should have for retiring early.
I mentioned the 4 percent rule earlier; in case you aren't familiar, this is a widely-cited informal rule that, as long as you withdraw no more than 4 percent of your well-diversified investments per year, you should be able to outlive your savings indefinitely. This is just a general rule, however, and some experts recommend going to 3 percent, just to be on the safe side. If your principal starts to wane, you may be forced to return to work when you're in worse physical or mental shape, which will make your retirement years anything but pleasant.
You also need to consider the effects that early retirement can have on your Social Security benefits. You can technically start withdrawing these benefits as early as age 62, but if your retirement age is 66, you could see your benefits reduced by 25 percent. And, if you start working after you receive benefits, some of your benefits may be withheld.
3. The Benefits of Actively Working
It may seem like the only reason to work is to make money, and once you've made enough money, you should retire and stop working forever. But don't forget, there are some compelling psychological and physiological benefits to working.
Staying busy and regularly challenging yourself helps to occupy your mind, honing your skills and giving you a sense of pride and personal achievement. Whether you're uniquely passionate about a specific career or not, working can give you a sense of identity, and give you a reason to socialize with others, meet new contacts, and build a network of social support. It's no wonder why people who are actively working tend to be happier and healthier than those who aren't.
If you plan to retire early, you should have a plan to keep working, at least part time, or find a hobby or side gig that can help you earn these benefits regardless.
What to Do Instead
Let's say you're still eager to retire early, because you want to get out of the workforce as soon as possible. What can you do instead?
- Decrease your hours. Go down to working part-time, instead of full-time. It may give you the extra free time you're craving. Even one extra day off per week could have a radical effect on your mindset.
- Find a new career. If you're burned out of this career or this job, consider finding a new career path, or taking on a new role at your company with a lateral move or demotion.
- Keep accumulating wealth. The more savings you have, the smaller the problems of early retirement become. Focus on accumulating more wealth, from stocks, real estate, and savings from your full-time job.
Retiring early can be a luxury, but it can also be problematic. The key is to understand the strengths and weaknesses of this significant financial move, and use that information to make the right decision for your situation.