3 Big Problems with Retiring Early

Early retirement is a great goal to have, if you plan accordingly. Here are three things you'll need to take into account before deciding to leave the working world early.

Aug 3, 2014 at 1:30PM

Early retirement is a very popular goal in the United States. According to one recent survey, more than one-fourth of Americans plan to retire before they turn 65.

While this is certainly can be an attainable goal, there are a few things you need to be aware of when planning your early retirement strategy. What will you do about health insurance? How about if you can't withdraw from your retirement accounts yet? These are just some of the things you'll need to plan for.

Your money has to last longer
One of the main problems you'll need to deal with is making your savings last longer. People are living longer than ever, and an early retirement can mean a very long period of time.


flickr/ 401(k) 2012

According to a recent report, the chance of one member of a married couple living until 95 is 31%, and there is a 10% chance they'll make it to 100.

So if you retire early, say at age 55, there is nearly a one-in-three chance that you're retirement savings will need to last for 40 years. That's longer than your working life, if you retire so early.

Keep this in mind when trying to figure out your "number" or the amount of money you'll need to retire comfortably. The most often-quoted guideline for retirement savings, the "4% rule", says that a retiree who withdraws 4% of their savings annually and adjusts for inflation every year has a very good chance of lasting 30 years.

And while I think the 4% rule is a bit conservative, the power of inflation over a longer period of time can really make a difference. If you decide to withdraw $50,000 per year today, you'll need more than $110,000 in 40 years, assuming a 2% average inflation rate.

If you plan on retiring early, you should err on the side of caution and plan on withdrawing less than you think you should, say 3.5% of your savings each year.

So you need more money, but can't get it!
If you've been saving money in an IRA or 401(k), you generally can't withdraw if penalty-free until you reach 59-and-a-half years of age. You also won't receive Social Security until at least 62, and your benefit will be greatly reduced if you take it so early.

If you plan on retiring early, you'll need a plan to support yourself in the "in-between" time. Even though you lose out on tax benefits, it could be to your advantage to contribute some of your savings to a standard brokerage account.

Basically, you'll need to figure out how much income you'll need in retirement in order to live comfortably, and then multiply it by the number of years until you'll be able to access your retirement savings. So, if you're retiring at 57, you'll need two and a half years of income in an accessible account.

Don't forget about insurance
Bear in mind that Medicare won't kick in until 65. Some people who work in public-sector jobs get to keep their insurance when they retire after a certain number of years, but for many people, health insurance can make early retirement much more costly.


Obamacare has made this less of an obstacle in recent years, but it still needs to be factored into your retirement income requirements. According to one insurance provider, mid-level plans average $432 per month for a 55-year-old and $526 for a 60-year-old. So, if you plan to retire at 55, expect to spend about $5,200 extra per year on insurance.

Be prepared
I'm not trying to talk anyone out of retiring early. On the contrary, early retirement can be very rewarding, as you'll be able to enjoy free time doing what you want while you're still relatively young.

However, make sure you realize that early retirement can be significantly more expensive. Your income requirements could be higher due to more out-of-pocket expenses like health care, you'll need extra savings so your money lasts longer, and you won't be able to get to most of your retirement savings right away.

Still, if you plan correctly for these things, early retirement could become a reality for you.

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