Retirement is called the golden years for a reason -- but that reason isn't what you think. The phrase was coined by an advertising campaign for Sun City, Ariz., in the late 1950s. And it has stuck around long enough to help brand retirement as life's ultimate goal.
The thing is, what if it's not? For many, the traditional, work-free retirement lifestyle falls flat. According to RAND Corporation, more than one-third of workers over the age of 64 previously retired and then later went back to work. The decision to unretire is often related to finances, but older workers also cited the desire to do meaningful work.
Here are eight financial and lifestyle disadvantages to early retirement that you should consider before rushing to give up your parking space at the office.
1. Lower income potential on your savings
The impact to your savings and their earnings potential may be the biggest reason to keep working. If you retire at age 55 instead of 65, your savings have to support you for an extra 10 years and you lower your income potential as soon as you start taking withdrawals. Each time you pull from your savings, you're reducing the amount of invested funds that are growing and generating income for you.
2. Tax implications of early withdrawals
The Internal Revenue Service imposes a 10% penalty on early withdrawals from your 401(k) or IRA. If you pull cash from these accounts before age 59 1/2, you'll likely owe 10% on the amount you take out, plus regular income tax.
There are situations in which you can avoid that extra 10% tax sting. The IRS does allow for penalty-free withdrawals from 401(k)s and IRAs to cover things like medical expenses, tuition, or a primary home purchase. But normal living expenses don't qualify. If you rely on those retirement accounts to pay your bills before you reach 59 1/2, it'll cost you.
3. Reduced Social Security benefits
Claiming Social Security benefits before your full retirement age, or FRA, lowers the amount you collect in each check. Your FRA is based on the year you were born, and is somewhere between the ages of 66 and 67. You can claim your benefits as early as age 62, but they will be reduced by up to 30% for the rest of your life.
On the other hand, if you delay collecting benefits beyond your FRA, your benefit amount increases. Depending on what year you were born, that increase could be as much as 8% per year until you reach age 69.
4. The prohibitive cost of healthcare
A study by National Business Group on Health estimates that healthcare premiums and out-of-pocket medical costs in employer-sponsored health plans will average $14,800 per employee in 2019. Large employers will cover 70% of those costs, or about $10,300.
Without an employer to foot part of your bill, your out-of-pocket healthcare costs will increase substantially -- particularly if you retire before Medicare eligibility at age 65.
You might get around this problem if your employer offers retiree benefits. Not all do, but it's worth asking about if you're set on early retirement. You could also purchase a healthcare plan through the health insurance marketplace, but it will be much more expensive without your employer pitching in to pay part of the cost. Or you could keep your current benefits active for 18 months through COBRA. COBRA premiums tend to be pricey, however, since employers don't normally subsidize them.
If you plan early, you could also address healthcare costs proactively by saving in a health savings account (HSA). This is a tax-advantaged account available to those covered by high-deductible health plans. In 2020, eligible people can contribute up to $3,550 of pre-tax money in an HSA. Your withdrawals for qualified health expenses are tax-free and the money never expires.
5. Reduced flexibility to adapt to changing goals
Your paycheck provides ongoing financial flexibility. If you make an unwise spending choice, your recurring paycheck is there to help you recover. Even better, you can usually count on annual raises or bonuses to offset any big financial missteps.
Spending mistakes are much harder to overcome when your income is fixed. If you splurge on a fancy vacation by withdrawing from your invested savings, it affects your long-term income. Or if your financial goals change -- maybe you want to invest in your niece's tech start-up or help your child buy their first home -- you may not have the resources to adapt.
6. Lower standard of living
You may be eager to walk away from your overbearing boss, but your work-free life will have a new set of challenges. More than two-thirds of retirees say they have a lower standard of living compared to their working years, according to a survey from ING. And unless you win the lottery, the earlier you retire, the simpler your life will be. Strict adherence to your retirement budget can be stressful, maybe more so than your former work responsibilities.
According to a survey from Home Instead, 44% of people who returned to work cited boredom as the second-most-important factor in their decision to unretire. As with the RAND study, financial stability was the primary reason these respondents went back to work.
Having 40 extra hours of free time on your hands each week may sound like a dream. But the dream can go south quickly when you're on a tight budget. Your fixed income won't support a spontaneous weekend trip to Paris, after all. And it might not take long to get your fill of free community events and nature walks.
8. Difficulty reentering the workforce
If you leave the workforce and then decide to come back, you may have trouble finding a good job. An AARP survey found that 19% of older workers experienced age discrimination in their job search. The Federal Reserve Bank of San Francisco conducted a study that focused on lower-skilled jobs which confirmed that older job applicants experience age discrimination, and women especially face ageism in the job market.
Alternatives to early retirement
If an unpleasant job is motivating you to get out of the workforce early, look at other solutions before you jump fully into retirement. Make a lateral move, change careers, or start your own business. You could also find a part-time role to replace a full-time one. Or talk with your employer about an extended, unpaid leave -- just to see what it's like on the other side before you commit. And in the meantime, double down on your savings to protect your financial flexibility and quality of life when you do retire.
The point is, keep your options open until you're definitively ready to leave the workforce. That's the best way to preserve the sheen on those golden years.