Perhaps early retirement was a possibility for you one year ago. And now? Well, it's tough to say. Your retirement balance has likely been hit by pandemic-related market volatility, and you might be worried about losing your job, too. All around, it's a stressful situation with no easy solutions. Hopefully, efforts to contain COVID-19 will show results and the economy will start to right itself later this year. We might even look back on this time as an odd detour that didn't take us too far off the road to financial independence.
In the meantime, you might explore the possibility of staying in the workforce a bit longer. If you're open to other perspectives, you don't have to view an extension of your career as a terrible thing -- it might be just the opposite. One study from Oregon State University concludes that working longer, past age 65, could lead to a longer life, even among adults who described themselves as unhealthy. There are also some definitive disadvantages to retiring early. Here are five of them.
1. You might get bored
A 2016 Federal Reserve study found that one-third of retirees change their minds and return to the workforce. Researchers assert that many of these "reverse retirees" simply didn't like their nonworking lifestyle. And boredom might be the underlying factor. It's a jarring transition to move from a 40-hour workweek to stretches of unfilled, unplanned days. You suddenly have less structure and far fewer obstacles to overcome. You likely get far less social interaction, too.
2. You might dislike the simple life
Retire at the traditional age of 65 or 66, and your savings have to last you about 25 years. Retire at age 50, and you may need to live off those savings for 40 years. No doubt you've done some rough math on this topic, and you know you'll need a big savings balance, some good dividend stocks, and a leaner lifestyle to make that work.
The thing is, a lean lifestyle is limiting. You might be all right with it today as a means to an end. Living simply is probably how you're funding those retirement contributions, after all. But once you leave the workforce, you're not working toward a goal any longer. You're just living, day in and day out, on a fixed income. And that could wear on you.
3. Lower Social Security benefits
Young retirees generally need to claim Social Security as early as possible, which is age 62. When you claim before your full retirement age (FRA), your benefit is reduced by up to 30%. To see your FRA and how your benefit amount changes between claiming at 62 and claiming at FRA, create an account at my Social Security. Once you log in, you can view estimated benefits at 62, FRA, and 70, plus your earnings record.
Early retirement puts another form of downward pressure on your Social Security benefit. Your benefit is calculated from your average monthly earnings over your highest-paid 35 years of working. If you have fewer than 35 work years under your belt when you retire, the missing years are counted as zeros in the average. Those zeros push down your average earnings, which results in a lower monthly Social Security benefit.
4. Expensive healthcare insurance
The biggest drawback of early retirement could be the problem of paying for health insurance. You don't qualify for Medicare until age 65. Until then, you'll need to fund your coverage out of pocket. Average costs vary by state, but you can expect to pay $400 to $600 monthly in premiums. Along with the cost of premiums, you'll have copayments, coinsurance, and deductibles to cover.
5. No financial flexibility
As much as you might dislike working, that paycheck provides a lot of financial flexibility. You probably get a raise every year, and you might even earn an occasional bonus, too. Those income increases help you contend with inflation and occasional overspending. Without them, it's much harder to absorb emergency expenses or even smaller spending mistakes.
Alternatives to early retirement
You might be inclined to grieve the loss of your early retirement prospects. That's understandable. But you might also revisit why you wanted to retire early in the first place. A deeper look at your motivation could reveal other solutions that can serve the same purpose.
If you dislike your job, consider whether another career would be more satisfying. Or perhaps you don't like the structure of work life. In that case, self-employment might suit you better. Is there a way you could turn a hobby into moneymaking opportunity? Brainstorming solutions and then planning for the one that feels right can keep you from getting down about having to change those retirement plans.