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3 Reasons Early Retirement Isn't All It's Cracked Up to Be

By Christy Bieber – Sep 3, 2020 at 9:47AM

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Leaving the workforce ahead of schedule may sound better than it is.

Early retirement sounds like a great idea if you picture having ample cash to travel the world or hang out at the beach. But in reality, retiring before your mid-60s could cause a whole host of financial consequences that affect your ability to enjoy your later years to the fullest.

In fact, here are three big reasons early retirement could end up being more hassle than it's worth. 

Older man eating alone at table in house.

Image source: Getty Images.

1. Your savings must support you longer

It's stating the obvious, but the earlier you stop getting a paycheck, the sooner you must start relying on your investment accounts (and the sooner your balance starts to fall). Not only do you begin making withdrawals earlier when you retire younger, but you also lose some prime investing years when you're eligible for catch-up contributions and may be able to afford to make them. 

The consequences can be far-reaching. If you maintain a safe withdrawal rate, you may limit your opportunities to enjoy retirement because your income could be too small. But if you indulge your retirement fantasies by taking out too much money too early, you could run out of money later in life when healthcare expenses rise, and working to get back on track is impossible. 

2. You risk lowering your Social Security benefits

If you claim Social Security prior to full retirement age (FRA), you're subject to early filing penalties that reduce your benefits.

And even if you can retire early without starting your benefits ahead of your FRA, you could still see less lifetime income. The problem comes from the fact the Social Security Administration bases your monthly checks on average wages earned during the 35 years when your earnings were highest (after adjusting for inflation).

If you don't work 35 years, your average wage will be lower due to the inclusion of years with no wages. And even if you manage to work 35 years, chances are good you'll be leaving the workforce when your salary is higher than at the beginning of your career. By quitting when your salary has peaked, you miss out on the chance to replace lower-earning early years in the calculation of your average wage. 

3. Health coverage could cost a pretty penny

If you're retiring early, that almost guarantees you're leaving the workforce well before 65, when you become eligible for Medicare. And that can be a big problem because you can't afford to go without health insurance.

While maintaining your employer-provided coverage through COBRA should be an option, as is purchasing an individual insurance policy, chances are good your premiums will be pretty high -- especially if you're used to your employer subsidizing coverage. If you buy an individual policy instead of sticking with a group plan, you're also likely to have higher deductibles and co-insurance costs than you're used to. 

The extra costs can quickly eat into your retirement savings, which can mean your account balance falls even faster or you have less to spend on other things. And that, combined with the possibility of lower Social Security benefits, plus the fact you'll be living on your savings for longer, can be a recipe for financial disaster. 

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