Like most people, I sometimes indulge in daydreams about how I'd spend my time if I were retired right now. I have no doubt I could happily fill the extra free time. But the truth is, even if I were sitting on a few million dollars right now, I probably wouldn't actually leave the workforce. Here are three reasons why.
1. Retirement planning is unpredictable enough already
Planning for a standard 20-to-30-year retirement is challenging enough as it is. You never know what expenses are going to come up, which means you never know exactly how much you have to save. You just have to make an educated guess and keep adjusting on the fly to steer yourself toward your target savings goal.
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If I were to retire today at 30, I'd probably be looking at 50 to 60 years in retirement. That means I'd have about 20 to 30 more years of unpredictable expenses to worry about. That doesn't mean it's impossible to plan for a retirement of that length, but it introduces risk.
An unplanned medical condition could drain my savings a lot faster than I initially had planned, leaving me with the tough choice to either return to the workforce or reduce my annual spending and hope I don't run out of money when I'm older.
This scenario could still play out, even if I wait to retire until my 60s. But by then, I'll have more years behind me than in front of me, so my savings won't have to last as long.
Whenever you intend to retire, it's important to go through your plan one more time and make sure you have a safe withdrawal strategy before you actually quit the workforce. This can help reduce your risk of running out of money prematurely.
2. I'd shortchange myself on Social Security
Your Social Security benefit is based on your average monthly income during your 35 highest-earning years, adjusted for inflation. I haven't even been alive for 35 years, so if I were to quit work right now, I'd have a bunch of zero-income years factored into my Social Security benefit calculation. That means I'd get a lot less when I eventually signed up for benefits than if I remained in the workforce for at least 35 years.
To show you what kind of an effect this can have, consider someone who earns $50,000 per year, adjusted for inflation, every year for 35 years. That would bring a full monthly Social Security benefit of about $1,911 based on the current benefit formula. But if that person worked for 34 years instead of 35, a zero-income year would be included for the 35th year. This would reduce that full benefit to about $1,873 per month.
You might wonder why I'd bother with Social Security benefits if I had millions of dollars already stashed away. But as I mentioned above, retirement costs are unpredictable. Social Security provides a regular paycheck I can count upon in retirement to help me out if my personal savings aren't enough. Plus, I've already paid quite a bit into the program, so I'd like to get as much out of it as I can.
3. I'd have a tougher time getting access to my retirement savings
Most retirement accounts charge 10% early withdrawal penalties if you take money out before age 59 1/2. There are exceptions to this rule for Roth IRA contributions, first-home purchases, and more, but you have to understand the rules surrounding these exceptions or you could run into problems.
You can use strategies like Substantially Equal Periodic Payments (SEPPs) to withdraw your money early without penalties, but these methods can be inflexible. For example, if you decide you don't want to continue taking SEPPs after you've started, the government will retroactively charge you all the penalties you should've paid for your past withdrawals.
A better strategy if you plan to retire early is to save some money in a taxable brokerage account. These accounts don't have any limitations on how much you can contribute or when you can withdraw your funds. But they also don't offer the same tax breaks as retirement accounts. You'll pay taxes on your contributions when you make them and your earnings when you withdraw the money. Rather than deal with all of that, I'm planning to wait to retire until I can freely access my retirement savings without government penalty.
We all tend to think of retirement as this constant vacation, but it has limitations of its own. Planning for them is the only way to ensure you can live comfortably after leaving the workforce. If you're considering an early retirement and you haven't thought about the three things discussed above, you might want to revisit your plan before you hand in your resignation letter.
