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3 Big Reasons Early Retirement Could Cost You

By Christy Bieber – Oct 29, 2021 at 5:33AM

Key Points

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You could end up regretting leaving the workforce early.

Early retirement can help you escape a job you're tired of and provide the freedom to spend your life doing things you enjoy. But it isn't necessarily the best move in every situation because of the serious financial consequences that could result.

Before you decide to walk away from your paycheck ahead of the customary retirement age, make sure you're aware of these three big ways early retirement could cost you. 

Older couple looking at computer together.

Image source: Getty Images.

1. You may need to accept a reduced Social Security benefit

Retirees have a full retirement age when their standard Social Security benefits becomes available to them. An early claim before FRA results in a reduction in monthly retirement benefits, while a late claim allows seniors to earn delayed retirement credits that increase their income.

In many cases, early retirement isn't possible without claiming Social Security because seniors need the income from these benefits to fund their lifestyle. So if you're planning to leave work ASAP and must have retirement benefits to do so, you should realize you'll end up shrinking your payments for good.

2. Your savings will need to support you for longer

The longer you go without a paycheck, the more savings you'll need to provide sufficient support. You don't want to start making withdrawals early in life when you leave work and then find yourself with too little cash in your late 70s or beyond when it's too late to find another job and start earning income again. 

To have enough money for early retirement, you'll need more savings or will have to make smaller withdrawals -- or both. This can mean sacrificing both during your career when you're trying to bulk up your nest egg and later in retirement when you can't take out as much money.  

3. You may have to cover expensive insurance costs

Seniors don't become eligible for government insurance through Medicare until they reach the age of 65. Early retirement before then will necessitate getting coverage elsewhere because going without health insurance is too risky as you get older. 

Options for senior health coverage can be limited. You may be eligible to stay on your employer plan under COBRA for 18 months after leaving your job. But depending on how early you retire, this may not provide coverage for long enough. Once you go on COBRA, any premium subsidies your employer was providing typically disappear, so your health insurance costs could become much higher. 

If you don't choose COBRA, you can sign up for individual coverage on an Affordable Care Act exchange -- but these plans may be more expensive and less generous than what you're used to from an employer. Or you may be able to get insurance through a spouse, if they keep working, but this could also come at a higher cost than you were currently paying.

Having to pay high insurance premiums could mean you need even more money saved to enable early retirement, which means more sacrifice. 

Before you hand in your notice, consider whether these three downsides are worth it or whether working a little longer could be a better way to go. 

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