Many people dream of retiring early for various reasons. And in the wake of the pandemic, early retirement has become many people's reality.
Now the upside of early retirement is clear -- getting to enjoy more freedom at a younger age without being held back by a job. But there are risks involved in early retirement that it's important to know about. Here are a few to consider if you're thinking of making an early workforce exit.
1. Your ability to grow your nest egg may be limited
When it comes to building retirement savings, time is perhaps the most effective weapon in your arsenal. But if you give yourself fewer years before you start taking withdrawals from your 401(k) or IRA, you might end up with a lot less money on a long-term basis.
Imagine you're able to save up $800,000 by age 60. If you were to leave your nest egg alone and not add a penny more, but let that money grow until age 67 at a conservative average annual 5% return, you'd end up with over $1.1 million. But if you retire at age 60 and start taking withdrawals immediately, you'll end up with a lot less.
2. You may end up depleting your savings prematurely
The tricky thing about retirement is that it's tough to predict how long you'll live. As such, you don't know how many years you'll need your savings to last.
But the earlier you retire, the more years of retirement you may need to fund. And if you start taking withdrawals in your early 60s, as opposed to later on in your 60s, you might run into a situation where you end up depleting your nest egg in your lifetime, leaving you cash-strapped when you're much older and unable to compensate by working.
3. You may wind up regretting your decision and having a tough time getting back into the labor force
Retirement can be a tough adjustment emotionally, especially if you're the type of person who doesn't tend to do well with a lot of downtime. And if you leave the workforce at a younger age, you could end up missing your old work routine -- to the point where you decide you want to start working again.
That could prove challenging, though. Unless your old employer is willing and able to take you back, you might struggle to get hired due to age-related bias (as much as it's illegal to not employ someone based on age, it can also be very difficult to prove). And if you're unable to get back to work, you could end up struggling from a mental health standpoint, even if you're managing OK financially.
Think things through
Early retirement could end up working out quite well for you, but it's not a decision to rush into. Think about the risks involved of retiring at a younger age and make sure you have a means of coping with them. And if you decide that early retirement isn't the right call, look at a partial retirement instead. Working 20 hours or so a week for a few years in your early or mid-60s could give you the best of both worlds -- a way to stay busy and earn money without having to overdo it.