Retiring early is a dream for many people. Some want to spend more time with family, some want to travel the world, some want to knock things off their bucket list, and some just want to have the option to sit around and do nothing.
Whatever the case, having the opportunity to retire early should be celebrated. But like most things in life, there are pros and cons to retiring early -- and one of the cons is that it could potentially cost you thousands.
Image source: Getty Images
Social Security benefits can be decreased
Working Americans spend years paying Social Security taxes with the plan of being able to receive Social Security benefits in retirement. For a lot of people, it plays a huge role in their retirement finances. You can begin receiving Social Security payments as early as age 62, but you will not receive your full benefits until you reach your full retirement age, either 66 or 67, depending on the year you were born.
Here is how your full retirement age is calculated
| Birth Year | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Data source: Social Security Administration.
If you're considering early retirement, it's important to understand how much your Social Security benefits will be reduced until you reach your full retirement age. Benefits are reduced by five-ninths of 1% for each month, up to 36 months. If you retire more than 36 months before your full retirement age, any months exceeding 36 will be further reduced by five-twelfths of 1% each month.
Assuming you retire at age 62, here's how much your benefits will be reduced by the time you reach your respective full retirement age.
| Birth Year | Months Until Full Retirement Age | Benefit Reduction |
|---|---|---|
| 1943 to 1954 | 48 | 25% |
| 1955 | 50 | 25.83% |
| 1956 | 52 | 26.67% |
| 1957 | 54 | 27.50% |
| 1958 | 56 | 28.33% |
| 1959 | 58 | 29.17% |
| 1960 or after | 60 | 30% |
Data source: Social Security Administration.
The average monthly Social Security retirement benefit is just over $1,600. If you were in a position to receive $1,600 monthly from Social Security but had your benefits reduced by 25% to 30%, you could lose out on thousands annually.
You miss out on a 401(k) employer match
One of the better benefits of having a 401(k) plan is the chance for an employer to match your contributions. Employers will generally match up to a certain percentage of your contributions, and this is essentially a guaranteed 100% return on the money. If you earned $100,000 and contributed 4% to your 401(k), you'd be saving $4,000 annually. If your employer matches your 4%, your savings are up to $8,000.
An early retirement takes away time you could be earning an employer match on your contributions, and depending on how early you retire, it could easily add up to tens of thousands of dollars. Using our example above, even retiring five years early could mean missing out on $20,000 in "free" money from your employer.
Be knowledgeable regardless
If you're in a position to retire early, chances are you're not strapped for cash or wondering where your next meal is coming from (or else you likely wouldn't be considering an early retirement). However, knowing the financial implications of early retirement is important. Even if reduced Social Security benefits or no company 401(k) plan match doesn't hurt you, you should always try to be knowledgeable of your financial situation and how your income in retirement will be affected.
