A lot of people dream about retiring early, whether it's financially feasible for them or not. While there may be no set definition of early retirement, most can agree that more free time for hobbies and family sounds like a pretty sweet deal.
But those who've actually achieved it can tell you that retiring in your late 50s or early 60s also brings some challenges. Here are a few of the pros and cons you need to weigh if you're thinking about it.
2 reasons to love early retirement
1. More free time
Once you retire, you can spend those hours you used to put in at the office on hobbies, time with family, or whatever you'd like. Retiring early gives you more years to devote to these activities.
But not everyone enjoys the change of pace that retirement brings. So if you're thinking about retiring early, make sure you have plans to fill some of that time. If you're struggling to figure out what you would do with all that new freedom, quitting the workforce right now may not be your best move.
2. A more active retirement
The younger you are when you retire, the more likely it is that you'll still be healthy and energetic enough to use your new freedom to engage in more active pursuits. People in their late 50s or early 60s have, on average, fewer medical issues than they will later. So they may have an easier time traveling or performing physically demanding activities. Those who wait until they're older to retire may find that they've missed their window to enjoy some things that they had been looking forward to.
3 potential problems with retiring early
1. Difficulty accessing your retirement savings
The federal government restricts your access to the funds you hold in most types of retirement accounts while you're younger than 59 1/2. If you withdraw money from them before that, you could face a 10% early withdrawal penalty, as well as a tax bill if the money comes from a tax-deferred account like a Traditional IRA or 401(k).
There are ways around that, though.
You can withdraw Roth IRA contributions from those accounts at any age without penalty, though this doesn't apply to your Roth IRA earnings. You may also be able to access your 401(k) funds early thanks to the Rule of 55. This enables you to take money from your 401(k) beginning in the year you turn 55 (or the year you turn 50 if you're a qualifying public safety worker) if you leave your job for any reason.
However, you can only take penalty-free withdrawals from your most recent employer's 401(k), not other retirement accounts. And employers are not obligated to make Rule of 55 withdrawals an option from their 401(k) plans -- some do, some don't. So if you're considering taking advantage of this option down the road, first, make sure you actually have it.
If you plan to retire before 59 1/2, it's often best to set aside money in a taxable brokerage account where you can access it penalty-free at any age.
2. No access to Medicare
You cannot apply for Medicare until you turn 65, so you'll need to find health insurance coverage to cover the gap if you plan to retire before that age. It may be possible to stay on your former employer's health insurance for a little while, but this usually isn't the most affordable option.
Most people are better off purchasing their own health insurance plans. Compare a few different providers and look for the one that offers the best coverage for the most affordable cost. And whatever you do, don't skip health insurance. A single medical emergency that you have to face without coverage could completely derail your finances.
3. More unpredictability
Retirement is always difficult to plan for because you can never be certain what your costs will be. It's likely that a few unexpected bills will crop up each year, and when you add more years to your retirement, you increase the risk that those unexpected costs will drain your savings prematurely.
There isn't a way to avoid this risk entirely, but you can minimize it by being realistic about your retirement budget and checking in with yourself every year or so. If you notice you're spending your money faster than you anticipated, you'll have to either find a way to cut costs or consider getting a part-time job to help boost your income.
Only you can decide if early retirement makes sense for you, but if it's something you'd like to try for, you need to begin planning for these challenges as soon as you can. And don't be afraid to change your retirement timeline if needed. You're better off retiring comfortably a few years later than retiring early without the money you need.