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3 Reasons It's Not Always a Good Idea to Retire Early -- Even if You Think You Can Afford It

By Katie Brockman – Updated Nov 12, 2018 at 3:09PM

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Even if you're financially prepared, there are some additional costs that may take you by surprise.

Who doesn't dream of retiring early? Rather than working until you can't work anymore, you can spend your days traveling the world, learning new hobbies, or simply relaxing at home.

Early retirement may sound great in theory, but in practice, it may not be the best idea. For one, most people aren't even on track to retire at a normal retirement age, let alone early. Forty-two percent of Americans have less than $10,000 saved for retirement, according to a survey of millennials, Gen Xers, and Baby Boomers from GOBankingRates, and of those people, 14% have nothing at all saved. That's not great news, especially considering the average person spends nearly $46,000 per year during retirement, according to the Bureau of Labor Statistics. 

Couple on the beach enjoying retirement

Image source: Getty Images.

However, say you're one of those who have been diligently preparing for retirement for decades, and you think you have enough saved to be able to retire early. Here's why that still may not be the best move.

1. You won't be eligible for Medicare until you turn 65

Healthcare is one of the biggest expenses you'll face during retirement, and the average 65-year-old retired couple can expect to spend around $280,000 on healthcare alone, according to Fidelity Investments. That number includes premiums, deductibles, coinsurance, and other out-of-pocket medical expenses, so even those who have insurance aren't protected from high costs.

Healthcare is even more expensive, though, if you aren't covered by insurance. You're not eligible for Medicare until you turn 65, and if you lose your health insurance when you leave your job, you run the risk of draining your retirement fund in the event that a health issue pops up while you're uninsured.

You do have a few options to fill the gap between when you retire and when you're eligible for Medicare, but most of them are expensive. If you're lucky, your employer may offer retiree medical insurance for after you leave your job. The premiums will likely be higher than what you paid as an employee, but it's a convenient option if your company offers it.

You can also purchase COBRA coverage through your employer, but the biggest downside to this type of insurance is that you're only covered for 18 months (plus the premiums are also typically high). So if you want to retire before age 63 1/2, this may not be the most effective option.

Finally, you can buy retiree medical insurance on your own through the Affordable Care Act marketplace, but this could potentially be expensive depending on the options available in your state and any preexisting conditions you may have.

So before you think about retiring, be sure to look at your healthcare options and get an estimate of how much you'd be paying in premiums, deductibles, and other out-of-pocket expenses. If you're going to be paying thousands more each year for healthcare than you were before you retired, ask yourself if your retirement budget can handle those expenses. The last thing you want is for healthcare to eat up your entire budget, making early retirement more trouble than it's worth.

2. If you retire before age 59 1/2, you could be hit with early withdrawal fees

Unless you have tens of thousands of dollars stashed in a savings account or under your mattress, you'll need to make withdrawals from your 401(k), traditional IRA, or Roth IRA once you retire. The problem with that is that if you withdraw money from any of these accounts before age 59 1/2, you'll have to pay a 10% penalty.

There are a few exceptions to this rule, and there are some occasions when you won't need to pay a penalty for early withdrawals -- such as if you're paying for health insurance premiums when you've lost your job. However, if you don't qualify for those exceptions, you'll need to pay a 10% penalty on the amount you withdraw if you're younger than age 59 1/2.

While 10% may not seem like a ton of money, it can eat up a good chunk of your retirement savings. For example, say you retire at age 55 and need to withdraw $40,000 each year until age 60. That's $4,000 per year in penalties you're paying every year -- or $20,000 over the full five years.

3. You may live longer than you expected

Of course, this isn't a bad thing from a personal perspective. However, it may not be great from a financial perspective if you spend more years in retirement than you did working. If you plan on spending, say, 30 years in retirement but end up living past that expectation, you'll find yourself struggling to make ends meet at a time when you can't simply go back to work to earn more money.

For example, say you're 55 years old and you're retiring this year. Let's also say you have a healthy nest egg of $700,000, you're planning on withdrawing $4,500 per month (or $54,000 per year) during retirement, and you'll be receiving $1,000 per month in Social Security benefits once you start claiming (keep in mind, though, that you're not eligible to claim benefits until age 62, so if you retire early, you'll need to live solely off your own savings until then).

Assuming you're going to increase your withdrawals by 3% each year to account for inflation and you're earning a 6% annual return on the money you still have invested, that $700,000 will only last you roughly 23 years -- or until around age 78.

While 23 years is a good, long retirement, the average life expectancy is around 85 years, according to the Social Security Administration. Also, a quarter of 65-year-olds will live past age 90, and 1 in 10 will live past 95. If you're planning only on having enough saved to cover you until you reach your 70s or 80s, do you have a backup plan in case you end up spending 40+ years in retirement?

Retirement in general takes a lot of planning, but if you want to retire early, there's even more preparation involved. As tempting as it is to leave your job as soon as possible and retire early, make sure you have all your bases covered before you call it quits if you want to truly enjoy retirement.

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