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5 Downsides of Early Retirement

By Christy Bieber - Mar 8, 2020 at 3:06PM

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You'll be surprised how many disadvantages there are to leaving the workforce early.

When you think of early retirement, you probably picture yourself traveling the world, having ample time for hobbies, and enjoying a life of leisure. The only problem is, retiring ahead of schedule isn't always all it's cracked up to be. In fact, if you don't have enough money or your plans for how to spend your time aren't solid, leaving the workforce early could turn into a financial and emotional disaster.

You don't want to retire early and regret it, especially since it can be difficult to get back into the workforce after getting out. To make sure this doesn't happen to you, think about these five major downsides.

Smiling older man with boy sitting on his shoulders.

Image source: Getty Images.

1. You could take a big hit to your Social Security benefits

Social Security benefits could be reduced in a few different ways if you retire early.

First and foremost, if retiring means you have to claim benefits, you'll see smaller checks due to early filing penalties. These apply if you retire before full retirement age, which is between 66 and 67. They reduce your checks by a small amount per month but add up to about a 6.7% benefit cut each year for the first three years before FRA and an additional 5% reduction for each year before that.

Retiring early could also affect your checks because the Social Security formula determines your benefit by giving you a percentage of your average inflation-adjusted wage over the 35 years your earnings were highest. The SSA always calculates this average based on a 35-year career, simply factoring in some $0s if you haven't earned wages for that long. 

If you've worked your way up the career ladder and have pretty high earnings as a pre-retiree relative to your early career, early retirement also means more early low-wage years make up your average, rather than being replaced by later years when your earnings are at their peak. 

2. Covering medical costs could get really expensive

Aging often comes with aches, pains, and an increased chance of illnesses, so having comprehensive health insurance coverage is essential to maintain your health. The problem is, if you retire early, you've got to figure out how to cover yourself since you don't become eligible for Medicare until you're 65. 

Choosing to continue coverage through your employer is possible under COBRA, but only for 18 months in most cases. And since your employer typically stops picking up a portion of your premiums when you retire, this could be an expensive option. Buying an individual policy could also come with a big price tag, although you may be eligible for subsidies under Obamacare to help defray the costs. 

3. You won't have as much time to save money

Your later years of working are often some of the best times to save money for retirement as you become eligible for catch-up contributions that increase the amount you can invest in tax-advantaged retirement plans. If you retire early, you'll miss out on the chance to make these extra contributions. 

4. Your savings will have to sustain you for a really long time

Life expectancies have been getting longer, so many experts now recommend being more conservative than in the past when it comes to how much you can take out of retirement accounts. If you retire early, you'll only extend further the number of years your savings has to support you. Unfortunately, this could raise the risk of running out of money, which could become a big problem if your accounts run dry when you're in your 70s, 80s, or 90s.

5. You're a lot more likely to get bored 

Without work to provide you with structured activities, it can be harder to fill your time. While you may have lots of plans, not everyone thrives without the built-in activities and social connections that work provides. Boredom could lead to depression or other health issues. It could also prompt you to overspend to find ways to entertain yourself, thus increasing the risk of running your savings accounts dry. 

Is retiring early right for you?

While early retirement definitely has some disadvantages, it could still be the right choice for some people. If you're truly financially prepared and you know how you want to spend your time, early retirement could make a whole lot of sense. But for many people, the downsides outweigh the upsides. You need to think about all that could go wrong before you make your choice, as you don't want to end up with a lot of regrets after leaving work for good. 

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