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3 Reasons Not to Retire Before 66

By Matthew Frankel, CFP® - Feb 21, 2016 at 8:42AM

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Early retirement is a nice goal to have, but make sure you carefully weigh the pros and cons.

Image source: National Cancer Institute. 

Many Americans dream of early retirement, and it's easy to understand why. Most of us would love to be able to live a retirees' lifestyle while we're still young enough to truly enjoy the benefits. However, early retirement isn't right for everybody. Here are three reasons you may be better off working for a few years longer.

Consider the hidden costs of early retirement
Obviously, if you retire early, your savings are going to need to last longer. As you can imagine, it's easier to make a retirement nest egg last for 30 years than it is to make it last 40. Plus, if you start collecting Social Security benefits before full retirement age (66 for those retiring now), your benefit amount will be reduced -- for life.

If you retire before age 62, you can't claim Social Security at all, so you'll need to get all of your living expenses from savings. And, if you retire before 59 1/2, you may not be able to access some of your retirement savings without paying a hefty penalty. Be sure to account for these two facts when determining whether you should retire early.

Furthermore, unless your employer will let you keep your health benefits in retirement, you'll have to pay that until you're 65 and qualify for Medicare. The Affordable Care Act has made health insurance more, well, affordable -- but it's still expensive, especially for older individuals. According to eHealthInsurance, the average individual health insurance premium for the 55-64 age group is $519, so plan on at least an additional $1,000 in monthly expenses for a retired couple.

If your job is going well...
One big reason not to retire early is that the latter years of many people's careers tend to be their highest-earning ones. Not only would working for another few years produce high cash flow and allow you to leave your savings alone, but it can also increase your Social Security benefit in more ways than one.

It is widely known that if you choose to delay Social Security beyond your normal retirement age, your monthly benefit will be higher when you do start to collect. As of this writing, for each year you delay, your Social Security benefit increases by 8% plus cost-of-living adjustments.

In addition -- consider how your Social Security benefit is determined in the first place. The Social Security Administration averages your 35 highest-earning years, adjusted for inflation, and applies its formula to this amount. So, if you choose to keep working during your highest-earning years, this average can increase. Not only will you have a few high-income years added to your record, but your lowest-earning years will no longer count in the average, provided you've worked for more than 35 years.

You haven't hit your "number"
Maybe you have enough money where you could retire, but not enough to live the kind of lifestyle you want to live. There are many different (valid) answers to the question "How much do I need to retire comfortably?" One common method is to save enough so you can comfortably get 80% of your pre-retirement salary from all of your retirement income sources. If you wait until you're 66, a good chunk of this will likely be taken care of by Social Security. If you retire early, it'll all have to come from your savings.

As one example, let's say that you and your spouse earn $100,000 per year, so you figure you'll need $80,000 per year to maintain your lifestyle after retirement. Consider these two scenarios:

  • You wait until age 66 to retire, and you and your spouse get a combined $35,000 in Social Security benefits, so $45,000 will need to come from your savings. Based on the widely used 4% rule of retirement, this means you'll need $1.125 million in retirement savings.
  • Or, let's say you decide to retire early at age 60. You can't claim Social Security yet, so all $80,000 will need to come from your retirement savings for the first few years, plus you'll need an extra $12,000 to cover your health insurance costs until you turn 65. So, in addition to the $1.125 million you'll need for age 66 onward, you'll need an additional $552,000 to support you in the six years until that happens.

Granted, this is a simplified example, but the point is that your retirement "number" can be a lot higher if you retire early. If you haven't hit your number, the safe thing to do may be to work for another few years.

Every situation is different
Now, I'm not trying to talk you out of early retirement if it is one of your goals. Far from it. In fact, I'd eventually like to retire a few years before my "full retirement age" if I'm in a position to do so. What I am trying to do is make sure you've carefully weighed the pros and cons of early retirement before you make one of the most important decisions of your life.

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