Can You (or Should You) Retire Early?

OK, so you’ve been working for the last oh… 30-40 years or so and the following thought has begun popping into your head at least a number of times recently… I think I’d like to retire early!

Retiring early is an exciting idea! No more work stress, all the free-time in the world and the ability to get out there and have some fun and enjoy all those hobbies you’ve been waiting to have time for.

What will you do with all that free time? Start up woodworking and build a boat? Check out that new hot yoga class? The possibilities are endless!

But, let’s face the key questions… can you afford to retire early? Should you? What can go wrong? As it turns out, retiring early has a lot of additional considerations that you need to be aware of.

But first, what does retiring early mean? When, precisely, is “early”? From my experience, the most typical retirement age is 65 years old. That’s because you can qualify for Medicare benefits for health care coverage, as well as being much closer to your Social Security FRA (full retirement age) benefit amount.

Retiring early, on the other hand, is commonly associated with age 60 and under. The reason for this is that almost all retirement accounts have rules restricting you from accessing your money prior to ages 59 ½. This creates additional and unique planning challenges.

Today we’ll examine the most important aspects of retiring early, the key challenges and unique strategies that you can utilize. Let’s dive in!

Research Shows Retiring Early Will Make You Live Longer

According to a 2017 study conducted by the University of Amsterdam and published in the journal of Health and Economics, retiring early can truly have a range of life-extending benefits!

Individuals that retired at age 54, for example, were 42% less likely to die over the subsequent 5-year period than those who were still working. A similar study by the New York Times found that 7 years of retirement can reduce the chances of getting a serious disease like diabetes or heart conditions by 20%.

These are pretty interesting statistics. The consensus is that work is stressful, and not working is, well… far less stressful! Additionally, you’ll have more time to focus on your health, eat better, sleep in, see the doctor and more.

Not that you needed even more reasons to consider retiring early, but this is pretty encouraging to hear!

On the Other Hand, You May Be Bored in Retirement

Swinging to the other end of the spectrum, many people who have retired early have found – once the initial bliss of retirement has faded – that they are in desperate need of something to actually do.

For example, how many rounds of golf can you really play? Will you miss the social aspects of being around your co-workers and friends? What else will you do to help you pass the time?

Research has also shown that, the longer you work, the less likely your risk for dementia. But, that doesn’t mean you have to keep working at your full-time high-stress job! Many people choose to retire early and then downshift into a more favorable, interesting, part-time job to help earn income and be fulfilled.

Will You Have Enough Money to Last Through Age 90?

From a financial planning perspective, the biggest question is, of course, “will I have enough money to retire early?” Let’s explore this more deeply.

As I mentioned and discussed further in a previous post, working longer can have some very profound “compounding effects” on your overall savings and retirement nest egg.

By choosing to retire early, you will be forfeiting these compounding benefits and be putting much further strain on your overall retirement portfolio. Studies have shown, for example, that with a married couple at age 65, there is a 75% chance that at least one of the spouses will live to age 90!

What that means is this – if you retire at say, age 56, your retirement assets need to last you approximately 34 years. For some, that’s almost the same number of years that you spent working, but now you’ll need to plan to cover those expenses without a paycheck.

Additional Key Planning Considerations

From my experience helping many clients to retire early, there are a range of other key issues that you’ll want to include in your retirement planning. Here is a quick snapshot of the most pressing ones. In future posts, we’ll spend more time in detail on each of these challenges individually.

1. How Will You Pay For Healthcare?
With Medicare starting at age 65, retiring early can cause you to have a big spike in healthcare costs in the years leading up to Medicare coverage. This can be a surprising amount of money that you may not have considered. A recent quote I ran for a married couple, age 56/58 for coverage in the marketplace was approximately $1350/month!

2. Will You Choose to Take SS Early?
If you retire in your late 50’s, it can be tempting to then take your Social Security as soon as possible so that income stream will begin. However, don’t forget that you’ll get a significant reduction in benefits, permanently, by doing so. It’s important to run these projections accurately and ensure that you’ll have sufficient assets!

3. Are You Planning For Inflation?
Many people I talk to about retiring early only account for their current lifestyle budget. They forget that inflation is really going to impact their budget in the future. For example, if you’re age 55 today and have a modest budget of $65,000 per year, by age 70 that will balloon to $101,267 using a 3.00% inflation rate. And, again, given that life expectancies for many are into the 80’s or 90’s, in just another 10 years (age 80), that same $104,267 will increase to $136,095.

4. How Will You Access Money Prior to 59 ½?
One last, but major consideration, is accessing your money before 59 ½. This is the age at which most retirement accounts (IRAs, 401ks) allow you to start withdrawing funds without incurring a 10% early-withdrawal penalty. There are a number of approaches and strategies that can be used here, including the Rule of 55, a 72(t), part-time work or pulling money from already-taxed accounts. In worse case scenarios, you may even have to incur the 10% early penalty, although that’s always something you want to try and avoid.

So, Is Retiring Early Right For You?

Retiring early certainly has a great allure. And, for many of my clients, we’ve successfully been able to plan and manage their finances to allow them to retire before age 60 and still have sufficient assets to last their lifetime.

Hopefully this article has shed some light on the unique challenges you’ll face as you plan your early retirement! Just ensure that, no matter what, you work with a professional financial advisor or financial planner to ensure all your bases are covered and that you won’t get hit with unwanted surprises down the road.

If there’s anything we can do to help you with your early retirement planning, let us know!

Until next time!