Should I Retire Early?

Retiring early sounds appealing, doesn't it? More time for travel, hobbies, and perhaps a second career. However, it’s important to weigh the pros and cons before making such a significant decision. Here’s a detailed, yet easy-to-understand guide to help you decide whether early retirement is right for you.

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What is Early Retirement?

Early retirement typically means retiring before age 65, the age at which you become eligible for Medicare. Many Americans dream of early retirement, with surveys showing 52% plan to retire before 65, and 23% before age 60.

Pros of Retiring Early

1. Health Benefits

Retiring early can lead to a healthier lifestyle. Imagine sleeping in, enjoying more fresh air, and no more hurried meals at your desk. Studies have shown that leaving the stressful work environment can improve mental health, especially for those in higher-level positions.

Retirement allows for more time to exercise, prepare healthy meals, and get adequate rest—all crucial for maintaining good health. Without the daily grind, you can adopt a more relaxed pace, reducing stress and potentially lowering the risk of stress-related illnesses such as heart disease and high blood pressure.

2. More Time to Travel

Without the restriction of limited vacation days, you can explore new places and experiences. The younger you are when you retire, the more you can enjoy travel before health issues might limit your mobility.

Traveling in your younger years allows for more adventurous and physically demanding activities, whether it’s hiking in the mountains, scuba diving in tropical waters, or exploring bustling cities. Early retirement offers the freedom to travel off-peak, avoiding crowded tourist seasons and taking advantage of better deals. You can immerse yourself in different cultures, learn new languages, and create lasting memories.

3. New Career Opportunities

Retiring early doesn’t mean you have to stop working altogether. It can be an excellent time to start a new career or business. You’ll have more time to dedicate to your new venture and the energy to enjoy it.

If you’ve always dreamed of pursuing a passion or hobby professionally, early retirement can be the perfect time to do so. Whether it’s opening a small business, consulting in your field of expertise, or engaging in creative endeavors like writing or art, the opportunities are endless. You might also consider part-time or freelance work that allows for a better work-life balance, providing both intellectual stimulation and additional income.

4. Increased Family Time

Early retirement can allow you to spend more quality time with your family. Whether it’s helping out with grandchildren, caring for aging parents, or simply being more present in the lives of your loved ones, the additional time can strengthen family bonds.

You can participate in family activities, attend important events, and be available for day-to-day interactions that might have been difficult with a full-time job. This increased family involvement can lead to a more fulfilling and satisfying personal life.

5. Pursuing Personal Interests

With the freedom that comes with early retirement, you can finally focus on personal interests and hobbies that you might have put on hold due to work commitments. Whether it’s gardening, golfing, painting, or learning a new skill, you have the time to indulge in activities that bring you joy and satisfaction.

Engaging in hobbies can provide a sense of purpose and fulfillment, contributing positively to your mental well-being. It’s an opportunity to explore new passions and rediscover old ones.

6. Community Involvement

Early retirement offers the chance to become more involved in your community. Volunteering for local organizations, participating in community events, or even running for a local office are all ways you can give back and stay active.

Being involved in community activities can provide a sense of purpose and belonging, keeping you socially connected and engaged. It’s also a great way to meet new people and make a positive impact on your surroundings.

7. Flexibility and Freedom

Perhaps the most significant advantage of early retirement is the flexibility and freedom it provides. You’re no longer bound by a work schedule, allowing you to structure your days as you see fit. This flexibility can lead to a more balanced and satisfying life.

You can wake up when you want, plan your activities around your preferences, and enjoy the freedom to make spontaneous decisions. This newfound autonomy can lead to a more relaxed and enjoyable lifestyle, enhancing your overall quality of life.

Cons of Retiring Early

1. Health Risks

While early retirement can reduce work-related stress, it can also lead to a decline in mental and physical health if not managed properly. Studies suggest that those who retire early without maintaining an active lifestyle or social connections may experience higher rates of depression, cognitive decline, and physical ailments such as heart disease and stroke.

2. Reduced Social Security Benefits

Choosing to retire early may mean that you elect to receive Social Security early (prior to your normal retirement age). For example,  if you begin collecting Social Security benefits at age 62, your monthly payments will be significantly lower than if you wait until full retirement age. This reduction can impact your long-term financial stability, especially if you live longer than expected.

3. Longer Retirement, Strained Savings

Retiring early means your retirement savings will need to last much longer, potentially 28 years or more if you retire at 62 and live to 90. This extended period can strain your savings, making it crucial to have a robust financial plan. Without sufficient funds, you risk outliving your savings, leading to financial insecurity in your later years.

4. Health Insurance Costs

If you retire before age 65, you’ll need to secure your own health insurance until you become eligible for Medicare. This can be a significant expense, as private health insurance premiums are often much higher than employer-sponsored plans. Additionally, health insurance costs typically increase with age, which can further strain your retirement budget.

5. Boredom and Missing Work

Many retirees find it challenging to adjust to the lack of structure and daily purpose that a job provides. The transition from a busy work life to a more relaxed retirement can lead to feelings of boredom and isolation. Missing the social interactions and sense of accomplishment that come with working can also contribute to a desire to re-enter the workforce, which may be difficult after a prolonged absence.

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A Middle Ground

If fully retiring early seems too drastic, consider a phased approach. You might negotiate a reduced work schedule or work from home part-time. This allows you to enjoy the benefits of retirement without completely stepping away from your career.

Life Expectancy Considerations

According to the Social Security Administration, a 65-year-old woman can expect to live about 20 more years, while a man can expect about 17 more years. It’s essential to plan for a potentially long retirement.

Key Takeaways

• Pros: Health benefits, more travel time, and opportunities for new ventures.

• Cons: Strain on savings, reduced Social Security benefits, and potential boredom.

• Middle Ground: Cutting back on work without fully retiring.

Important Things to Consider When Planning for Early Retirement

1. Financial Readiness

Ensure you have enough savings to cover a longer retirement period. Calculate how much you will need annually and multiply it by the number of years you expect to be retired. Don't forget to include all potential expenses like housing, food, travel, and entertainment. Also, account for unexpected expenses that may arise, such as major home repairs or unplanned medical costs. Financial advisors often recommend having at least 25 times your annual expenses saved before considering early retirement.

2. Health Care Costs

Factor in the cost of health insurance and potential medical expenses. Health care costs tend to rise as you age, and you’ll need coverage until you become eligible for Medicare at age 65. Consider premiums, out-of-pocket costs, and any additional coverage you might need. Long-term care insurance is also worth considering to protect against high costs associated with extended health care needs.

3. Social Security Benefits

Understand how early retirement affects your Social Security benefits. Calculate the reduction in benefits if you claim Social Security early and how it impacts your long-term financial plan. Starting benefits at age 62 will result in significantly lower monthly payments compared to waiting until full retirement age (67 for those born in 1960 or later). Delaying benefits until age 70 increases your monthly benefit, which can provide more financial security in your later years.

4. Retirement Lifestyle

Think about how you want to spend your retirement. Plan activities, travel, hobbies, and consider part-time work or volunteering to keep yourself engaged and socially active. The more detailed your plan, the better prepared you’ll be for the transition. This not only helps in budgeting but also ensures a fulfilling and enjoyable retirement. Consider what gives you a sense of purpose and how you can incorporate that into your retirement years.

5. Inflation

Consider the impact of inflation on your savings. Ensure your investment strategy accounts for inflation so your purchasing power remains intact throughout your retirement. Inflation erodes the value of your savings over time, so it’s essential to invest in assets that have the potential to outpace inflation. This might include a mix of stocks, bonds, and other investment vehicles that offer growth and stability.

6. Contingency Plans

Have a backup plan in case your retirement savings are insufficient. This might include part-time work, downsizing your home, or other cost-saving measures. It’s important to have a safety net and flexibility in your plans. Unexpected life events, such as economic downturns or personal health issues, can affect your retirement savings and plans. Having a contingency plan ensures you can adapt without major financial stress.

7. Estate Planning

Make sure your estate plan is up to date. This includes your will, any trusts, and beneficiary designations to ensure your assets are distributed according to your wishes. Proper estate planning can prevent legal complications and ensure your loved ones are taken care of. Consider consulting with an estate planner to cover all aspects of your estate, including power of attorney, healthcare directives, and tax implications.

Bottom Line

Deciding when to retire is a personal choice that goes beyond financial considerations. Your health, family obligations, and personal goals should all play a role in your decision. It’s not just about retiring from something, but to something. If early retirement appeals to you, ensure you’ve planned thoroughly to enjoy it without financial stress.

Consider your unique situation and use retirement calculators to understand the financial impact. Speak with a CERTIFIED FINANCIAL PLANNER™ at ONE Advisory Partners to explore all your options before making this life-changing decision. Let our experts help you create a comprehensive plan tailored to your needs for a secure and fulfilling retirement.

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Reference

Social Security Administration. What Important Things to Consider When Planning for Retirement

Social Security Administration. Early or Late Retirement?

U.S. Centers for Medicare and Medicaid Services. When Can I Sign Up for Medicare?

United States Government Accountability Office. Unemployed Older Workers: Many Face Long-Term Joblessness and Reduced Retirement Security

National Bureau of Economic Research (NBER). The Effects of Retirement on Physical and Mental Health Outcomes