Early retirement may seem like a dream but it can actually turn into a nightmare if you haven’t planned properly or made sure leaving the workforce prematurely is right for you.
Here are four disadvantages to departing the workforce before you’ve hit the typical retirement age.
1. Your Social Security checks may be smaller
For many people, retiring early isn’t possible without claiming Social Security benefits. Unfortunately, these benefits are reduced if you claim them prior to your full retirement age, which is 66 or later for those born in or after 1943.
The benefits reduction for early filing can be substantial. In fact, claiming at 62 if your FRA is 67 could leave you with checks that are 30% below the standard amount you’re entitled to at your FRA.
All of your future cost-of-living adjustments are calculated based on the benefit you receive when you first claim. So all your future monthly checks will be smaller than they could have been had you waited. By claiming early, you also reduce any survivors benefits that your spouse could receive if you pass away first.
Since Social Security benefits are guaranteed for life and protected against the effects of inflation due to cost-of-living increases, reducing the amount of your monthly checks may not be the best choice.
2. You won’t have as much time to save
When you retire, you usually start making withdrawals from your retirement savings accounts rather than continuing to invest in them to grow your account balance.
Unfortunately, early retirement thus means you have far fewer years when you can invest for the future. And since you become eligible to make extra catch-up contributions to tax-advantaged retirement accounts after age 50, you could be missing out on the chance to sock away tons of extra money with a little help from the government.
When you have fewer years to work and save, you run the risk of ending up with a much smaller account balance. To make up for this, you’ll have to save much more aggressively in the time before you leave work for good.
3. You may need to withdraw less so you don’t run out of money
Not only will your savings potentially be smaller due to having less time to save, but your retirement funds will also have to support you for a longer time. This means your risk of running out of cash is greater.
The Center for Retirement Research recommends lower withdrawal rates from savings when you retire at a younger age to make sure your investments can sustain you throughout the rest of your life. If you’re not able to take as much money out of retirement savings accounts, your quality of life will likely be lower.
4. You may get bored
When you retire early, you have many more years when work no longer provides you with a social circle or a structure to your day. If you don’t have plans for what to do to fill your time, you could become bored and depressed.
You may find that due to your lower withdrawal rate and smaller Social Security checks, the plans you envisioned for your retirement are now financially out of reach. And if that’s the case, boredom is even more likely. While you may assume you could return to work if you get antsy in retirement, jumping back into a career after leaving the workforce isn’t always possible.
Don’t end up regretting early retirement
These are just four of many possible reasons why you may decide early retirement isn’t all it’s cracked up to be. For some people, sacrificing and perhaps accepting a reduced retirement income is worth it. But for many others, it makes a lot more sense to work longer to achieve a better quality of life during their golden years.
— Christy Bieber
Where to Invest $99 [sponsor]Motley Fool Stock Advisor's average stock pick is up over 350%*, beating the market by an incredible 4-1 margin. Here’s what you get if you join up with us today: Two new stock recommendations each month. A short list of Best Buys Now. Stocks we feel present the most timely buying opportunity, so you know what to focus on today. There's so much more, including a membership-fee-back guarantee. New members can join today for only $99/year.
Source: The Motley Fool