3 Reasons You Should Reconsider an Early Retirement | personal-finance

(Stefon Walters)

Everyone should be able to retire knowing they won’t have to worry about anything financial. There’s no one strategy that fits everyone when it comes to retirement, as different people will seek different lifestyles.

If you find yourself in a situation where you can comfortably withdraw early, that’s a blessing. While there are many pros to retiring early, there are also a few downsides you should be aware of.

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Your Social Security payments could be less

as far as Social Security is concerned, the full retirement age (FRA) is 67 for those born in 1960 or later. If you retire at or after full retirement age, you can be eligible to receive your full Social Security benefits. If you decide to retire before full retirement age, your benefits will be reduced based on how long you have until full retirement age. Benefits are reduced 5/9 of 1% for each month, up to 36 months.

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If the number of months before you reach full retirement age is greater than 36, any month over it will reduce benefits by 5/12 of 1% per month. If you retire at 62 with 60 months’ worth of reductions until you reach 67, your benefits will be reduced by 30%:

  • First 36 months: 36 * (5/9 * 0.01) = 0.2 or 20%
  • Last 24 months: 24 * (5/12 * 0.01) = 0.1 or 10%

In 2022, if you retire at 67, your maximum benefit would be $3,345 monthly. If you withdraw at 62, it would be $2,364. If you delay your benefits until 70, you can receive $4,194. If the benefits were to remain the same, retiring early could cost you thousands in benefits each year.

You lose time to get an employee 401(k) match

Working for a company that offers a 401(k) plans is one of the best ways to save and invest for retirement. Although you’ll owe taxes on the money when you take withdrawals in retirement, you get to contribute pre-tax money to your 401(k), reducing your taxable income. One of the better perks of a 401(k) plan, however, is the potential for an employer match.

If you earned $100,000 and contributed 5% to your 401(k), you’d be saving $5,000 annually. If your employer matches your 5%, that brings your savings up to $10,000. Retiring early takes away time you could be earning an employer match on your contributions, which can essentially be viewed as “free” money.

You could face increased health insurance costs

In 2021, the average annual premium for health insurance was over $7,700 for single coverage and over $22,000 for family coverage. One of the major benefits of being an employee is the chance to receive health insurance through your job. Currently, 99% of large employers and 58% of small employers offer health benefits. For single coverage, employers, on average, paid 83% of their employees’ health insurance costs; for family coverage, they paid 72%, on average.

Of course, you’ll be able to get your own health insurance after retiring early, but you’ll likely be paying more. With the cost of premiums, having an employer cover the bulk of costs can save you thousands annually.

Make sure you’re aware

More than anything, deciding whether to retire early has to do with your level of comfort. For some in a position to retire early, money may not be at the forefront of their problems. Others may care less about their financial position before retirement and more about the freedom that can come with it.

Either way, one of the best things you can do is to make sure you’re aware of the effects of early retirement, such as potential added costs or decreases in benefits.

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