Why You Should Reconsider if Early Retirement Is Right for You

(Stefon Walters)

Retirement is something most workers look forward to. Whether they want to travel the world, spend more time with family, or take up a new hobby, the thought of having the freedom to do what fulfills them is a well-deserved reward after decades of work. There’s no one-size-fits-all age for when someone should retire, but the choices you make have an impact – especially if you retire early.

If you are thinking about early retirement, here are some things you should know in advance.

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Your social security may be reduced

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The amount of Social Security benefits you receive depends largely on how much you earned from your job and when you stopped receiving benefits. You can start claiming Social Security benefits as early as age 62, but the amount of the basic amount – the amount of your monthly benefits at different ages – is based on your full retirement age (FRA ). Social Security uses your birth year to determine your FRA:

1943 to 1954 66 48
1955 66 and 2 months 50
1956 66 and 4 months 52
1957 66 and 6 months 54
1958 66 and 8 months 56
1959 66 and 10 months 58
1960 or later 67 60

Taking Social Security benefits before your FRA will reduce them, depending on how far you are from your FRA. Benefit is reduced by 5/9 of 1% for each of the first 36 months you claim before your FRA. If you start receiving benefits more than 36 months before FRA, every month beyond 36 will reduce your benefits by 5/12 of 1%.

If your FRA is 67 and you start receiving benefits at 62, it will be reduced by 30%. For 2023, the average monthly Social Security benefit is $1,827. If you can earn the median wage and start receiving benefits at age 62, your monthly benefits will decrease by about $548. When you consider an average of $548 per month for 60 months between ages 62 and 67, that would cost you around $32,880.

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Don’t forget about health insurance

One of the best job benefits is often health insurance offered. By subsidizing the cost of health insurance, employers ease the financial burden on their employees. The same can be said about Medicare, the health insurance program for people age 65 and older (except for certain disabilities). Medicare does not cover all medical expenses or long-term care, but it can be a great financial help.

When many people retire, they switch from their employer’s insurance to Medicare, but unfortunately, if you retire before you qualify for Medicare, you may end up with a coverage gap. Of course, you can buy your own health insurance, but it can be very expensive – especially in old age when health costs increase due to the more comprehensive coverage people need.

For people over age 60, the average monthly cost of a health insurance plan from the government marketplace (HealthCare.gov) is less than $1,000. The out-of-pocket cost of this is nearly $12,000 more in annual expenses.

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A 401(k) is a great way to save for retirement, especially if your employer matches your contributions. Early retirement takes away the opportunity to get a match with an employer and can easily add up to tens of thousands of dollars, depending on how you retire early.

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Imagine you make $100,000 a year, and your employer matches 5% of your contributions. If you contribute 5% ($5,000) that’s an extra $5,000 from your employer every year. Just $5,000 may not sway a person’s decision, but given how much it can grow over time due to income, it’s worth considering more.

Do what makes you comfortable

If you’re thinking about early retirement, money may be out of your control, and you’ve probably earned it. The purpose of this article is not to convince you not to retire early but to emphasize the need to understand the decision-making process.

No one knows you and your life better than you. There is no “you shouldn’t retire early because of ____” that can be applied to everyone’s life. It is important to first make sure you understand the financial implications, and then do what makes you comfortable.

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