Empower Blog

April 25, 2022

Pros and Cons of Early Retirement

Financial Planning, Savings
Who doesn't want to ditch their morning commute for a slow cup of coffee overlooking the ocean? While the idea of retiring early is enticing, there is much to consider when deciding on a retirement age that makes sense for your finances.

Below we'll explore the advantages and disadvantages of early retirement and a few ways to begin planning for that tremendous goal.

The Advantages

The advantages of early retirement may seem obvious; these are some benefits to starting that next chapter.

More Time for Loved Ones

You can't put a price tag on time. Especially if you have led a demanding career, the value of having more time with loved ones is invaluable.

Opportunities to Change Careers or Take Up a New Hobby

Having the margin and extra time to do the things you love is a clear advantage to early retirement. This is a good opportunity to take up a new hobby, travel, or even start a new career choice.

Reduced Stress

Retiring early may even improve your mental health by reducing your stress. If your job has been physically demanding, calling it quits sooner rather than later may increase your physical health and prevent more wear and tear on your body.

The Disadvantages

Even after careful planning for early retirement, these are a few items you may not have considered.

Health Insurance Costs

Individuals often overlook the high cost of health insurance during retirement. Medicare does not go into effect until age 65, so if you plan to retire before then, you will need to budget for private health care until you are eligible for Medicare. Private insurance adds a considerable expense to a budget without employer-sponsored health insurance.

401k Penalties

Most retirement plans come with a hefty tax for withdrawing money before age 59 1/2. While there are a few exceptions for certain professions, hardships, and life events, most people will have to pay an additional 10% penalty tax on the money they draw early.

Reduced Social Security Income

Your social security benefits largely depend on your age when you begin utilizing this source of income. Individuals that retire early will receive a reduced social security income. This is certainly something to consider as you are subject to losing as much as 30% of what you have invested due to drawing early.

Outliving Your Savings

Another scenario to consider is outliving your savings. As life expectancies go up, there could be a real fear that you may live longer than your saved money, not leaving enough for the care needed as you age.

Lack of Structure

While the gift of time is considered an advantage, people often don't plan for what they will do with all the extra time they have. Without the structure of a job shaping your day, some people may get overwhelmed into nothingness, becoming less active during retirement leading to health issues, depression, and loneliness. If you cannot afford to do everything you'd planned, you may be forced to live a more sedentary and isolated lifestyle.

Next Steps for Those Considering Retiring Early

It is always wise to consult with a professional early when deciding what age is appropriate for your financial situation to ensure you have saved and planned accordingly to accommodate your retirement goals.

Examining Your Retired Lifestyle

Consider the retirement lifestyle you want to have. If you're going to travel or snowbird, which means owning multiple homes, you'll want to plan and start saving even earlier. You may consider reducing your monthly expenses now to invest and save for your future.

Begin Saving and Investing Early

Examine what you contribute to your IRA or 401K and consider maxing it out. Often, people contribute a small amount and accept their companies match, only to find out later that what they were contributing was not enough to retire early or live the lifestyle they had hoped to achieve during retirement.

Consult a Professional

If you are considering retiring early or have that goal, it is always best to consult with an advisor sooner rather than later. The earlier you can lay out your expectations for retirement, the sooner a professional can help you customize a savings plan to attain your retirement goals.

Contact a Wealth Management by CommunityAmerica advisor or contact your local branch to set up an appointment to talk through your retirement savings plans and goals.
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About the Author
communityamerica financial advisor joe kraemer
Joe Kraemer

Wealth Management by CommunityAmerica

Joe Kraemer is a Financial Advisor whose passion is understanding what drives members so he can help build a plan to achieve their financial goals.

Neither Wealth Management by CommunityAmerica nor its financial advisors provide tax advice. For tax advice, please speak with a qualified tax professional.

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