4 Disadvantages of Retiring Before Your Full Retirement Age

Retirement is an excellent time to spend time with family, pursue hobbies and interests, and knock travel destinations off your bucket list. Retiring early can give you more time to engage in all of these activities.

However, early retirement can bring about several financial problems if you are not careful in your retirement planning. This can potentially prevent you from living out your dream retirement.

This article will dive into a few disadvantages of retiring before your full retirement age to help you determine if early retirement is worth it or not.

1. Reduced Social Security Income

You can take Social Security benefits starting at age 62. Retiring before that means you must rely solely on your savings until you are 62.

However, even if you wait until age 62, your benefits are smaller the earlier you take them since you will be receiving benefits for a longer period. You can delay Social Security benefits to age 70 — the longer you wait, the larger the benefit.

Furthermore, your benefits are calculated using an indexed average of your 35 highest-earning working years. Many earn more closer to retirement since they are far in their careers. Thus, retiring later could cause the Social Security Administration to use a larger average number when calculating your benefits. This could mean a larger monthly benefit.

2. Could Impact Medicare Coverage

Most are not eligible for Medicare until turning 65. Thus, retiring early could leave you without healthcare coverage.

It’s important to remember that healthcare costs tend to increase as people get older, so you may have to purchase a plan privately to get the coverage you need. Getting a private plan can cost more than Medicare or your employer’s health plan. This can drain your retirement savings faster.

3. Retirement Withdrawal Penalties and Tax Implications

Retirement accounts have restrictions on when you can withdraw in exchange for their tax benefits and to promote saving. Withdrawing early can cause you to incur penalties and additional taxes.

For example, traditional IRAs and workplace 401k plans let you withdraw penalty-free when you are 59½. Withdrawals are taxed as ordinary income. However, the IRS may tax you an additional 10% additional on any amounts withdrawn before you turn 59½.

Meanwhile, Roth IRAs let you withdraw contributions at any point penalty-free. However, you may not withdraw earnings before age 59½  or you could incur a 10% early withdrawal penalty.

4. Risk of Outliving Your Savings

Retiring early increases the length of your retirement and reduces the number of earning years you have. This means you will have fewer years to save for retirement and let your savings compound, and that retirement period is longer.

Thus, retiring early may require some sacrifices to avoid outliving your savings. You might have to compromise on certain aspects of your lifestyle now to save more or in retirement to spread your savings across a longer retirement period.

The Bottom Line

Retirement is a huge financial goal requiring careful planning and discipline. Early retirement can add complexity, leading to several downsides if you aren’t careful.

Retiring early may prevent you from getting Social Security immediately or maximizing your benefit. Similarly, you might have to purchase private health insurance until you qualify for Medicare.

Furthermore, retiring early could force you to pay penalties on your retirement assets. This, a longer retirement period, and having less time to save, all increase your risk of outliving your savings.

Everyone has a different situation. Make sure to weigh your retirement preferences against the potential costs carefully. Consult with a financial professional to develop a plan that fits your needs and goals.

Sources:

https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans