Journey Into Retirement

THE CASE AGAINST EARLY RETIREMENT

What an appealing concept: Early retirement. This is the opportunity to live a more carefree life while you are still relatively young and healthy. This usually means leaving the workforce sometime after age 55, but before age 66. What could be better?

THE STATS

Early retirement in the US is not only common, but the norm. According to a 2012 report issued by the Social Security Administration 71% of men and 76% of women retire before their full Social Security retirement age. Compare this to 1965 when only 21% of men and 49% of women retired before their full retirement age. This trend is clearly accelerating.

Of course some of this is voluntary retirement and some is forced. According to a 2013 survey conducted by Merrill Lynch, 34% of respondents retired early due to poor health and 24% retired following a job loss. So, nearly 60% of early retirees did so under conditions that were arguably involuntary.

On the voluntary side, 27% said that they retired early because they had the financial resources they needed, 16% wanted to spend more time with family, and 10% needed to retire to look after another family member.

So, is early retirement the panacea to a carefree, stress-free, and worry-free life or is that only an illusion?

THE FINANCIAL ISSUES

There are clear financial pitfalls to early retirement. First, the best predictors of how much you have in savings at retirement is how much you contribute monthly and how long you save. Early retirement can lop years off of your savings. Also, if the tendency is for earning to go up with years in the workforce, the amount you save can be reduced as well. So, in the survey mentioned above, 27% had determined that they had the financial resources they needed which leaves a lot of people who might not.

Second, if you file for Social Security benefits before your full retirement age (and age 62 is the earliest), these benefits are reduced. Notwithstanding the fact that you have more years to collect benefits if your retire early, analyses have shown that people who delay filing for Social Security Benefits actually collect a larger total sum, even adjusting for fewer years to collect. The same may be true if you are entitled to pension benefits. Early retirement could mean a smaller income which could force you to downshift your lifestyle.

Finally (and perhaps most obvious), if you retire early, your funds must spread over a longer period of time. So, if you are worried about “running out of money before you run out of life,” early retirement may not work.

In total the issues can be less time to save, a longer time period that your savings must cover, and a lower income being provided by entitlements including a pension if you have one.

THE PSYCHOLOGICAL ISSUES

Are you ready to begin a new life that will be fulfilling? Have you mapped out what that life will be and what you will do on a day-to-day basis? There is a very good question that I ran into on the internet: “Are you retiring from something or are you retiring to something.” We all know how frustrating the working world can be. How many times do you feel that knot in your stomach and the creeping depression on Sunday when you realize that you will need to go to work the next day? I think that this is very common. However, work can provide structure and purpose in your life. So, are you just trying to flee this structure for what you perceive to be more freedom or do you have a new and more exciting life planned out? If it is the former and you have no sense for the latter, you may want to rethink the early retirement decisions. Without forethought, retirement can lead to a boring and unfulfilling existence.

THE PRACTICAL ISSUES

Finally, there are the practical issues. The most obvious of these is healthcare coverage. Affordable healthcare coverage is provided by most employers these day. However, if you are not employed, private coverage can be very expensive. Medicare coverage doesn’t kick in until the month you reach age 65. So, if you retire before then you may be forced to buy health insurance coverage in a very expensive private market. Will your finances be able to handle that additional expense?

WHAT IS THE VERDICT

The idea of early retirement is very appealing on the surface. However, it is not without its pitfalls and is not for everyone. If you decide to explore this option, make sure to do the due diligence of assessing your finances, addressing the psychological issues before you pull the trigger, and making sure that the practical issues of healthcare can be handled adequately.