Planning for an early retirement can come with its own share of financial, emotional, social, and psychological effects. Read this WealthHow post to find out the disadvantages of early retirement.
“Don’t simply retire from something; have something to retire to.”
― Harry Emerson Fosdick
In today’s times, when work is causing excessive stress, an early retirement sounds like a comforting idea. It will allow you to find time for pursuing various hobbies which you wouldn’t have otherwise. Also, it can help you spend quality time with your family.
However, as you know, nothing in life comes for free. Hence, with the inherent freedom of early retirement comes a set of strong disadvantages which may deter you from opting for it. People who retire early need to have strong financial plans in order to support themselves.
Else, they may have to undertake a part-time job. However, this will not serve the purpose of early retirement. Apart from financial issues, you will also bear the burden of unhappiness, loneliness, insecurities, and feelings of being rendered redundant. You may also feel that you have been robbed of a purpose in life. This WealthHow article intends to inform you about several emotional, financial, and social disadvantages of early retirement.
Lack of Fulfillment
Often, our work and the appreciation we get for it motivates us to do even better. For example, a promotion at work not only boosts your financial situation, but also motivates you to put in your best efforts. Due to early retirement, you may miss the thrill of achieving various professional milestones in your life. You may feel extremely discontent and even jealous on seeing your colleagues and friends achieve success in their careers. All this will result in a severe lack of fulfillment.
It may so happen that you are a workaholic and like to spend time working. If, due to certain circumstances, you have to opt for an early retirement, it will cause a void in your life. You will direly miss your work and will want to spend your time by doing something constructive. You may feel totally redundant and dependent on others. This will lead to unhappiness and depression.
As you will no longer get a paycheck every month, it will definitely cause a deficit in your savings. Though you will get a lump sum amount during the time of retirement, you will still fall short on savings, as your expenses will also increase considerably. Just imagine how much more you would have earned and saved had you continued to work till your full retirement age. While you will not feel the financial brunt initially, as years pass, you may regret your decision of retiring early.
Though the idea of retiring early sounds interesting and favorable, you may be constantly worried about your financial situation. This is because, due to inflation, the prices of necessities and other things will continue to increase, and your savings will not be able to match their pace. This will lead to exhaustion of your savings some day or the other. Ensure you make provisions for the rising inflation rate as well as increasing expenses. This is because, the fear of living with limited or zero savings can constantly haunt you.
A person who retires early, lives in the fear of outliving his savings. Even if a person retires at the ripe age of 60 and lives up to the age of 85, he will have to support himself without any income for 25 years. The difference in the years will increase even further if you plan to have an early retirement. This means that in order to support yourself, you will have to undertake some kind of a part-time or work-from-home job.
At first, you may feel good that you are now your ‘own boss’ and you don’t have to work for someone. However, with passage of time, you could find it difficult to while away time at home. Also, all your friends and relatives will be at their workplaces. This will make you feel lonely. Whenever you happen to meet your friends and family members, they will discuss work, and you can feel out of place.
An early retirement will definitely impact your social security payments. If you start drawing your social security at 62 years of age, you are expected to receive about 75% of benefits. This is a percentage of benefits which you would have received if you had worked till your full retirement age. Now, imagine what will happen if you are planning to have an early retirement, say at the age of 42. You may not even qualify for the benefits until a certain age. This means that you will lose out on a good amount of social security pay in the long run. Hence, the earlier you retire, the lesser will be the social security benefits.
Health Care Coverage
Today, the cost of medical expenses is really very high. If you have not planned your early retirement, then you may not have kept cash reserves for your health insurance. It is ideal that you know about your health care needs, and make provision for the amount of insurance premium. You will have to spend an extensive amount of your savings on health insurance, as you will qualify for Medicare only at the age of 65. If you retire even at the age of 50, you will need a medical insurance coverage throughout the time you live. This will require you to make regular insurance payments. Hence, plan your early retirement only after giving this a clear thought.
State Pension Benefits
The amount of pension payment is inversely proportional to the payout period. Hence, earlier the request, the lesser is the payout period, and vice versa. This causes an early retiree to suffer, as he gets lesser payments due to a long payout period. Apart from this, in order to access the state benefits, like national insurance and social security, you need to have a minimum age limit as stipulated by the norms. Hence, if you retire before the age of 60, 62, or 65, you will have no option but to depend on alternate sources of income until you reach that particular age limit.
Adjustments and Sacrifices
The early retirement picture may not turn out to be as rosy as you may have painted. You must have thought about a life of relaxation and leisure after retirement. However, it is said that post retirement, you should curtail your expenses in order to have a comfortable life. The amount of medical or household expenses will blow your expenditure out of proportion. This means that you will have to limit your luxury expenses and give up on those elaborate ‘once in a lifetime’ plans of buying a special edition car, traveling abroad, or getting a new house.
You may have thought about reducing your expenses after an early retirement. But think about it, now you will have plenty of free time to pursue old hobbies and interests. For example, you always wanted to learn a foreign language, but could not make time for it because of your work. Now, that you have the time and the will, you may enroll for language classes. This will add to your expenditure rather than reducing it. It will cost you more than what you had planned initially.
Control of Distributions and Early Withdrawal Penalties
If you want to avail for early retirement distributions, you will be charged with early withdrawal penalties. If you withdraw funds from a tax-deferred account before the age of 59.5, you will be subjected to income tax on the amount as well as 10% early withdrawal penalty based on the distributions. You may also have to pay additional penalty charges if you withdrew funds from annuity contract or certificate of deposit. However, there are a few exceptions to this, so analyze them before you go ahead. In order to avoid this, you will have to make substantial payments at regular intervals as stated by the IRC section 72(t). This will help you get annuity of payments from IRA or other plans until the money from your account gets over. However, this cannot be changed once the process begins. So, be sure about it.
Even if you think about getting a part-time job, it will not be an easy task to find a good one. Also, whatever you want will result in a higher income tax and reduced social security. It is advisable that you recheck your social security calculation. If you find that you will have to start drawing amounts at the age of 62, it is probably not a good idea to retire early. Now that you know the disadvantages of an early retirement, plan it properly, keeping all the aspects associated with it in your mind. There are many modes of income for early retirees, so try to explore these opportunities. Ensure that your early retirement is as pleasing as you have thought and does not make you regret your decision.