Want to Retire Early? Think Again

Some people consider “early retirement” to mean leaving the workforce at age 55, but most of us don’t. Unless you’re lucky enough to have a full pension and benefits that kick in at that age (say, if you worked in the military, or as a police officer or firefighter), you’ll probably need to work until at least age 65 to accrue enough money for a comfortable retirement. In that case, retirement at 62 would qualify as early. Of course, you may want to work even longer, just to keep your mind and body active and possibly extend your life. (See 10 Money-Making Jobs for Retirees.)

Is it bad to retire early? Here are some practical reasons not to take early retirement.

If you’re a typical baby boomer, you might have started your family late, and now that you’re nearing retirement age, you may still have kids in college. You could also have elderly parents who need help paying high medical bills or nursing-home fees. Maybe you still have a mortgage and credit card debt. If you’re planning to stay in your home and maintain your existing standard of living, you need to take a cold, hard look at your expenses and the size of your nest egg before deciding whether to retire early.

An estimate of your life expectancy is listed on your Social Security statement, or you can get it by logging on to the Social Security website and entering your gender and year of birth. But your personal life expectancy might differ for a variety of reasons. Let’s say your family has a history of longevity and you look after yourself – eating a healthy diet, getting plenty of exercise and taking your medications as prescribed. You have to factor that into how long your savings will last.

According to the Social Security Administration, about one in four 65-year-olds today will live past age 90, and one in 10 will live to age 95. The average monthly benefit for retirees in 2018 is $1,422, or $17,064 a year. After a 2.8% cost-of-living adjustment, the average monthly payment in 2019 is expected to be $1,461, or $17,532 a year. For retirees with no savings and no pension, it may be hard to meet basic living expenses on Social Security income alone. Therefore, you might want to wait till age 70, when you can collect your maximum Social Security benefit.

A 2017 paper published in the Journal of Public Economics found a link between early retirement and mortality rates, especially among men. Around one-third of Americans start claiming Social Security benefits in their first month of eligibility when they turn 62. The study "provides evidence that, for a large group of workers in the U.S., retirement may have an immediate, negative relationship on an important and objective health outcome." In particular, the research showed men could see a 20% increase in mortality risk by claiming benefits early and retiring. 

The more you put away, the more you can pamper yourself in your retirement years. Sure, Cape Cod is nice, but what about going on safari in Tanzania, taking a Caribbean cruise or sailing the Mediterranean? If you stay in the workforce, you could grow your 401(k) savings significantly – and then live out your dreams.

You probably already know that if you start collecting at the earliest opportunity, at age 62, you won’t receive your full benefits. In fact, you'll only receive about 75% of your benefits. For those who turned 62 in 2018, full retirement age is 66 and four months. For those who turn 62 in 2019, the full retirement age is 66 and six months. The full retirement age is slated to increase by two months each year until it hits 67, which means that for anyone born in 1960 or later, the full retirement age will be 67.

But you don't have to collect benefits at your full retirement age, and waiting means you will earn a higher monthly benefit. If you delay your benefits until age 68, for instance, your monthly benefits will be 16% higher. If you delay your benefits until age 70, your monthly benefits will be 32% higher. 

Your Social Security statement tells you what you can expect to receive at age 62, 66 (or 67) and 70. If you quit work before 62, those projected amounts may change. That’s because the amount is based on your 35 top-earning years. (And it’s worth remembering that, generally, your later years will be your highest-earning years.) If you started late in the workforce or didn’t work consistently – say, you took some years off to raise children, or you came to the United States partway through your career – you may not have hit the magic number of 35. The years you don’t work, or have reduced income, will be factored into your benefits. It is possible you could lose money for every year you defer collecting. So be sure to talk to the Social Security Administration to get the details for your particular case. 

Let’s say you’ve always earned more than your spouse. If you die first, the Social Security benefits you’re collecting will go to your surviving spouse for the rest of his or her life. That’s after age 60, unless your spouse is caring for a child under the age of 16 or disabled – in which case, he or she will get benefits sooner. If you’ve started collecting before your full retirement age, you’ll be getting a lower amount – and that’s what your surviving spouse will then collect. "Early claiming results in lower benefits over longer lifetimes: lower benefits for the earner, lower spousal benefits and lower survivor benefits," says Charlotte A. Dougherty, CFP, of Dougherty & Associates, in Cincinnati.

That golden (or silver) handshake could be less lucrative than it looks. Before you sign the offer, examine the details carefully. Is the amount enough to see you through? If you’ll need to tap into your 401(k) before you reach retirement age, be aware that there will be tax penalties. Is adequate medical coverage included? If you have to buy COBRA insurance until you’re eligible for Medicare, that won’t come cheap. Buying Affordable Care Act insurance through the health insurance marketplace may not be inexpensive either, depending on your financial situation, and conditions in this market will change with the partial repeal of the law. You'll probably need a financial professional to walk you through the options.

If you change your mind after you take early retirement and want to return to the workforce, it won’t be easy. Whether you quit your last job or were laid off, finding new employment when you’re over 50 can be a struggle. If you do manage to snag a job, chances are it won’t pay as well as the one you left.

Clearly, there’s a lot to consider as you approach retirement and decide when to stop working. If you have questions (and you should!), just keep asking the experts: Social Security Administration agents, tax consultants, financial professionals.