Retiring early might seem like a dream come true — you’re no longer stuck to the 9-to-5 and can spend your days doing whatever you like. And thanks to the popularity of the FIRE (Financial Independence Retire Early) movement, many people are electing to leave the workforce well before 62. But even if you believe you’re financially able to clock out for good before you hit legal retirement age, this might not be the best decision — especially in light of the recent pandemic-related economic downturn, which has derailed retirement plans for many.
You’re Doing It Because of FOMO (Fear Of Missing Out)
“I have had clients who have retired earlier than they should have because they felt they ‘deserved it,'” said Joseph Conroy, CFP, a financial consultant at Synergy Financial Group. “The problem is while they may have deserved it, they weren’t prepared for it. This can happen more often when there is an age gap between spouses.”
Conroy gave the example of a couple with a husband in his late 60s and a wife in her early 60s where FOMO — or the fear of missing out — got the best of them.
“The wife felt some FOMO when her husband retired and she put her notice in not long after,” he said. “I told them it was not a good move, and so far I have unfortunately been correct. They are drawing way more than they thought they would and have been depleting their nest egg at a distribution rate of 10% or more.”
You Genuinely Enjoy Your Job
“I’ve worked with several clients who are financially independent and wealthy enough to retire; however, calling it quits would be a drastic change to their lifestyle — sometimes a negative one,” said Timothy Hooker, co-founder, investment advisor representative and chief compliance officer at Dynamic Wealth Solutions. “Those types of clients are typically business owners and entrepreneurs who genuinely love what they do.”
If you love your job, there’s really no reason to stop working early.
You Might Get Bored
Even if you don’t love your job, you might crave working again once you retire.
“On the flip side, I have seen clients retire early from corporate jobs and get bored, so they started their own business or joined a start-up,” Hooker said.
Not Working Could Negatively Impact Your Mental Health
“Simply because you can retire early doesn’t mean it is always the best decision,” said Ryan Hughes, founder of Bull Oak Capital. “Staying active within the workforce has proven to increase one’s mental health. According to researchers at Cambridge University, working one day per week is optimal for mental happiness.”
You Might Get Lonely
Unhappiness is a definite risk of retiring early, as is loneliness — especially if many of your peers are still working.
“Many seniors report being lonely in retirement,” said Taylor Jessee, CPA, CFP, director of financial planning at Taylor Hoffman. “While spending your days reading, watching TV or playing golf may sound appealing compared to sitting in a cubicle all day, plenty of research shows that after the first year or so of this type of retirement, many seniors report feeling lonely or isolated. It is not unusual for these types of retirees to seek some kind of part-time or volunteer work once they realize retiring cold turkey isn’t as great as they thought it’d be.”
You Could Lose Your Sense of Self
“Many people have their personal identity and sense of self tied to their work life,” said Joseph Edmondson, a certified financial planner professional at AXA Equitable. “Retirement causes a huge change in how people perceive themselves that they may not be ready for.”
Working Later in Life Can Help You Feel Young
“Our clients who are still working well into their 70s and 80s seem to stay younger longer, as they are always around younger people in the workplace,” Edmondson said. “They continue to be forced to stay relevant and keep up with technology, etc. — not to mention the exercise the brain gets.”
You Haven’t Created a Financial Plan
In addition to affecting your mental health, there are serious financial impacts of retiring early that you need to consider before calling it quits. You might think you have enough funds to retire, but without a secure financial plan in place, you shouldn’t take that leap.
“You should examine your financial situation holistically but keep a keen eye on any risky investments you might have,” said Philipp von Girsewald, CEO, US, at Deposit Solutions. “Make sure you build a buffer for risk into your budget. It’s important to do your research to find investment vehicles and savings products that meet your retirement goals, support unexpected liquidity needs and also align with your overall risk tolerance. If you haven’t created a budget, an investment plan and a savings strategy for your cash assets, it might not be a great time to retire.”
You Haven’t Factored In Healthcare Costs
One cost that needs to be part of your financial plan is healthcare.
“People who retire from their jobs early may need to obtain private health insurance until they reach Medicare age,” said Chuck Mattiucci, a financial consultant at Fort Pitt Capital Group. “Even when they reach Medicare age, they may need to obtain supplemental insurance. Private health insurance can be very costly, so by continuing to work the employee continues to receive their company’s health benefits package, and forgoes having to pick up private health insurance and incur all of the costs associated with it.”
You Haven’t Properly Planned For Other Future Expenses
Healthcare isn’t the only living expense that you need to be mindful of. You also need to keep in mind that the cost to maintain your lifestyle now might not be enough to pay for your life in the future.
“If your children are young, have you factored in braces, higher car insurance, college costs, wedding assistance or financial gifts for your future grandchildren? For yourself, have you factored in increased travel costs and issues like long-term care insurance?” said John Madison, CPA, a personal financial counselor at Dayspring Financial Ministry. “As time passes, new expenses will arise that you’ve never had before.”
You Didn’t Budget For the Unexpected
You might have saved enough to cover everyday expenses — for your current and future self — but you might not have enough to cover an unexpected life change such as a divorce or medical emergency.
“Things will come up, sometimes quite suddenly,” Madison said. “Having some surplus to handle the expense is important to keep you from eating into your portfolio.”
You’re Giving Up a Potentially Higher Pension
In some cases, the financial benefits of continuing to work could outweigh any potential benefits of retiring early. This is especially true if you have a pension plan.
“Some workers have compensation packages that would provide significant financial benefits should they continue to work,” Mattiucci said. “Many defined benefit pension plans provide higher benefits for folks who work longer. Some of these defined benefit plans base the monthly pension benefits on an employee’s highest earning years. In most cases, these employees’ highest compensation years are their most recent years or the years towards the end of their career. By continuing to work during these high-earning years, they continue to grow their pension benefits.”
Even If You Don’t Have a Pension, You’re Giving Up Potentially Higher Social Security Benefits
“Your monthly Social Security benefit is calculated based on your 35 highest years of salary and wages,” Jessee said. “Oftentimes, workers’ highest salary years are later in their careers, so if you call it quits too soon you won’t be adding higher income years to the Social Security calculation to replace those years where you weren’t making as much. If you start Social Security ASAP at age 62, you will permanently lose up to 30% of your monthly benefit.”
You’ll Have To Pay a Penalty To Access Your Retirement Accounts
Even if you have saved up a healthy amount in a 401(k) or IRA, keep in mind that you typically can’t touch this money — without paying a fee — if you retire early.
“Assets in retirement accounts can’t be accessed penalty-free — and in some cases tax-free — until a person is 59 1/2, so someone would need access to a lot of funds outside of retirement accounts,” said personal finance expert Alicia Rose Hudnett.
The CARES Act currently allows you to make early withdrawals of up to $100,000 without paying a penalty, but this only applies for withdrawals made in 2020 so this is still not a great long-term early retirement strategy.
You’re Relying On a Bull Market
If much of your retirement income is from investments, you might be too reliant on the market to continue an upward trajectory. And now that we’re in a bear market, if you keep the same withdrawal rate, you might have to live off of significantly less.
“Can you still support yourself if you’ve lost half the value in your portfolio?” Madison said.
You Don’t Have Any Alternative Cash Flows
If you retire early, chances are the current market downturn won’t be the only one you experience in your lifetime. That’s why it’s essential to have additional sources of income outside of your investments — which may mean continuing to work at least part time rather than quitting cold turkey.
As an alternative to working part time or taking on a side hustle, you could invest in passive income streams, such as rental properties.
You Don’t Have an Emergency Fund
Relying entirely on investment income is a risky game, especially during a down market. If you don’t have a healthy emergency fund ready to cover unexpected short-term expenses as they arise, you should probably hold off on retiring.
You Won’t Have as Much Flexibility
When you live on a fixed income, you don’t have the financial flexibility to make lifestyle changes that you might want to. Perhaps you want to go on a vacation that blows your allotted travel budget, or you want to relocate to a more expensive part of town. When you still have the ability to increase your earning potential, you can afford to make these money moves, but you might be more “stuck” when you retire.
You Still Have Debt
Even if you have a healthy amount of money in savings and investment accounts, you shouldn’t retire if you’re still carrying debt.
“Managing cash flow is the cornerstone of a retirement plan because retirees typically live on a fixed income,” Robert Westley, a certified public accountant and financial planner, told AARP. “Routinely, retirement income is lower than preretirement income, and therefore debt repayments that were once manageable preretirement begin to consume a proportionately larger share of income.”
You Don’t Know What You’re Going To Do Next
You’ll now have 40-plus extra hours to fill every week. If you don’t have a game plan to fill those hours, you might want to hold off on retiring.
“Early retirement may seem like a permanent vacation, but even that can get old after a while,” Madison said. “Most of your peers are still working 40-plus hours a week. Have a plan for how you’re going to spend your time and who you’re going to spend it with.”
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