What No One Tells You About Early Retirement

The reality of quitting employment may differ significantly from the dream. Here’s what you should know.

Even if you enjoy your job, there are times when alphabetizing the spice cabinet might be preferable to traveling a crowded train with hundreds of sniffling fellow commuters. 

Regrettably, early retirement is not for everyone; in truth, it isn’t for most individuals. In a survey conducted by Employee Benefit Research Institute (EBRI), just 11% of today’s workers expect to retire before 60. Many who leap find that the reality of early retirement differs significantly from the illusion. Before you decide to retire early, consider the following factors.

1.  Health care is prohibitively pricey.

It is not until age 65 that Medicare, the federal program that provides health insurance to more than 61 million seniors, begins. You’ll need an alternative till then, and it won’t be cheap.

Private health insurance costs an arm and a leg before Medicare comes in, says Brian Schmehil, director of investment management at the Mather Group in Chicago. The current legislation states that insurance payments cannot exceed 8.3 percent of your family income. A mid-level silver plan would cost $346 per month, or $4,150 per year, for a person with a family income of $50,000, for example.

2.  Early withdrawals from your nest egg might be expensive.

If you retire before 59 1/2, most tax-deferred funds, such as conventional IRAs and 401(k) plans, will have a 10% early withdrawal penalty. There are some possibilities for withdrawing IRA funds before reaching the age of 59 1/2, but it’s complex and can result in significant fines if done wrong, says Matt Stephens, founder of AdvicePoint in Wilmington, North Carolina.

You’ll also owe income taxes on withdrawals from conventional accounts financed with pretax contributions unless you own a Roth IRA. If you take $20,000 from an IRA before reaching the age of 59 1/2 and are in the 15% federal tax rate, you’ll pay $5,000 in taxes and penalties, leaving you with $15,000.

3.  You give up the power of compounding interest.

When it comes to saving for retirement, time is your friend, but not when it comes to spending. If you save $250 each month — $3,000 per year — from the age of 25 to the age of 55, you’ll have around $237,000 when you retire, assuming no withdrawals and an annual return of 6%. Not a terrible return on your $90,000 donations, it appears.

But suppose you work another ten years and retire at 65. In that case, you’ll have about $464,000, nearly twice. Why? The extra decade of contributions is helpful, but it only amounts to $30,000. The true growth comes from the additional ten years of interest generated not just on the principal amount you contributed but also on the interest accumulated for four decades.

4.  You might have a very long life ahead of you.

A woman who retires at 55 must save an average of 28.6 years, compared to 20.4 years if she retires at 65. A 55-year-old man must extend his funds for 25.1 years rather than 17.8. According to the Society of Actuaries, couples who survive to 65 have a 25% chance of the surviving spouse living to 98.

With better health care, more people are living longer lives than national norms, says Angela Dorsey, a certified financial adviser in Torrance, California.

5.  More money will be spent than you expected.

A good rule of thumb is that you’ll spend around 80% as much in retirement as you do working. Therefore, you won’t be contributing to your retirement account, commuting daily, or paying Social Security payroll tax if you don’t earn a living. However, in the early years of retirement, when you’re younger, healthier, and no longer bound by the restraints of employment, you may easily spend as much as, if not more, than you did before retirement. Per J.P. Morgan Asset Management research, new retirees have a “spending spike” on vacation, house improvements or relocation, and other retirement-related lifestyle adjustments that level out after two or three years.

With inflation reaching an all-time high of 8.6 percent over the last year, your spending plans may need to be significantly revised. According to EBRI, 36% of retirees believe their overall expenditures and costs are more than planned, up from 36% the previous year. The share stating that housing and travel expenditures, in particular, are greater than projected is also up from last year.

Sean Pearson, a licensed financial advisor in Conshohocken, Pennsylvania, says, “Every day is Saturday.” When you don’t work, you get up and search for things to do, which is how we all feel on Saturday. Some activities may be enjoyable and sociable, and some things around the house may require work. Most things are expensive, so Saturday is frequently the most expensive day of the week.

6.  When you retire, your housing expenditures do not.

Retiring without a mortgage is a frequent desire for would-be retirees, but many fail to achieve it. American Financing found that 44 percent of retired homeowners aged 60 to 70 had mortgages.

Other expenditures continue to exist even after you have paid off your mortgage. Home upkeep and rising property taxes may eat up a significant portion of your budget, says Dorsey, a California financial advisor. 

According to Rocket Mortgage, the highest property tax rates are in New Jersey, Illinois, and New Hampshire, while the lowest is in Hawaii, Alabama, and Colorado. As a general guideline, homeowners should set aside 1% of their home’s purchase price each year for repairs and replacement, which works up to $3,500 each year on a $350,000 home. 

Remember that several states provide lower property tax rates to persons 65 and older.

7.  The extra money might be difficult to come by.

Working in retirement may not be as easy as you believe. According to the EBRI survey, whereas 74 percent of employees anticipate working for money after retirement, just 27 percent of real retirees reported working for pay. Even part-time work might be difficult. One thing that early retirees don’t seem to grasp is that if they plan on doing regular part-time work while retiring, those positions demand a commitment to a schedule that isn’t often particularly flexible, says Leslie Beck, a certified financial planner in Rutherford, New Jersey. This may interfere with other retirement aspirations, such as travel or family visits. 

If you think you’ll bridge the income gap with Social Security, remember that the earliest you can normally collect retirement benefits is age 62. Even so, you will only gain a portion of the benefits. The full retirement age for everyone born in 1960 or after is 67, at which point you are entitled to 100% of your monthly pension. The compensation amount is decreased by 30% if you claim at the age of 62.

5 Questions to Ask (and Answer) Before Early Retirement

Can I afford to quit my job?

Is it necessary for me to work part-time to make ends meet?

How am I going to acquire health insurance?

How can I pass the time?

Are my plans in line with those of my spouse/partner?

8.  There is plenty of time to kill.

When you retire, you will have a 40-hour gap in your week to fill. Are you certain you have enough hobbies to keep your body, mind, and soul active for the years ahead? asks Winchester financial planner Catherine Valega.

How much time do you anticipate going on long walks, relaxing poolside, or cuddling up on the couch with a good book until the novelty wears off? Before you retire, consider what you plan to do with your time. Do you wish to help out? Return to school? Should you start a new pastime or return to an old one? Make a strategy for retirement far in advance.

9.  You may need to Find New Friends

You might have to find new acquaintances. When you retire in your 50s, you may discover that your existing acquaintances aren’t as accessible since they still work full-time. During the week, you may be able to go to the movies or play golf, but individuals in your social circle who work nine to five may not.

According to Dennis Nolte, a certified financial adviser in Oviedo, Florida, new pals are likely to be older: Many of my pre-60-year-old retirees, particularly those who are active, bemoan the fact that their new peer group is substantially older than they are — and consequently has a different set of expectations regarding food, sleep routine, and even cultural references.

10.  Retirement may be difficult for couples.

Retirement is a significant life adjustment, says Patti Black, a certified financial advisor in Birmingham, Alabama. Most retired couples do not resemble those portrayed in advertisements. You’ll have to decide how your housework will alter. Will you truly share the cooking, cleaning, and yard work? And do you want to be together 24 hours a day, even if you move to a smaller home?

These choices can have major ramifications for a marriage. Gray divorce, or divorce beyond 50, has more than quadrupled since 1990 despite falling in all other age groups, Black cautions. And the wife usually files for divorce beyond 50.