Three Major Costs of Retiring Early

Estimated reading time: 3 minutes(Last Updated On: December 23, 2020)

For most, retiring early is, at best, a fun fantasy to help them survive yet another work week. Free time for traveling, spending time with loved ones, or just working on projects around the house sound like enough reasons to walk out of the office today and never look back. Despite the fact that the loss of income would be a huge blow to the monthly budget, most Americans would also find themselves struggling to afford all of the benefits their current jobs supply—making early retirement more of a pipe dream than a reality. Retiring before 65 doesn’t just equate to a loss of income at an earlier age. Take a look below at the three major categories affected by early retirement.

  1. Retirement savings. Not only will you lose the ability to contribute to your retirement accounts without that taxable income, but you will most likely need to pull from your accounts to pay for bills and other expenses. This means that your accounts will dwindle quicker and you will lose out on years of growth those funds would have had if they stayed put. Depending on how early you retire, this could equate to hundreds of thousands of dollars lost in the end. If your current employer offers matching for your 401(k), you should factor in the loss of those funds and growth potential as well.

For those lucky enough with a spouse at work, you will still be able to contribute to your IRA using their income thanks to a little caveat called “Spousal IRAs”. With a Spousal IRA, you can still keep a separate account with your name on it, but your contributions will come from your spouse’s income. The same contribution limits, distribution rules, and taxes as a regular IRA will apply.

  1. Social Security. There are advantages to postponing social security benefits as long as financially possible. If you collect on social security at the earliest age allowable, 62, then the checks you receive will be quite a bit lower than if you waited a few more years to start collecting. This is because the funds allocated to you would be forced to cover you for a longer period of time, thus dividing them further. The difference in yearly income you could expect from social security between beginning collections at age 62 opposed to age 70 (the latest you can start collecting), is nearly double. If you retire early, you may need to prematurely take social security in order to afford expenses on an already tight budget.
  2. Healthcare is arguably the single largest expense affecting retirees in the United States. Most companies don’t offer health insurance to non-employees, and you won’t be eligible for Medicare until age 65. You could continue health insurance through your current plan using COBRA if your plan allows and if you had a qualifying event to activate this option. Otherwise, you will need to figure out another way to pay for your health coverage. Even for retirees on Medicare, health costs should always be one of the first factors in deciding whether or not you have enough money to retire when you want.

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