Why It May Make Sense to Wait
Creative Planning recently published an article about the FIRE Movement, which stands for financial independence, retire early. Practitioners of FIRE seek to aggressively save between 50% to 70% of their monthly income in their 20s and 30s, with the goal of retiring at a young age. Using this approach, some FIRE followers are able to retire in their 40s, decades before the average American.
Even if you don’t take such an extreme approach to saving, you may still dream about retiring early. After all, who wouldn’t want to leave the workforce behind to pursue a more leisurely lifestyle?
As with everything in life, there are pros and cons to consider. Below are a few of the cons to consider while deciding whether an early retirement is right for you.
#1 – A greater chance of running out of money
Running out of money is a major risk of retiring too early. The potential to outlive your retirement savings may seem straightforward but can add complexity. If you retire at age 40 and live until age 90, you’ll need enough retirement savings to last for 50 years. Over such a long window of time, you must closely consider the impact of inflation. As we’ve seen recently, this can be very hard to predict, especially over the next 50 or 60 years. The longer your retirement window, the greater the risk. Without a sufficient nest egg, you could be in a position that forces a lower quality of life as you age.
#2 – Missed opportunity for investment growth
Retiring early also means you have fewer years to grow your investments and take advantage of compounding interest. If you decide to continue working a few more years, you can give your investments more time to potentially grow while you live off your employment income. The longer you can allow your investments to grow without taking money from them, the better chance you’ll have for a successful retirement. The shorter the working window, the more you have to save to offset the missed opportunity for growth. While it’s certainly possible to save enough, it becomes a greater challenge the younger you plan on retiring. Even delaying retirement from 40 to 50 can have a huge impact.
#3 – A smaller Social Security check
Social Security is a great resource to help offset the first two risks we spoke about. Social Security reduces the amount of savings you need at the start of your retirement. The fewer years you work, the smaller amount of monthly benefit you’ll be likely to collect, forcing higher savings. Historically, Social Security benefits have grown alongside inflation. They likely won’t cover all your needs, but they can help to offset the risk a bit. Depending on when you were born, full retirement age for Social Security is between age 66 and 67, but you can begin receiving reduced benefits as early as age 62. However, the sooner you start, the lower your monthly Social Security payment will be. If you begin taking Social Security benefits at age 62, your monthly benefit amount will be 30% less than if you had waited until age 67. Beyond that, if you can afford to delay, each year you delay taking benefits between age 67 and 70 will boost your monthly benefit by 8%.
Now, you may be thinking, “hey, Social Security won’t be around by the time I get there!” It’s fine to plan for that potential outcome, but just know it comes with a greater need for more savings. I’m always hesitant to make a call one way or another. Even the government has a hard time knowing what they’ll do next year — let alone 10 years from now. We don’t know who the next president will be, and we definitely don’t know who the presidents will be in the 2030s and 2040s (when that decision is likely to be made).
Good planning should account for both possible outcomes. If you’re close to retirement age, it’s a clearer picture. If you’re planning on stepping away at age 40, there’s more uncertainty.
#4 – Loss of fulfillment
Some individuals who leave the workforce early discover that retirement isn’t all it’s cracked up to be. You may have a difficult time transitioning from a full-time job to an unstructured lifestyle with too much flexibility. It might seem like a silly problem, but keep in mind that your friends won’t be retired! Many folks in the FIRE community comment on this issue. Their existing friends have kids and work responsibilities, which limits their ability to socialize. It can be hard to find new friends in your 40s that are also retired.
Before you retire early, make a plan for how you’ll spend your days. Consider activities that will provide you with both fulfillment and social interaction.
#5 – Higher health insurance costs
As you consider an early retirement, you’ll also want to plan for healthcare expenses. Medicare eligibility doesn’t begin until age 65. In the meantime, you may need to purchase your own insurance, which can be incredibly costly. In fact, you may find that health insurance premiums are double to triple what you were paying for your employer-sponsored insurance. The cost of health insurance further compounds the risk of inflation. Historically in the United States, healthcare costs have gone up by more than the cost of inflation. This problem is unlikely to get any better as the population continues to age. When making the determination on whether to retire early, be sure you have a good handle on what your healthcare costs will be.
Alternatives to early retirement
If you dream of retiring early but worry you may regret your decision, the following alternatives can help you remain engaged while still experiencing some of the benefits of an early retirement.
Find a part-time job
One alternative to full retirement is scaling back to part-time work. Doing so allows you to continue receiving a paycheck while also having more time to pursue your hobbies and interests. If benefits, such as a 401k plan and health insurance, are important to you, be sure to work the minimum number of hours to maintain eligibility.
Work from home
With the rise of remote work opportunities, you may find the right work/life balance by working remotely. Consult with your employer to determine whether working from home is an option, or find a new job that supports remote workers.
Freelance/consult
You may find that your work experience and education make you well qualified to work as a freelancer or consultant. While this option may not solve the challenge of obtaining health insurance, it can help support your income needs while also providing additional flexibility to pursue your interests outside of work.
Monetize a hobby
Another option is to turn a hobby into a paycheck. If you have a specific talent, such as woodworking or jewelry making, perhaps you could open an online storefront to sell your wares. Or maybe you’re a fitness enthusiast who could become certified in personal training and start helping others. Finding ways to monetize your hobby can bring you both a paycheck and fulfillment.
Key takeaways
Retiring early has a massive appeal for many. The daily grind of going to work and having limited personal time is tough for all of us. If you can be dedicated to the required savings plan and are able to sock enough away to make it worthwhile, that’s great. The risks are just that, risks, and all can be solved for by having more money. Some folks are willing to sacrifice in their 20s and 30s to have freedom in their 40s and beyond. The most important thing is to be as comprehensive and thorough during your planning as possible. Keep these risks in mind when making a decision for yourself and your family.
