The Drawbacks of an Early Retirement


by Christopher E. Mediate

Let’s face it, when it comes down to the subject of retirement, there are two mindsets that most people adopt. At one end of the spectrum, there are those who work and have a tough time imagining what they’ll do to occupy their time in retirement. For them, either their job is all they’ve known, or they genuinely love what they do. Then there’s the other side of it; the people who can’t get to retirement soon enough so that they can focus more on the things that fill them. I think this side of the spectrum is the one that most people fall on, and I can’t blame them. However, there are some things you should know first before making that kind of decision, and that’s what I want to talk about today.

Everyone has their own unique vision and goals when it comes to a financial plan. Retirement, in and of itself, is a financial goal that requires careful planning. Hence why it’s key that you don’t cut corners. Individuals who might take an early retirement may also risk the chance of outliving their savings. Yep, that’s right.

When planning for retirement, you need to figure out where your retirement income is coming from, how much of it you will be receiving, and how frequently you will get it (A.K.A., income planning). This way, you will know how you will be covering your basic needs along with all the life plans you might have for your post-work years. Without running a proper income analysis and/or choosing to take an early retirement before your plan allows for it, your retirement savings could dry up in a hurry. Whenever you retire, you are transitioning from the main steady income source you’re used to – that’s not something you want to take lightly. You cannot retire WITHOUT income.

You want to have a withdrawal strategy in place to ensure you don’t deplete your savings too quickly.

While we’re on the subject of saving, another point you want to pay attention to is the possibility of not being able to access the savings if you’re under 59 ½. Just as it does in any major life decision, age matters in more ways than one. In this instance, if you don’t have a qualifying reason, many retirement accounts will have tax penalties they’ll charge you if you either take early withdrawals or drain the account altogether.

So, say someone is trying to retire before the age of 60. They are also limiting their retirement income source options since they cannot apply for their Social Security Benefit until age 62 and can’t apply for Medicare until age 65.

In addition to highlighting why it’s so important to plan your income, I believe this also tells us why we include tax planning when it comes to planning for your retirement. You would need a strategy that addresses these kinds of concerns.

The last thing you want to consider is something that brings us back full circle: what if you miss your job? No, seriously. I want you to disregard everything you might hate about your job for just a second and think about whether or not you can hang on for just a few more years to save yourself from the headaches in the long-term.

I feel like I say this to the point of redundancy, but it holds true every time: everyone is different. Who knows, maybe you can afford an early retirement. Maybe you did plan for all of the pitfalls I mentioned above. I think that plays into the overarching point of this blog, which is if an early retirement is a possibility, you should include that whenever you are initially creating your retirement plan. Or, if you’re already deep into your plan, don’t be afraid to bring it up at your next review with your financial professional so you can evaluate your options.

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.