The Financial Implications of Early Retirement Versus an Extended Career

People dream of the day they’ll retire. They work hard for decades to reach the time they can hang up their work keys and finally pursue their outside interests. Some people have plans to travel, while others want the freedom to putt around as they see fit. They may want to spend more time with family, move closer to grandkids, or finally finish their memoir.

However, retiring too early can potentially have negative financial consequences you have to endure for years to come if you’re not thoroughly prepared. How can you know when is the right time to exit your company and when you should work a bit longer to put yourself in a more positive monetary situation? Learn more about deciding whether to retire early or extend your career.

Is Working Longer a Good or Bad Plan? The Pros and Cons of Early Retirement

Experts disagree on when is the best time to retire. Around 10% of people retire before they reach 60, leaving 90% to retire a few years later. Each situation is unique, so it’s impossible to put a positive or negative label on early versus late retirement.

CNBC reported that about 46% of retirees left their positions earlier than planned. Many cite reasons such as job loss or health issues as reasons for drawing retirement sooner. While most people expect to work until 66, the actual average retirement age is 62. Since 2002, there has been a gap of around five years between expected retirement and when people must leave the workforce for various reasons.

Financial planners say delaying retirement by a few years makes a huge economic difference. While drawing a paycheck, people can leave their retirement savings to grow. Compound interest adds up quickly the more money you have in savings. If your debt ratio is low, you can save even more. If you still owe on your home or vehicles, you can use the extra time to pay down bills and get them to a more manageable level.

Pros of Retiring Early

If you’re toying with the idea of early retirement, you might look to positives such as:

Even if you don’t have a lot of savings, early retirement might be in sight with wise budgeting. Develop a skill before retiring. You’ll have marketable skills if you need to work part-time to make ends meet.

Cons of Retiring Early

While there are many positives to retiring at a younger age, there are also some disadvantages:

7 Factors to Consider When Deciding Whether to Retire Early

After considering the pros and cons of early retirement, the choice is ultimately yours. However, it’s helpful to consider the many factors that could contribute to the feasibility of retiring early before making your decision. Planning for no longer working has many moving parts. Here are some issues to consider before choosing.

1. Tax Concerns

If you retire early, you may need to start distributions from your retirement savings accounts earlier than you first expected. If you’re younger than 59 and a half, you might face an additional tax on any withdrawals. Once you reach a certain age, you can withdraw money without paying extra tax or penalties. However, withdrawing when you’re younger can negatively impact your overall savings balance.

Talk to your financial advisor (FA) about your age, how much you have saved, and if you can afford to pay more taxes until your age catches up with regulations. An FA may bring up situations you may have yet to consider. For example, maybe you still have children in college you’re supporting. Everyone has unique circumstances, so considering your goals and obligations gives you the best picture of when you can comfortably retire.

2. Lower Social Security Payments

When you collect Social Security before your full retirement age, the government reduces your benefits. Around one in five people receive Social Security checks as part of their retirement plan. Unfortunately, recent surveys show the funds have lost some buying power in the last two decades.

Younger people worry Social Security will collapse before they reach retirement age. They may not have a reliable payment to fall back on. Although they’ve paid out of their paychecks to save for the day they’ll retire, the money may be mismanaged, and the fund could fail.

3. Unexpected Expenses

Another thing to keep in mind is how much money you have saved and if you can weather unexpected expenses. Some people head into retirement early, feeling good about their finances. Imagine you owe zero on your home, pull enough monthly pension to pay other expenses, and have no other pressing bills. Suddenly, your house has foundation problems, and you must come up with $15,000 or more. You may face a health crisis, and medical bills consume most of your savings.

You might think you can pick up a part-time job or freelance work if something changes. However, you also have to consider what the employment rate might be in the next few years. While unemployment rates are currently at a low 4%, they can change drastically as the economic outlook shifts. Picking up part-time or temporary jobs could be easier said than done in an employer’s market. While unfair and discriminatory, some companies are reluctant to hire older workers.

4. Not Having Enough Saved

Macrotrends estimates the average life span is 79.25 years in the United States. You could live even longer depending on your family’s longevity combined with environmental and lifestyle factors. Consider whether you have enough money saved to live comfortably for several more decades. If not, you may need to extend your career and save more funds.

Consider how you’ll feel in your 70s and 80s, for example. You may not have the energy to work part-time jobs to make ends meet. Ensure you have enough money to last the rest of your life.

5. Lack of Investment Growth

The stock market could fall or growth could stagnate at any time. If you’ve saved but the returns need improvement, allowing a little more time may be necessary to retire comfortably.

Another option is to work part-time and let the money in your IRA or 401(k) grow until you must take a distribution. More time typically equals more money.

6. Government Ability to Keep Up

Experts estimate 83.9 million people in the U.S. will be over 65 by 2050. At some point, the people working may not be able to support the current Social Security system. Some experts believe Social Security is here for the long haul, while others predict a collapse and reduction in benefits or an increase in eligibility age.

You have to work closely with your financial advisor to assess risk. What will you do if you depend entirely on a government payout to make ends meet, and it disappears or gets lowered?

7. Health and Well-Being

Your health and mental well-being are also factors in your decision to retire early or extend your career.

You may have health insurance at your employer that covers things such as counseling or mental health leave. Retirees may get fewer perks than workers. Assess any major life shifts you’re going through and whether you need to take advantage of the additional insurance. Employees expect excellent coverage, so extending retirement might benefit someone dealing with a death in the family, divorce, or other crisis.

If you’re battling physical health issues, such as cancer, a heart condition, or high blood pressure, early retirement might keep your pension secure and free up time for self-care. Early retirement can give you precious time to do what you want before your health deteriorates.

Generation and Life Situations Could Play a Role in Early Retirement Considerations

Along with the factors listed above, demographic information like the generation you were born into and your marital status can play a surprisingly large role in how you should prepare for an early retirement.

Gen X May Be at Retirement Age But Not Prepared

Gen Xers may face particular challenges, including a lack of a pension plan, various economic crises, and rising living costs. One study uncovered that Gen X is so busy caring for aging parents and adult children that they have little or no retirement savings. Of the 65 million people in this generation, 35% have under $10,000 saved, and 18% have zero.

Some Gen Xers saved money diligently but lost huge chunks during the Great Recession. Seeing an impossible mountain to climb, they gave up and resigned themselves to working forever.

While a 54-year-old might be more than ready to walk away from the nine-to-five grind, their finances aren’t. Additionally, Social Security benefits may decrease as incoming funds are limited and people live longer than ever before. Gen X will need to rely more on personal investments and savings than previous generations.

Millennials and Gen Y Face Similar Retirement Concerns

One method to help people prepare for retirement is to learn to live within a tighter budget. Assess how much you’ll likely spend each month once you are no longer working. Work to trim your budget as much as possible to align with expected funds. For example, you might eat out less frequently and cook at home more often. You should assess all subscriptions and fees paid and determine whether you need and use the service.

Millennials are sometimes called Gen Y or the debt generation. Faced with rising costs, student debt, and ever-changing job markets, they may struggle to make ends meet. Unlike baby boomers, millennials typically don’t have pensions but must rely on 401(k)s and other investments. Unfortunately, when you’re barely paying your rent, finding funds to invest in retirement seems nearly impossible.

Many millennials have difficulty paying monthly bills, leaving them wondering if they’ll ever be able to retire. Additionally, people are uncertain if Social Security will even be available by the time they retire.

What If You’re Single and Retiring Early?

Numerous financial benefits are available for married couples, including tax breaks, splitting costs, and sharing one another’s savings. However, by the age of 65, around one-third of men and over 50% of women are divorced, widowed, or still single.

There are some financial advantages to being single. You may have lower debt and less responsibility. If you never had children, you’ll save on the costs of putting them through college or helping them as they struggle through a challenging economy. You also have complete control over household spending. Many couples struggle with one person who loves to save and one who loves to spend.

You can take on a roommate or temporarily rent to travelers needing short-term leases. Some single people buy a home with several bedrooms, rent out the extra rooms, and pay their mortgage with the additional funds. By renting, they can pay off their home and have a source of income in retirement. Those who plan to travel in retirement may find it particularly attractive to turn their residence into a vacation rental when they aren’t there and bring in some extra money.

Tips for a Sustainable and Enjoyable Early Retirement

Early retirement is a dream that many well-prepared individuals are able to achieve and enjoy. If you believe an early retirement is for you, consider the following tips for making that dream a realistic goal.

Consider the FIRE Movement

If retiring early is a goal and you have time to get there, consider methods such as the FIRE movement. FIRE stands for Financial Independence Retire Early. Since 67% of Americans seek financial independence, the movement aligns with their goals.

The concept comes from the book “Your Money or Your Life” by Vicki Robins and Joe Dominguez. The book’s core tenets include saving more money, spending less, and making intelligent investments. Those who follow the FIRE movement save as much as 70% of their salary and live as cheaply as possible.

You may need to live with your parents longer or with roommates to share expenses and reduce costs. Those following FIRE buy used vehicles rather than new ones and put off significant purchases such as a home. They eat ramen noodles for lunch every day and shop at local second-hand clothing stores.

One of the most beneficial components of FIRE is figuring out your “safe withdrawal rate.” This is how much money you can pull out of savings each year of retirement and not run out of money. You’ll ask questions such as:

Some experts believe you’ll need to withdraw 4% of your savings in your first year of retirement and adjust for inflation yearly. The computations can be rather complex. The book is helpful, but working alongside a retirement planning expert is crucial to ensuring you’re ready.

Tap Into Catch-Up Provisions

If you’re determined to retire soon but your finances disagree, you can use some tax laws to help you catch up and save money later in your work life.

If you have a 401(k), 403(b), or similar plan, you can make an additional catch-up contribution of $7,500 if you’re over 50. When you add the number to the $23,000 you can put into these retirement accounts in a calendar year, you can save around $30,500 per year until you choose to retire.

If you have no savings, working another three years gives you nearly $90,000 in savings, which is better than zero. Combined with part-time work, Social Security, and other retirement funds, it could make you more comfortable in your twilight years.

Start a New Career

For some, retiring means still working. They use early retirement to launch their own company or do something they’ve always wanted. If your current employer offers tuition reimbursement, you might use the benefit to get specialized training in something you’ve always wanted to do.

You could also take a leave of absence and start a new business. If things take off, you may be able to replace your income and do something you enjoy more.

Read books such as “The Four-Hour Work Week” and embrace that doing less is sometimes more. Learn to delegate work and grow a business while still having plenty of time to do the things you enjoy.

Owning a business gives you much flexibility and freedom you won’t have as an employee. You can choose your hours, your clients, and your company’s growth. Some recent retirees are turning to the gig economy to make ends meet with far less stress. They drive for Uber, shop via Instacart, or pick up dog-sitting jobs.

What’s the Verdict? Should You Retire Early or Work Longer?

Ultimately, deciding whether to take early retirement or extend your career is a personal choice — a factor in your finances, plans for the future, and how busy you like to stay. You should also consider if you love what you do. A nurse who has a passion for helping others may miss her patients. An art teacher might adore teaching others about techniques. A business executive may thrive on securing a deal. Consider the things you love about your job and if you can replicate them outside of employment.

Perhaps you should retire and offer your services as a consultant. Your company may allow you to go to part-time status and still earn some money doing what you love without the high stress of working full-time. Whatever you decide, you can make it work by being flexible and open to new opportunities and ways of bringing in money even after retiring. The only right choice is the one that works best for you and your life goals.

Featured Image Credit: Photo by Monstera Production; Pexels

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