Understanding the Challenges of Early Retirement

Early retirement may be a goal you spend decades working to achieve, or it may be a decision forced upon you due to the health needs of a loved one or the loss of a job. No matter your circumstances, early retirement can come with both benefits and challenges. Some benefits of early retirement include less stress, more time for meaningful activities, and opportunities to start a new hobby or even a new career. Some of the challenges of an early retirement include covering the greater expense of a longer retirement, figuring out when to claim Social Security, finding health insurance, and maintaining good health. Though these challenges may feel overwhelming, with proper planning, they can all be overcome.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

Funding a Longer Retirement

The biggest challenge is also the most obvious—the longer you’re retired, the more money you’ll need. Many people mistakenly assume that retired living will cost less. While certain expenses may be minimized or even eliminated in retirement, such as commuting costs, you’ll have more time to spend money.

One of the biggest challenges for early retirees is that they can’t access the money they specifically put aside for retirement without being penalized. Both IRAs and 401(k)s have early withdrawal penalties. These penalties are usually quite high, and it’s best to avoid using these funds unless absolutely necessary. 

Handling a Longer Time Horizon

Earlier retirement also means a longer time horizon. The longer the time horizon, the harder it is to predict how various factors including inflation, investment earnings, and real estate prices will affect your long-term financial plan. With so many factors coming into play and a longer time horizon, in order to make your money last, you’ll need to create a plan that accounts for many different potential outcomes. 

Deciding When to Claim Social Security

Another challenge of retiring early is how it affects your Social Security. Taking Social Security early means receiving a smaller benefit amount. Taking Social Security prior to the “full retirement age” means you’ll receive a smaller monthly benefit amount, while waiting until after the full retirement age can lead to an even larger benefit amount. For every year after full retirement age that you wait to begin claiming Social Security, up to age 70, you’ll receive eight percent more.

Finding Health Insurance

Those considering early retirement often focus on income sources and having enough saved to fund their current lifestyle. While these are certainly important considerations, there’s more to retirement planning than saving a specific amount. Health insurance is a perfect example. You don’t become eligible for Medicare until 65. If you retire prior to 65, this means you’ll need to get health insurance. Health insurance is typically more expensive the older you get, and many early retirees are surprised by just how much health insurance ends up costing them. Insurance premiums may be two or even three times more expensive than you’re used to. 

Maintaining Good Health

Retiring early can have plenty of health benefits, but it depends on your lifestyle. One of the biggest advantages of early retirement is the ability to take advantage of all the opportunities of retirement while you’re still in good health. Though better health is often easier to maintain at a younger age, a sedentary lifestyle with little to no social interaction or purpose is a recipe for bad health no matter how old you are. In order to protect your health, you’ll need to create a plan. How will you spend your days? Who will you interact with? What will your purpose be? As exciting as retirement is, it can also be lonely and isolating, even if you retire on time. Those who retire early at are at even more of a risk since their friends may still be employed. 

Considering All Your Options

While early retirement isn’t always a choice, for those that have control over the timing of their retirement, it may be worth considering some form of partial retirement. Even those who have reached retirement age often choose to consult, move to part-time in the same position, or take a part-time position in a lower pressure work environment. In this day and age, there are plenty of different ways to retire. Early retirees may no longer have the interest or need to work full-time but may feel they have more to give. Don’t become so hung up on the idea of how retirement should look that you miss out on amazing opportunities.

A Financial Planner Can Assist You!

Retirement requires a lot of planning, and retiring early requires even more. Now that you understand the challenges of early retirement, consider working with a financial advisor from Good Life Financial Advisors of Mount Pleasant. Our experienced team can guide you through the retirement planning process and ensure you’re prepared.