Even though Americans’ net worth still hasn’t recovered from the Great Recession of 2007-2009, many of us continue to dream of retiring early. A survey by the financial services provider TIAA-CREF in early 2014 found that 37% of Americans plan to retire before age 65.
Not everyone will have a choice in the matter, of course. Job loss, health problems or family responsibilities can disrupt the best-laid retirement plans, forcing people out of the workforce sooner than expected. According to 2016 reports from the Social Security Administration, the average age at which today’s retirees retired is a relatively early 63.
But if you're lucky enough to have control over when you retire, it's worth thinking through the pros and cons before you make any rash decisions. Even if you can afford to retire early, you might not want to.
Some Pros of Retiring Early
1. It could be good for your health. A 2002 study of British civil servants, for example, found that retiring at age 60 had no effect on the subjects’ physical health and that those with higher-level jobs saw an improvement in mental health, possibly because they were no longer subject to work-related stress (and had better pensions than lower-ranked workers). Other studies, however, have suggested that retirement can be hazardous to your health, as we’ll get to in the next section.
2. You’ll enjoy more time for travel. The earlier you retire, the more years you’ll have before health issues begin to limit your mobility.
3. It’s an opportunity to start a new career. If you dream of switching fields or starting your own business, sooner may be better than later. You’ll be a more desirable job candidate to many employers the more years you have ahead of you. And if you want to be your own boss, you’ll have more time to get your business off the ground. A business you launch at age 60, for example, could easily keep you intellectually challenged and out of mischief for another 20 years or more. See Don't Retire Early – Change Careers Instead.
Some Cons of Retiring Early
1. It could be bad for your health. A 2008 analysis from the National Bureau of Economic Research reported that retirement leads to declines in mental health and mobility, and increases in other poor health outcomes, such as heart disease and stroke. While that’s one argument for delaying retirement, those problems aren’t inevitable. The report also concluded that retirees who remained physically active and socially connected were less likely to suffer any ill effects.
2. Your Social Security benefits will be smaller. The sooner you start to take Social Security, the lower your benefits will be. If you were born in 1960 or later, for example, and you start taking benefits at age 62, the earliest age at which you’re eligible, your monthly benefits will be 30% less than if you wait until age 67, which Social Security refers to as your “full retirement age.” For each year you postpone from age 67 to 70, you’ll receive an additional 8% in your monthly benefit. After age 70, there’s no further bonus for delaying.
3. Your retirement savings will have to last for more years. If you retire at age 62 and live to 90, let’s say, your IRAs and other savings will have to cover you for 28 years. If you retire at 70 and live for the same length of time, however, your savings will only have to last for 20 years. Working longer also means you’ll have more years to contribute to a 401(k) or other retirement plan, and the money in your plan will have more time to compound.
“An easy rule of thumb to estimate your retire-ability is to multiply your expected draw on investment portfolios that will supplement Social Security and other sources by 25. If you have that amount of money in your combined accounts, you’re ready to put a pencil to it. If you’re ‘close,’ think twice,” says Stephen J. Taddie, managing partner, Stellar Capital Management, LLC, Phoenix, Ariz.
“One common myth is that your expenses decline in retirement,” says Jennifer E. Myers, CFP®, president of SageVest Wealth Management, McLean, Va. “We seldom find that to be the case for three primary reasons. First, you simply have more time on your hands to enjoy, partake and spend. Second, as individuals grow older, they tend to outsource more, layering on new expenses. Third, your healthcare expenses logically tend to increase as you age. It’s important to make sure your assets can sustain potential, and perhaps inevitable, growth in spending over your lifetime.”
4. You’ll need to find health insurance. Unless your ex-employer provides it, you'll have to pay for health insurance on your own until you're eligible for Medicare at age 65.
5. You might get bored and miss working. Many retires have a tough time making the transition from the daily routines of a fulltime job to the unstructured life of retirement. They may also miss their former colleagues (sometimes even the boss) and yearn to return. Unfortunately, it isn't easy to get back into the workforce once you've left it, voluntarily or otherwise. A 2012 report by the U.S. Government Accountability Office noted that people over age 55 generally need more time to find new jobs than their younger counterparts do.
A Middle Ground
If you don’t want to retire early for fear you’ll regret the decision but also don’t want to wait so long that you miss out on the pleasures of retirement, there are ways to have the best of both worlds. One example: you could do some of the traveling you’ve been saving for your retirement years while you’re still working. Or, you might try to negotiate a reduced work schedule with your employer and enjoy the life of a retiree on your days off, an arrangement that’s often referred to as “phased retirement.”
The Bottom Line
Deciding when to retire is a complex decision that isn’t just a question of dollars and cents. Your health, family obligations and individual temperament all figure into it, or at least they should. Perhaps most important is whether you’ve thought through what you plan to do with your retirement years, however many of them lie ahead. As the wise old retirement cliché put it, it’s important not just to retire from something but to something.