Shrinking retirement benefits, increased volatility in the securities markets and rising prices have combined to make a successful retirement harder than ever to achieve. Many workers are postponing their retirement for two to five years or even longer, depending upon their situations. Therefore the prospect of retiring early can seem more unrealistic than ever, especially during adverse economic conditions. But there are some advantages to taking this route, especially for those who have big plans for their lives after they finish their current careers. This article examines some of the benefits that retirees can reap when they stop working ahead of schedule. (Find out how to determine whether you're on the path to a comfortable retirement, or financial ruin. See Will Your Retirement Income Be Enough?)
TUTORIAL: Qualified Plans
More time to enjoy family and hobbies
Logistically, those who retire early will get an early start on all of those fun things that others will have to wait a few more years to enjoy, such as indulging in a favorite hobby, traveling, doing volunteer work and spending time with family and friends.
Furthermore, those who retire early, such as an active corporate executive who retires at age 55, may still be hale enough for things like mountain climbing, marathons or other physical activities.
The freedom to start a new career
Not everyone is content to sit back on a rocker after they stop working. Entrepreneurial types can use their past work experience to embark on a new career or start their own business using their accumulated knowledge and professional contacts. For example, retired military personnel might be interested in moving into law enforcement, while those who leave the police force early could become private investigators.
Those who are able to stop working early can save themselves several years of job-related stress and other ailments that come with most jobs, such as lack of sleep and poor lunchtime diet. They may also have time to get more exercise after they stop working. (Of course, improved health can lead to greater longevity, which must be taken into account when computing necessary retirement savings.)
Greater returns from pensions and Social Security
Although the actual benefit paid from Social Security or a company pension plan will be lower for early retirees, the recipient may still come out ahead over time if he or she plays the cards right.
If at least some of the money received can be invested in a Roth IRA, then a sizeable tax-free nest egg can be accumulated for one's later years. For example, someone who retires at age 55 and starts drawing on their pension under the early retirement rules could set aside $100 per month for the next 10 years. If this were to grow at 5% per year, then the retiree would see over $15,500 at age 65. And Social Security would start paying out at age 62, for which the same strategy could be used. (Here are some personal finance tips for those who want to live well after work ends. Refer to Retire From Work, But Not Personal Financial Planning.)
While this may be the least important of all issues pertaining to retirement, being able to retire early can earn one the respect of his or her fellow workers, friends and family. Not many people are able to successfully do this in this world; the ones that can obviously know something that the rest of us do not. To retire early is to retire in style, assuming that it is properly planned for.
The Bottom Line
Of course, the benefits of early retirement must be carefully weighed against the potential risks and drawbacks. Those who fail to carefully plan for an early retirement may find their savings running out at a point in their lives when they are unable to do much about it and may have to depend on the kindness of friends or family. For more information on the benefits of early retirement, consult your HR department or financial advisor. (Keep saving when mortgages, marriages and debt demand your attention. Check out Retirement Savings Tips For 25- To 34-Year-Olds.)