Pros and Cons of Retiring Early

Many Americans dream of retiring early and leaving the day-to-day, seemingly endless grind of having to go to work. Fun vacations, spending valuable time with friends and family, and tackling new hobbies. These are usually the things we think of regarding leaving our jobs at a young age.

There are, however, often two sides to every story. What if you must leave your job early without a plan or can’t cover all the expenses? How will you even spend all your time once you have it? In this article, we’ll explain what it means to retire early and illustrate its positives and negatives.

What Does It Mean to Retire Early?

In general, the time to retire would be when you become eligible to begin collecting Social Security payments. According to a chart on the Social Security Administration (SSA) website, this typically happens when reaching around 65 to 67 years old. Under these terms, early retirement would count as leaving the workforce any time before this age, whether you’re 35 or 55.

Being able to retire early often means you have reached important savings thresholds. “A common guideline is that one should have saved at least 25 times their annual expenses before considering early retirement,” recommends Taylor Kovar, a certified financial planner (CFP) and CEO of TheMoneyCouple.com. He continues, “This is based on the 4% withdrawal rule, suggesting that retirees can withdraw 4% of their portfolio annually and adjust for inflation without running out of money. Ideally, potential early retirees should have no high-interest debt and should have a plan for managing mortgage payments or other significant recurring expenses.”

Deciding to leave your job early also requires an understanding of life fulfillment. That is, it’s important to know if you’re ready to move on to the next chapter, as well as to have a vision for what to do when you finally stop working. Choosing to begin an early retirement is a major step and, therefore, will need you to reflect on your life, financial picture, and the direction you want to take in the future.

Pros

There are several substantial benefits to retiring early. The biggest, of course, is that you regain significant free time to focus on family and hobbies. Below is a list of some of the most notable advantages:

Flexibility

According to Cody Garrett, a CFP and owner at Measure Twice Financial, “The greatest benefit of retiring early is having command over how you spend your time, as well as the who, what, where, when, and why.” Without the restrictions of a time- and energy-consuming job, you can do anything you want at any time. You can make your schedule, travel, spend time on hobbies, and live anywhere.

It’s also not uncommon for retirees to take up another, potentially more enjoyable job to keep themselves busy with their newfound time. Garrett says, “Achieving financial independence means you can work because you want to, not because you have to.” This means that if working still sounds like something you want to do, you can choose a job you think would be more fun or rewarding.

Flexibility can sometimes be more pronounced for those who leave work sooner. Per Kovar, younger retirees, such as those in their 30s and 40s, may “be more adaptable to changes in the economy or job market, given their relatively younger age.” On the other hand, for people “closer to traditional retirement age,” Kovar points out that “the benefits may be more health-focused,” as the next section will explain.

Health and Wellbeing

Once retired, you’ll have more time to take care of yourself. For instance, you’ll be able to exercise more, take walks, sleep in, or otherwise get more rest, and you’ll also have less stress without a never-ending stream of impending deadlines. The company cafeteria and sack lunches will become a thing of the past, as will bumper-to-bumper traffic on your work commute each day.

While more time to yourself can sometimes lead to boredom, which we’ll discuss later in this article, it can be incredibly useful for self-care. This can look different depending on your age. People who stop working at a young age can reap the unquestioned benefits of still being youthful. “Since many retirees seek to travel to adventurous places with their family and friends, younger retirees get to enjoy their body’s physical capacity – to climb tall mountains, go on long hikes, and swim far distances,” says Garrett.

Time for Family and Friends

With your schedule wide open, you can spend time with the people you care about. You can make more time for friends and have more opportunities to meet new ones. An open schedule allows you the freedom to spend significant, quality time with your partner, spouse, children, and grandchildren. A flexible schedule also allows you the time to provide caregiving for aging parents.

Cons

Early retirement sounds great. However, it can be hard to achieve and, like anything, has its set of drawbacks. It can become even more of a challenge if you don’t have much of a plan and must do it out of necessity, such as a health issue forcing you to quit your job. Here are some important cons to consider:

Inflation

Inflation can be a serious threat to the nest egg you have worked hard to build. This is because it reduces your money’s purchasing power. When you retire early, inflation has more time to eat away at your savings.

If inflation is bad enough, it can deplete your savings to the point where you need to re-enter the workforce. This is one reason why it’s often recommended to diversify your holdings, rather than keep cash in a savings account. Having many kinds of investment vehicles gives you the chance to grow your portfolio, rather than have it sitting and potentially losing value. Kovar emphasizes, “A well-diversified portfolio that can withstand market fluctuations is crucial. Given the longer retirement, having a more substantial emergency fund can provide a buffer against unexpected costs or market downturns.”

Additional Health Care Costs

You must be at least 65 years old before you can begin using Medicare. So, if you retire before this age, you’ll face paying expensive health insurance and medical costs out-of-pocket. And, if you’re young, you could end up paying for your health coverage for a long time. These costs can quickly add up.

Less Social Security

You Social Security benefits are based on your highest 35 years of earnings. If you work fewer years and miss out on high earnings later in your career, you’ll get smaller Social Security checks in retirement. This is because, according to the SSA, Social Security payments are made up of your average monthly earnings.

Isolation

For many people, a job is where you spend half your waking life. It’s a place where you form relationships, meet friends, and get automatic social interaction. As Garrett puts it, there are four C’s someone may miss when they retire, including “conversations with colleagues and clients, collaborations with team members, challenges to solve, and contributions for a greater purpose.” When you stop working, you’ll be cut off from many of these people, and your amount of interaction per day may drastically reduce. You’ll have to find new challenges to solve or seek new interactions, which can be a jarring change.

Boredom or Lack of Purpose

Some individuals face an existential crisis when they retire. This is because their career may be a major part of their financial security and life’s purpose. Unfortunately, it can be hard to know exactly what to do after retiring. So much time on your hands can be a blessing and a curse.

Market Uncertainty

If you retire early, there is a greater chance for a market downturn or correction that could significantly reduce the value of your investments. If your assets lose enough, you could be forced to do less, eat less, etc. If situations deteriorate even more, you might find yourself looking for work.

Deciding When to Retire

As the above indicates, there are both significant benefits and downsides to retiring early that you should weigh. When you decide to stop working is a personal decision. For this reason, it’s important to consider the factors that are most important or relevant to you and your situation.

Choosing early retirement means accepting the reality that you’ll be living off of your savings and investments for several years. This is especially true if you are far off from receiving Social Security. Because of this, it’s important to be sure you can handle this financial burden and have a plan to keep you on track.

It’s also important to weigh the social and mental ramifications of retiring early. As we mentioned earlier in this article, not working anymore can cause isolation from others or a lack of meaning in your daily life. Like with your finances, it’s important to visualize how you want your life to look before retiring.

If you do decide to retire early, we recommend having a financial advisor by your side. They can help you avoid pitfalls in your plans and find solutions of any issues do arise. Specifically, professionals like Certified Financial Planners (CFPs), Chartered Financial Consultants (ChFCs), and Chartered Retirement Planning Counselors (CRPCs) are especially useful for situations concerning retirement.

Frequently Asked Questions

What is a good retirement age?

Even though many people retire in their mid-60s, there isn’t an agreed-upon ideal time to do so. It will ultimately vary by person. However, it will normally be when you have built enough savings or a substantial enough portfolio to support you for the rest of your life. Garrett highlights that if you want to “retire permanently, you should be able to support your current and future desired living expenses from your investment portfolio or passive income sources, such as private/public pensions and real estate income.”

What is a common threshold to meet before considering retiring early?

The 4% rule is one of the most mentioned methods for preparing for early retirement. According to Jeff Rose, a CFP and founder of GoodFinancialCents.com, it “suggests that retirees can withdraw 4% of their portfolio annually to fund a 30-year retirement.” However, he observes that this can be a little “aggressive” for young people and that it may be more beneficial to use a lower percentage. He continues, “For instance, if someone has $1 million in savings, a 4% withdrawal rate would provide $40,000 per year. However, early retirees might consider a 3% or even 2% withdrawal rate to reduce the risk of depleting their savings too quickly.”

What are some ways to prepare myself for early retirement?

Several of the drawbacks of retiring early involve not knowing what to do with free time or running out of funds at a certain time. One of the most effective ways to curb this is by putting a plan in place and visualizing what you intend to do in retirement. This can help you know how much money you’ll need and feel more comfortable with the new vacuum of time you’re soon to get.

If you need help assembling a plan, it’s a good idea to work with a financial advisor. They’ll be able to help you understand the steps to take to get to an early retirement, as well as how to maximize your savings once you get there.