Is Early Retirement a Good Idea?
Why retiring early could be the best retirement goal for you
Is early retirement a good idea? To some people, it sounds like a dream come true, complete with lots of travel and time with family and friends while you’re still young and healthy enough to enjoy it fully. To others, it may seem risky and even irresponsible. Below we’ll discuss considerations to help you determine whether early retirement may be the right plan for you.
Arguments Against Early Retirement
Early retirement works well for some people, but detractors of early retirement frequently bring up the following areas of concern:
- Claiming Social Security earlier will lower your benefits. The earlier you tap into your Social Security benefits, the lower your benefit rate will be. Early retirement can make some people feel the urge to begin their Social Security benefits before they originally planned, possibly out of necessity.
- Earlier retirement requires greater savings. Another argument levied against early retirement is the need for a much larger retirement fund. The theory is, you’ll not only be losing out on several years of earning potential, but also losing your years of highest earning potential.
- Access to health insurance. One of the benefits of being employed is access to health benefits. If you retire before your Medicare starts, it can create a substantial period of years where health care can be very pricey, and the possibility of a medical emergency could take up a large portion of your retirement savings.
- Feelings of loss of purpose. The last, and perhaps harder to quantify argument, is a feeling of loss of purpose. Many people can find the transition into retirement difficult and have trouble adjusting to and finding a new lifestyle that feels meaningful.
These are all valid reasons to be wary about early retirement, and they require serious thought and consideration. Of course, there’s always the other side of the coin.
Arguments in Favor of Early Retirement
There are also several arguments in favor of early retirement shat should be taken into account by anyone considering this plan. Oftentimes, it’s not that early retirement is unwise on its face, but more a matter of ensuring you approach it correctly.
Keep a Steady Lifestyle
Saving becomes easier as you progress through your career and your earnings increase, and it becomes exponentially simpler to save if you keep your spending and lifestyle choices in check. Find what style of life is livable for you and keep it – and your spending habits – consistent as your earnings and promotions increase. When setting a budget, you shouldn’t be aiming to maximize your spending to match your income.
For example, a substantial pay increase doesn’t mean you should necessarily move to a larger apartment or house. The increase in salary doesn’t mean you need to upgrade everything about your lifestyle. Large purchases like electronic devices, cars, and boats don’t require upgrades every year. If your lifestyle still works well and brings you joy, there is no need to change things. The excess you are saving can increase the speed at which you are saving for your retirement. Make sure you are reaching your maximum contributions for your Roth IRA, and be sure to maximize any available employer match for 401(k)s.
Retirement Does Not Equal Stagnation
Two of the arguments against early retirement, as mentioned above, include needing a larger retirement fund and feeling a loss of purpose. Both of these arguments can be countered with one idea: retirement does not have to mean you are out of the workforce. In fact, many retirees decide to consult or work freelance on a limited basis. These are great options if you want to stay involved with your business or if you need a little supplemental income.
Being free of needing a job for day-to-day expenses is also an incredible opportunity to pursue your true passion. If there was a career you wished to do but didn’t feel it provided the financial stability you found elsewhere, you are now free to pursue that dream. Maybe you want to write a novel or start a creative business. Whatever your passion is, it can be amazing what opportunities open up to you once you don’t have the shackles of needing the next paycheck. Many people have gone from retirement into the not-for-profit world or started their passion career. For some, this late-stage career can create tremendous feelings of purpose, satisfaction, and meaning, too.
Think Outside the Standard Retirement Tools
There are more options for retirement than the standard plans most of us hear about growing up. There is a reason we always hear about 401(k)s, IRAs, Social Security, and Medicare; these are great sources of retirement income for many people, especially if you’re willing to wait until your later years to retire. They are tried-and-true methods. However, with a little work, you can move outside these retirement tools to find ones that will suit the early retirement you’ve been dreaming of.
Instead of placing all your money in retirement accounts, you can also put a percentage away in standard investment accounts. These accounts are taxed, but there are no penalties for withdrawing from them as you please. If you are using a Roth IRA, don’t forget that you are free to withdraw the contribution amounts; it is only the gains that are inaccessible. Check-in with your financial advisor on the possibilities of turning your 401(k) and 403(b) accounts into IRAs and making early withdrawals from them using the 72(t) rule.
Lastly, don’t forget that you have the option of retirement annuities. Considered by some as “insurance for retirement,” annuities are a great way to create a guaranteed income for your retirement years.
Time Versus Money
When you ask most people what they envision when talking about retirement, they often mention having free time to do what they want. Time is what you’ll be gaining through early retirement, and it is impossible to put a value on that. You are gaining the freedom from all those late nights and long weekends so often sacrificed to a busy work life.
Being able to retire early gives you back that time and, hopefully, you’ll be entering retirement at the prime of your health and energy. Being a younger retiree will allow you to take advantage of more of the opportunities of experience that present themselves.
Though it may be a lot of work, early retirement is a viable option for many people. You will need to have looked thoughtfully toward the future and put a lot of sweat into the effort, but it is doable. In truth, one of the biggest hurdles to overcome may be overcoming your self-stigma about early retirement.
Final Thoughts on Early Retirement
Retirement planning isn’t one-size-fits-all, and an early retirement isn’t the right course for everyone. If it’s something you’re thinking about, you’ll need to consider all the pros and cons first. It may also be helpful to speak with a financial advisor who can help you develop the right retirement plan to reach your goals.
At Charles Carroll, we’re committed to providing you with personalized guidance for your retirement plan because we know how important it is to feel that you have control over your future. If you’d like to begin a conversation about your financial goals and how you might achieve them, please reach out today.