Dec 25, 2024
Who doesn’t want to retire early? To be able to have time to relax and pursue your hobbies?
Nearly 60% of American retirees stopped working earlier than they had planned, according to research from the Transamerica Center for Retirement Studies. The survey found that the median retirement age is 62, three years younger than the traditional retirement age of 65.
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However, for the majority of these early retirees, the decision to leave the workforce wasn’t made because they were financially ready.
Reasons and risks
Of those surveyed in the Transamerica report who retired earlier than planned, around half (46%) left their working years behind because of health issues, whereas 43% said it had to do with employment-related challenges. A low percentage (21%) said they retired because they had their finances in place.
An unplanned retirement, especially one where a retiree may not have enough money to maintain a comfortable standard of living, can pose serious financial risks. Not having the opportunity to work a few more years means lost income, fewer opportunities to save and invest, and less time for compound interest to work its magic on your nest egg.
Think about how much your savings and retirement accounts could grow if you were able to leave them untapped for at least another five years.
Retiring before you’re ready could also mean additional healthcare expenses before Medicare eligibility kicks in. You no longer have the benefit of having an employer pay for health insurance. Even if your former workplace offers a COBRA plan, you would likely still end up paying more.
Not having enough savings could mean that you’re more likely to rely on Social Security benefits to pay for the necessities. Retiring before your full retirement age also means you’re permanently receiving a lower monthly payout compared to those who waited.
In the Transamerica survey, only 4% of retirees waited until age 70 or later, which would have maximized their monthly benefit.
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What you can do
Whether it’s health, employment-related or another reason, if you find yourself retiring earlier than anticipated, there is some hope. It’s normal to feel scared or worried about what your future holds and acknowledge that before making any drastic changes. You may not have a lot of wiggle room, which is why fleshing out a plan is key.
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Take the time while you’re managing your emotions to gather all relevant documentation, including brokerage statements, bank account statements, loan documents and anything that can help give insight into your current financial situation.
Then, take a good look at your current spending habits. Is there anything you can tweak, like spending less or something major like moving to a smaller place? Consider budgeting software or using cash only to track what you’re spending.
Consider if it's time to start tapping your retirement nest egg and decide a safe withdrawal rate. If you lost or left your job the same year you turned 55 or older, the good news is the 10% penalty for early withdrawals from the 401(k) or other tax-deferred plan from your employer you were contributing to is waived. It may be a smart idea to consult with a trusted financial professional to help you make this decision.
If possible, try delaying taking Social Security benefits until you’re 70 or at least until you’re at full retirement age, because this would mean a bigger monthly paycheck.
Taking on a part-time job or gig work may help to ease the financial burden you have. Even working a few hours a week in retail (if you can physically do so) could also offer a sense of purpose and way to socialize with others in addition to a paycheck.
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Sarah Li-Cain, AFC is a finance and small business writer with over a decade of experience.
