Aug 16, 2024
If you're at least 59 ½ years old, you're at the age where you can start tapping into your retirement funds without getting hit with early withdrawal penalties.
Retirement is theoretically on the table, but is it a good idea, especially if you have a high-paying job right now?
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Here's what you need to think about to help you decide.
Staying on the job longer at a higher salary has huge benefits
If you’re tired of the daily grind, you may be tempted to hand in your notice. But if you’re making a lot of money, resisting that temptation could pay off big time.
If you can work until you’re 67, you have eight more years to save. If you invest just 10% of your $150,000 salary and earn a 7% average annual return over the next eight years (assuming a relatively conservative portfolio as you’re nearing retirement), you’d grow your nest egg by almost $154,000. That provides an extra $6,160 to spend annually as a retiree, assuming a safe 4% annual withdrawal rate.
If you’ve taken care of other financial obligations and can invest half your income, the benefits of delayed retirement become way more impressive. Investing an extra $75,000 per year for eight years leaves you with about $770,000 more in your investment accounts. That's a game changer as it increases your retirement income by $30,800 a year.
Not only that, but you'll also increase your Social Security checks. Your retirement benefits are based on an average of the income you made in your 35 highest earning years. Unless you were making $150,000 throughout your entire career, putting in an extra eight years at that salary will replace eight years of lower years in your benefits calculation.
Of course, you can also put off claiming Social Security if you keep working. If you retire at 59, you might decide to claim well before your full retirement age of 67. Sadly, starting checks at 62 shrinks your standard benefit by 30%.
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As if that wasn't enough, your savings also won’t have to support you for as long if you wait, and you can keep taking advantage of any help your employer offers with health insurance instead of having to buy coverage on the expensive individual market until you become Medicare eligible at 65.
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There are benefits to early retirement to think about
All that being said, there are plenty of people who retire early and are happy they did. Leaving work at 59 means you’ll have many more years to enjoy your life while you’re still young and in good health. If you’re tired of your job, escaping may be well worth the trade-off of less savings and a smaller Social Security check.
The big question is, are you in a financial position to do it? If you have just $250,000 saved right now, you’d have $10,000 a year or less to live on from your investments, as withdrawing more than 4% of your account balance is dangerous when you have so many years of retirement to fund. Plus, you won't even become eligible for your reduced Social Security benefit until 62.
With private health insurance to pay for and a $10,000 annual income, you’d be looking at financial disaster unless you have a lot of extra money coming from somewhere.
Now, if you had $2.5 million in the bank, leaving work might make sense. But, with very little saved, there’s no way to make retirement at 59 work. Instead, if you truly can’t stand your job, it may be worth looking into other opportunities so you can work for as long as you need to build security.
Just be sure you understand the opportunity cost if you have to take a pay cut to switch careers. These are critical years, and it may be worth a few years of annoyance to stay at a high-paying job to increase your Social Security and save a ton of money — especially when you can take advantage of catch-up contributions to score extra tax breaks for retirement investing.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
