3 reasons why you should reconsider early retirement | Smart Change: Personal Finance

(Stefon Walters)

Everyone should be able to retire knowing they don’t have to worry about financial matters. There is no single strategy that will suit everyone when it comes to retirement, as different people will pursue different lifestyles.

Being in a situation where you can comfortably retire early is a blessing. While there are many benefits to early retirement, there are also a few drawbacks to keep in mind.

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Your Social Security benefits may be lower

In terms of Social Security, the full retirement age (FRA) is 67 for those born in 1960 or later. If you retire at or after full retirement age, you may be eligible for your full Social Security benefits. If you decide to retire before full retirement age, your benefit will be reduced based on the time you have until full retirement age. Benefits are reduced 5/9 from 1% for each month, up to 36 months.

If the number of months before you reach full retirement age is greater than 36, the benefit will be reduced by 5/12 of 1% per month for each month. If you retire at age 62 with 60-month reductions until age 67, your benefit will be reduced by 30%:

  • First 36 months: 36 * (5/9 * 0.01) = 0.2 or 20%
  • Last 24 months: 24 * (5/12 * 0.01) = 0.1 or 10%

If you retire at age 67 in 2022, maximum benefit would be $3,345 per month. If you retire at age 62, that would be $2,364. If you delay your benefits to 70, you could receive $4,194. If the benefits stayed the same, early retirement could cost you thousands of benefits per year.

You lose time getting an employee 401(k) match

Working for a company that offers a 401(k) plan is one of the best ways to save and invest for retirement. Although you owe taxes on the money when you take withdrawals in retirement, you are allowed to contribute money to your 401(k) pre-tax, lowering your taxable income. However, one of the better perks of a 401(k) plan is the potential for an employer match.

If you made $100,000 and contributed 5% to your 401(k), you would save $5,000 a year. If your employer matches your 5%, that brings your savings to $10,000. Retirement early takes time that you could earn from your contributions, which can essentially be seen as “free” money.

You may face higher health insurance coverage

In 2021, the average annual health insurance premium was over $7,700 for single coverage and over $22,000 for family coverage. One of the main benefits of being an employee is the chance to receive health insurance through your job. Currently 99% of large employers and 58% of small employers offer health benefits. For a single coverage, employers paid an average of 83% of their employees’ health insurance; for family coverage they paid an average of 72%.

Sure, you can get your own health insurance after you retire early, but you’ll likely pay more. With the cost of premiums, having an employer covering most of the costs can save you thousands each year.

Make sure you are aware

Deciding whether to retire early mainly has to do with your comfort level. For some who can retire early, money may not be at the forefront of their problems. Others may care less about their financial position before retirement and more about the freedom that comes with it.

Either way, one of the best things you can do is make sure you’re aware of the effects of early retirement, such as potential additional costs or benefit reductions.

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