7 things nobody tells you about early retirement

What is early retirement?

Early retirement is the ability to retire before the traditional retirement age. Early retirement can be achieved by saving aggressively, increasing your earnings, or both. 

Early retirement can provide many benefits, including more time to enjoy life, less financial stress, and the ability to leave a legacy outside of your career. 

What are the benefits of early retirement?

There are many benefits to early retirement, including more time to enjoy life, less financial stress, and improved health.

Retiring early can give you more time to do the things you love, whether that’s spending time with family, traveling, or pursuing a hobby. 

You’ll also have less financial stress, as you’ll no longer have to worry about working to make ends meet. Additionally, early retirement can lead to improved health, as you’ll have more time to focus on taking care of yourself.

Overall, early retirement can be a great way to improve your quality of life. However a lot of thought needs to go into it. Here are 7 things nobody tells you about early retirement. 

Withdrawing From Your Savings Can Be Expensive

If you retire before the age of 59 1/2, most tax-deferred funds, such as traditional IRAs and 401(k) plans, will charge you a 10% early withdrawal penalty. “There are ways to get IRA money before age 59 1/2, but it’s complex and can lead to significant fines if done wrong,” says James Runey, founder of RAA Wealth.

If you don’t have a Roth IRA, which is funded with after-tax contributions, you’ll have to pay income taxes on the amount you withdraw from a traditional IRA account, which is funded with pre-tax contributions. For example, if you withdraw $20,000 from an IRA before reaching the age of 59 1/2 and you’re in the 15% federal tax rate, you’ll pay $5,000 in taxes and penalties, leaving you with only $15,000.

Housing costs don’t suddenly go away

It is a typical aim of would-be retirees to retire without a mortgage, yet many fail to achieve this goal. 44% of retired homeowners aged 60 to 70 still have a mortgage. Even if you have paid off your mortgage, you still have additional expenses.

The power of compound interest is neutralized at a severe cost

Time is your ally when it comes to saving for retirement, but not when it comes to spending. If you save $250 each month, or $3,000 per year, from the ages of 25 to 55, you will have around $237,000 in retirement, assuming no withdrawals and a 6% annual return, a decent return on your $90,000 in contributions.

Suppose you work for another decade and retire at age 65. In this situation, you will have approximately $464,000. This is nearly double the amount. Why? The additional decade of contributions is advantageous, although it amounts to only $30,000. The genuine growth results from 10 years’ worth of additional interest accrued not only on the principal you invested but also on the interest that has accumulated for four decades.

You will spend more than you anticipate

A decent rule of thumb is that you will spend 80 percent as much in retirement as you do while working. After all, if you have no more earned income, you won’t be contributing to your retirement account, commuting daily, or paying Social Security payroll tax. 

Nonetheless, in the early years of retirement, when you’re younger, healthier, and no longer confined by the constraints of work, you could easily spend as much, if not more, than you did before to retirement. 

According to a study by J.P. Morgan Asset Management, new retirees experience a “spending surge” on travel, home renovations or relocation, and other retirement-related lifestyle modifications for the first two or three years, after which the spending level out.

In light of the fact that inflation has reached 8.6 percent during the past year, your spending plans may need to be substantially updated. According to EBRI, 36% of retirees think their overall spending and costs are more than planned, up from 36% the previous year. The proportion of respondents who report that housing and transport expenses, in particular, are more than anticipated is also up from last year.

Earning income in retirement is very difficult

Working throughout retirement may be more difficult than you anticipate. According to the EBRI survey, while 74% of workers intend to work for compensation after retirement, only 27% of actual retirees have reported doing so. Even part-time employment may be tough.

You may have a long life ahead of you

A woman who retires at age 55 must sustain her financial resources for an average of 28.6 years, compared to only 20.4 years if she retires at age 65. A man who retires at age 55 will have to distribute his funds over 25.1 years as opposed to 17.8. According to the Society of Actuaries, surviving spouses of 65-year-old couples have a 25% probability of living until age 98

The cost of living could skyrocket in upcoming years

The most recent inflation which has been around 8.5% over the last 12 months could go north even farther in upcoming years according to a recent article in the Brookings Institute. While early retirement sounds great, it might be wise to research and plan ahead. 

In Conclusion

There are a lot of things to consider when even thinking about early retirement. Obviously there are a lot of financial things to consider as well. It’s always wise to reach out to a financial advisor who can properly help you plan your retirement and manage your portfolio to insure you have enough money to live a long healthy life with your loved ones.