The Pros and Cons of Early Retirement

When most of us envision early retirement, we think it will be spent pursuing new hobbies, spending more time with family, and traveling the world — all in good health, and all with enough spending money to occasionally enjoy a little room service.

But the reality of it can be far less dreamy. What about income? How do you portion out your savings? What's left to pass on to your kids? Before making the decision to retire early, consider the pros and cons of early retirement.

Pros of Early Retirement

Though the traditional retirement age in the U.S. is 65, many Americans hope to retire sooner, somewhere around age 62 or earlier.¹ The benefits of retiring early include opportunities to travel, explore a new business venture or hobby, or do meaningful volunteer work. There may even be health benefits.

Consider these advantages of early retirement:

1. The chance to do work that is meaningful to you

Retiring from your job does not have to mean retirement from every job. Many people take on new careers or start businesses when they retire. If you have sufficient retirement savings, you can choose your job based on what actually interests you, not what interests your wallet — a first for many.

2. More leisure time to pursue interests or hobbies

With more free time comes more opportunities to pursue passions you may have put on a back burner while you were busy with your career. Some retirees report being busier in retirement with personal hobbies and interests or meaningful volunteer or philanthropic work than they were during their career years.²

3. Improved general health

Early retirement may allow you more time to prioritize your overall health. Some studies show that early retirees are more likely to reduce alcohol consumption, quit smoking, get more sleep, and exercise more often.³

Having less stress, no commute, no office politics, and no schedule of endless meetings doesn't hurt either. More free time can mean more time to dedicate to eating right, regular exercise and attending to medical issues you may have put off.

4. Ability to travel

Many retirees say they hope to travel in retirement, with the U.S., Europe, Mexico, and the Caribbean topping the list of destinations.⁴ Whether your travel goals include high-adventure vacations, relaxing beaches or sightseeing tours, early retirement allows you the flexibility and time to get to everything on your bucket list.

5. More time with family

Early retirement leaves you free to spend more time with family, whether it's with an aging parent or children. For many people, deeper personal relationships are the ultimate upside to early retirement.⁵

6. Early retirement lasts longer

For some people, another five to 10 years of work might as well be an eternity. For others, more time with family is the be-all and end-all.

For people with chronic medical issues or potentially terminal conditions, early retirement will provide more time to relax and enjoy the things that matter most. Depending on your condition, you may be eligible for Social Security Disability Income (SSDI), which can help cover costs until you can earn retirement benefits.⁶

Cons of Early Retirement

Some experts say retiring early could be a big financial mistake for most Americans, and that many working families are poised for a sharp decline in their standard of living after retirement.⁷ Every situation is different, but consider the following downsides to early retirement:

1. Outliving your savings

Exiting the workforce early means your retirement savings needs to last, possibly decades longer than you expected. According to the Society of Actuaries, a woman who retires at 55 will need her savings to last an average of 28.6 years, while a man will need his for an average of 25.1.⁸ And, if you're lucky, your lifespan may exceed the average, so you will want to be prepared.

You might also need more money than you think. Conventional wisdom says you will spend about 80% as much in retirement as during your working years.⁸

2. You could lose some Social Security benefits

Some people retire later to receive more retirement benefits. Others prefer to take the reduced income and retire earlier. Let your savings, investments and retirement income prospects be your guide.

You can start collecting Social Security benefits as early as age 62, but waiting until you are of full retirement age (FRA) can help you maximize benefits. To estimate what your FRA might be in the eyes of the government, consider that for those born after 1960, the FRA is age 67.⁹ You can see your FRA, as well as an estimate of the monthly social security benefits you would collect at certain retirement ages, on the Social Security Administration website.

3. You might incur early withdrawal penalties on your retirement accounts

If you retire before your FRA, you may be penalized for accessing your dedicated retirement accounts. For instance, if you withdraw money from a 401(k) retirement account before the age of 59 ½, you will need to pay both a penalty fee of 10% of the withdrawal as well as taxes on the money withdrawn. The only exception is if you are laid off or fired between the ages of 55 and 59 ½.¹⁰

Penalties apply to traditional IRAs as well. You'll pay both taxes and a 10% penalty on the money you withdraw before 59 ½. You can set up 72(t) payments to try to avoid this penalty, but that comes with its own series of penalties for not following the payment schedule.¹¹

4. Loss of employer health insurance

If you have an employer health insurance plan, you could lose it when you retire early. Most people are not eligible for Medicare until they turn 65, unless they have a qualifying medical condition. Thus, you may need to pay for your own health insurance at a far higher cost.¹²

Keep in mind that health expenses tend to increase as people get older. You may want to wait to retire until you can apply for Medicare, and it's never a bad idea to maintain a Health Savings Account (HSA) to offset healthcare costs until then.¹³

5. Boredom

Being on the job can provide a sense of purpose, opportunities for social interaction and mental engagement. Without a workday structure, some retirees struggle to fill their time and experience increased feelings of loneliness. This may be especially true if you have retired early and many of your friends, family and colleagues are still employed and unavailable to socialize during the workday.¹⁴

6. Increased risk of cognitive health issues

While early retirement may provide a general health boost at first, some research suggests that early retirement can have an overall negative effect on cognitive function in the long term.

Social isolation, lack of mental and intellectual stimulation, and shrinking connection with family and friends are all thought to be factors in increased cognitive decline.¹⁵

Determining if Early Retirement Is Right for You

Getting a head start on the golden years may sound ideal, but depending on your situation, it may or may not be prudent. What is early retirement worth to you? What is it worth to your mental and physical health? What does it matter to your balance sheet? It is all a matter of what is best for you and your family.

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Author Bio

Anne-Marie Kennedy is a freelance writer with more than 20 years of experience covering health and wellness, personal finance, and real estate/investing.

Our Expert Reviewer

Patty Caballero and her team of consultants together have more than 35 years of health insurance knowledge working for some of the biggest health insurance companies in the US. She has knowledge in building brands and strategic initiatives to help consumers better understand their health benefits.