3 Early Retirement Risks You Should Know About | personal finance

(Maurie Backman)

Many people dream of retiring early for various reasons. And in the wake of the pandemic, early retirement has become a reality for many people.

Now, the upside of early retirement is clear: being able to enjoy more freedom at a younger age without being held back by a job. But there are risks associated with early retirement that it’s important to be aware of. Here are a few to consider if you’re thinking of making an early exit from the workforce.

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1. Your ability to grow your savings may be limited

When it comes to building retirement savings, time is perhaps the most effective weapon in your arsenal. But if you give yourself fewer years before you start withdrawing money from your 401(k) or IRA, you could end up with a lot less money in the long run.

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Imagine that you can save $800,000 at age 60. If you were to leave your savings alone and not add another penny, but let that money grow to age 67 at a conservative 5% average annual return, you’d end up with more than $1.1 million. But if you retire at age 60 and start taking withdrawals immediately, you’ll end up with much less.

2. You may end up depleting your savings prematurely

The tricky thing about retirement is that it’s hard to predict how long you’ll live. As such, you don’t know how many years your savings will need to last.

But the earlier you retire, the more retirement years you’ll have to fund. And if you start making withdrawals in your early 60s, rather than later in your 60s, you could find yourself in a situation where you end up depleting your life savings, leaving you penniless when you’re much older and unable to repay. working.

3. You may end up regretting your decision and having a hard time getting back into the workforce

Retirement can be a difficult adjustment emotionally, especially if you’re the type of person who doesn’t tend to do well with a lot of downtime. And if you leave the workforce at a younger age, you could end up losing your old work routine, to the point where you decide you want to start working again.

However, that could prove challenging. Unless your previous employer is willing and able to take you back, you may have a hard time getting hired because of age-related bias (as much as it’s illegal to not hire someone based on age, it can also be very hard to test). And if you can’t go back to work, you could end up struggling from a mental health standpoint, even if you manage just fine financially.

think things through

Early retirement could end up working out quite well for you, but it’s not a decision you should rush into. Think about the risks of retiring at a younger age and make sure you have the means to deal with them. And if you decide early retirement isn’t the right decision, consider partial retirement instead. Working about 20 hours a week for a few years in your early to mid-60s could give you the best of both worlds: a way to stay busy and earn money without having to overdo it.

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