Retiring early is a dream for many people. Some want to spend more time with family, some want to travel the world, some want to cross things off their bucket list, and some just want the option to sit back and do nothing.
In either case, the opportunity to retire early should be celebrated. But like most things in life, there are pros and cons to retiring early, and one of the cons is that it could cost you thousands of dollars.
Social Security benefits may be reduced
Working Americans spend years paying Social Security taxes in hopes of being able to receive Social Security benefits in retirement. For many people, it plays a huge role in their retirement finances. You can start receiving Social Security payments at age 62, but you won’t receive all of your benefits until you reach your full retirement age, either 66 or 67, depending on the year you were born.
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This is how your full retirement age is calculated
|Year of birth||full retirement age|
|1943 to 1954||66|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 or later||67|
If you’re considering early retirement, it’s important to understand how much your Social Security benefits will be reduced until you reach full retirement age. Benefits are reduced by five ninths of 1% for each month, up to 36 months. If you retire more than 36 months before your full retirement age, the months in excess of 36 will be further reduced by five-twelfths of 1% each month.
Assuming you retire at age 62, this is how much your benefits will be reduced when you reach your respective full retirement age.
|Year of birth||Months to full retirement age||Reduction of profits|
|1943 to 1954||48||25%|
|1960 or later||60||30%|
The average monthly Social Security retirement benefit is just over $1,600. If you could receive $1,600 a month from Social Security but your benefits were reduced by 25% to 30%, you could lose thousands of dollars a year.
An employer 401(k) match is lost
One of the best benefits of having a 401(k) plan is the ability to have an employer match your contributions. Employers will generally match up to a certain percentage of your contributions, and this is essentially a guaranteed 100% return on the money. If you earned $100,000 and contributed 4% to your 401(k), you would be saving $4,000 a year. If your employer matches your 4%, your savings are up to $8,000.
An early retirement takes away time that could earn an employer match and, depending on how early you retire, could easily add up to tens of thousands of dollars. Using our example above, even retiring five years early could mean losing $20,000 in “free” money from your employer.
Be well informed regardless
If you’re in a position to retire early, chances are you’re not strapped for cash or wondering where your next meal is coming from (or else you probably aren’t considering early retirement). However, it is important to know the financial implications of early retirement. Even if reduced Social Security benefits or a company 401(k) plan aren’t hurting you, you should always try to understand your financial situation and how your retirement income will be affected.
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