Even if you don’t want to wrap up your career at a young age, you may want to assume that’s what you’ll do.
Some people start saving for retirement from a young age for one key reason — they know they want to leave the workforce early, so they do what they can to make that possible. But early retirement has its drawbacks. Not only might you end up having to stretch your nest egg for many years, but you might have to withdraw from your savings aggressively if you retire before you’re eligible for Social Security, thereby running the risk of your nest egg running dry.
Plus, there’s healthcare to think about. Retiring early often means leaving the workforce before you’re eligible for Medicare.
In fact, early retirement comes with so many pitfalls that a lot of people would rather just work until they’re old enough to claim their Social Security benefits in full. But even if you’re not seeking to retire early, you may want to operate under the assumption that you will. Here’s why.
When you need motivation to boost your savings
If you’re not planning to retire early, you may decide to put off retirement savings and focus on other more near-term goals. But delaying your savings efforts for too long could really backfire on you — especially if you wind up having to leave the labor force sooner than expected.
Let’s say you decide that you want to retire at age 67. If you were born in 1960 or later, that’s full retirement age for Social Security purposes. You might then decide that you’ll first really start saving for retirement in your late 40s because at that point, you’ll still have a good 20 years to build yourself a nest egg.
But what if health issues force you to stop working around your 60th birthday? Suddenly, your savings window is slashed substantially.
And it’s not just health issues you have to worry about. What if a prolonged recession hits, and you’re laid off in your late 50s or early 60s?
It can be difficult to find work later in life because even though it’s illegal for companies to discriminate against job candidates based on age, it’s also a hard thing to prove. If you lose your job later in life, you could end up permanently unemployed (whether because you truly can’t find work or don’t want to take a menial job after a 40-year career).
That’s why it’s not a bad idea to operate under the assumption that you’ll retire, say, in your early 60s. Doing so might give you the push you need to start funding your IRA or 401(k) plan sooner, thereby helping to ensure that you wind up with a more sizable nest egg.
It’s also a good idea to amass enough savings to live on in case you wind up retiring at a time when you can’t yet claim Social Security. Plus, you might retire on time but decide you want to delay your Social Security filing as long as possible to snag a lifelong boost on benefits. And that option will only exist if you have a strong enough nest egg to support yourself.
