4 Reasons Early Retirement Isn’t the Dream Many Expect

It’s time to take off those rose-colored glasses. As someone with many hobbies I never seem to find enough time for, I’ve been known to romanticize the idea of early retirement. An extra 40 hours a week to do whatever I want sounds like a pretty sweet deal a lot of the time, but then I remind myself that the reality of early retirement isn’t always idyllic. If you’re considering an early exit from the workforce, make sure you’re prepared for the following four challenges first.

1. You’ll need more savings

Retiring early means you’ll have to cover more years of living expenses, and that means you’ll need a larger nest egg. This may not be a problem for you if you’re able to save a lot during your working years. But if you’re already worried about how long your savings will last, early retirement may not be the best move for you. Take the time to calculate how much money you’ll need for retirement if you haven’t already. See how this stacks up against what you’ve already saved and make sure you’re confident you’ll be able to set aside enough before your chosen retirement date comes around. If not, you’re better off delaying retirement for a while. It’s not ideal, but it’s much easier than trying to come up with extra income in retirement.

2. You may not be able to sign up for Medicare right away

Many retirees rely upon Medicare to cover a lot of their healthcare expenses in retirement, but you can’t sign up for this until you’re 65. Before then, you’ll need to obtain health insurance elsewhere. Many people get coverage through their employer, but this may not be an option if you retire early. If you’re married and your spouse is still working, you may be able to get health insurance through your spouse’s employer. Otherwise, you may have to purchase an individual health insurance plan. Some employers may allow you to remain on your existing health insurance plan for a time after you retire as well, but this is rarely your most affordable option. Whatever you do, don’t go without insurance until you’re old enough for Medicare. Even if you’re reasonably healthy, you never know when you could experience an injury or other medical emergency. A single ER bill could cost thousands or tens of thousands of dollars, and that could take a huge chunk out of your retirement savings.

3. You could face penalties for tapping your retirement savings

The government discourages you from making early retirement account withdrawals by charging a 10% early withdrawal penalty if you’re under 59 1/2. There are exceptions for this for things like large medical expenses. But if you don’t qualify for one of these, you could find it difficult to access your savings. You can combat this by anticipating your needs and coming up with strategies to access your money penalty-free. For example, you might keep some money in a taxable brokerage account that you can draw upon freely until you turn 59 1/2. Or you might withdraw Roth IRA contributions if you have them since you can take these out penalty-free at any age. You may also be able to make some penalty-free 401(k) withdrawals if you’ll turn at least 55 in the year you retire. Think about whether one or more of the above strategies works best for you. You could always continue to work at least part-time as well if you’re worried about penalties for accessing your retirement savings early.

4. You may not like all the extra downtime

Some people love all the free time retirement gives them, but others can feel like they’re lacking purpose once they’ve quit the workforce. Some people also find it difficult to fill all their extra time, especially if they don’t have close friends or family to spend it with. It’s not always easy to predict how you’ll feel until you’re actually in retirement. But having some sort of backup plan in case you don’t enjoy early retirement is a good idea. You might be able to fill your time by getting involved in community activities. Or you could always rejoin the workforce on a part-time basis to give yourself a chance to socialize and help others. None of these things are intended to discourage you from retiring early if that’s something you really want to do. Many people who retire early are happy with their decision. Just remember that even in retirement, personal and financial challenges will still arise. Planning for the above issues now will give you one less thing to worry about after you leave the workforce.