Can I retire at 55? Most people retire in their 60s, and the average age of retirement is steadily climbing. That doesn’t mean you have to wait until then. Many people choose to retire early, and doing so can help you achieve your goals, enjoy more experiences and take more pleasure in your day-to-day activities. Here are four advantages to retiring sooner rather than later.
Four benefits of early retirement
1. You’ll be motivated to increase your income.
If you start planning for early retirement now, you’ll be more motivated to make wise investments as well as work longer hours to increase your income as much as possible now. This might mean taking on part-time work in addition to your full-time job. Working more now may create added stress, but it will pay off in the long run.
Consider types of investments that will help facilitate retirement. Converting investments into a Roth IRA will help you save money in taxes. While money is taxed when you initially invest it, it is not taxed when you withdraw it when you retire. Keep in mind that there are income limits as to how much you can contribute to a Roth IRA, and annual contribution limits of $5,000 for people under 50 and $6,000 for people aged 50 and older.
If your 401(k) or 403(b) plans allow you to do so, you may also make Roth contributions within your accounts. After age 50, you’ll also be able to make catch-up contributions to employer-sponsored retirement savings plans, such as your 401(k), meaning you can contribute a greater percentage of your paycheck to retirement savings than you would have previously.
Penalties to remember
Keep in mind that you’ll be penalized if you withdraw from your retirement savings accounts early. When it comes to 401(k) plans, a penalty is imposed if people withdraw before the age of 59 ½. You may want to keep your money invested longer, so you’ll earn more interest if it’s not necessary to withdraw it then. That’s why maximizing your income earlier will pay off later and may enable you to retire early.
Making other investments through the stock market, real estate market and businesses can also help you increase your wealth in preparation for retirement. It’s a good idea to speak to a financial counselor to discuss the best options for you and your individual situation.
2. You’ll be healthier.
Working is associated with many unhealthy behaviors, including lack of sleep, less movement (especially if you work at a desk all day) and poor diet. If you retire early, you’ll not only be able to move around more and sleep longer, but you’ll also have more time for exercise and cultivating healthier eating habits. You’ll also be dealing with less stress, so you’ll be enjoying improvements to your psychological health as well.
3. You’ll have more time to spend with your family and pursue new activities.
This is a no brainer and one of the biggest motivations people cite for wanting to retire early. If you retire early, you’ll have more time to spend with family and friends. You’ll also be able to pursue activities and hobbies that you might not have had time to do in the past. You can start or continue checking items off your bucket list: hike the mountain you've always had your eye on, travel to the country you've meaning to visit or go on the adventure that been a lifetime dream.
Also, retiring early doesn’t mean you can’t still work part-time. Many retirees continue to work on a freelance or part-time basis. That way, you’ll still be earning some income, but won’t be tied down to a schedule and will have more flexibility and free time.
4. You’ll spend less.
Since most people wait until they’ve paid off big expenses, such as student loans and mortgages, to retire, they generally find that they have more money to spend. You should wait until you’ve paid off any debts you’ve incurred to retire.
When you have more free time, you’ll also have time to search for better deals on items you want or need. For example, you can travel during off-peak seasons, which is generally more affordable than visiting destinations during tourist seasons and participate in cheaper events at non-peak hours.
You might also have time to take up new hobbies that could even earn you unexpected income. For instance, if you take up painting, you might sell your artwork to make a little extra cash.
You also won’t have work-related expenses, such as dining out for lunch or transportation (since you won't be traveling to work every day), which can really add up.
A couple caveats…
While retiring early has numerous benefits, you should also keep in mind that there are several potential consequences. You should account for these disadvantages as you formulate your early retirement plan and make sure that the benefits outweigh the costs before you make any decisions.
What age can you take early retirement?
For instance, you won’t be able to start receiving Social Security benefits until you’re 62. If you decide to start taking them as soon as you turn 62, your payments will be smaller than they would be if you waited until 65 (full retirement age). If you waited until the maximum age of 70, they would be even higher. While you’ll receive more money earlier on, since you’re starting at a younger age, there is a threshold at which someone who waits will catch up to and exceed the total Social Security earnings of someone who starts earning Social Security benefits early.
Can you claim any benefits if you take early retirement?
Of course, this tipping point depends on how long you live. If your life expectancy is shorter, you will ultimately see more earnings from Social Security within your lifetime compared with someone who waits to collect and lives the same amount of time as you do. It’s impossible to predict exactly how long you’ll live, and, of course, if you have an illness that is your motivation for retiring early, it may be well worth it to begin collecting your benefits at 62. As we mentioned earlier, you will also incur a penalty if you withdraw from your 401(k) before you turn 59 ½. Again, you should weigh the pros and cons of withdrawing from your account early. If you need the income, it might be worth it; however, trying to earn income in other ways may be a better option, so your retirement account will be worth more in the long run.
How much do I lose if I retire early?
That reduction in your Social Security benefit amounts to 5/9 of one percent for every month you claim before reaching full retirement age for up to 36 months. After 36 months, the reduction is 5/12 of 1 percent per month. The maximum amount of this reduction is 30 percent. This chart shows you the deduction you can expect depending on when you retire.
You also won’t be eligible for Medicare until you turn 65, so you’ll need to find another source of health insurance. If your spouse continues to work, you may be able to share that plan. Otherwise, you should look into other means of receiving health insurance. You may be able to arrange continued coverage through your employer, and you can also buy it directly from an insurance company. Keep in mind and make sure to account for the additional expenses you will incur when you don’t receive health insurance through work.
Retiring early can have many benefits. If you create a retirement plan now, you can lay the groundwork to ensure that your financial future is secure, and you’ll be able to enjoy your much-deserved break.