For many people, early retirement is a dream. With proper planning and discipline, this dream can come true. Unfortunately, people often don’t fully understand what early retirement will mean for their financial future, physical health, and emotional well-being.
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Before you quit your job at around 55, you need to think about what life is like as a retiree. Can you imagine traveling the world or helping take care of your grandchildren? Are you ok with living on a tight budget or do you want retirement life to be full of excess and extravagance? Writing down your plans and meeting with a financial advisor can help you achieve your retirement goals at any age.
Consider these important pros and cons of early retirement before embarking on your next adventure.
Pros: More family time
A recent survey by the American Advisors Group (AAG) found that the most anticipated retirement activity for baby boomers is spending time with family. However, baby boomers weren’t the only ones thinking about their loved ones when deciding where to retire. The main factor in deciding where to spend their golden years for respondents born between the early 1980s and the late 1990s was proximity to family.
So, for people whose retirement is filled with the laughter of grandkids and family reunions, getting out early can provide just that. Without a doubt, stepping away from your 9-5 before full retirement age (67 for those born in 1960 or later) can help you spend more quality time with your loved ones. And, the best part is, spending time with family doesn’t have to be expensive.
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Disadvantage: money problems
The earlier you retire, the more money you will need. One thing you don’t want to do is outlive your savings. Depending on the type of retirement you are considering, you will need to do substantial planning ahead of time.
Early retirees hoping to live on Social Security will have two big problems. First, you can’t start receiving Social Security retirement benefits until age 62, but even if you wait until that age, your benefits will be reduced by 25-30%.
Second, it is expected that the reserves of the trust fund will be exhausted in 2037, which means that at that time pensioners will only receive part of their benefits. Pre-retirees will need to plan accordingly and may not be able to rely on government programs.
Pro: Second chance at a career
On the plus side, retiring early gives you a chance for a fresh start. When you entered the workforce, you may have accepted a position not because you liked it, but because it put food on the table. Retirees are often able to choose the work they do based on what satisfies them, not how much income it brings.
A well-planned early retirement can allow you to volunteer for a non-profit organization or work as an elementary school teacher’s aide. After all, retiring doesn’t necessarily mean that you stop working altogether, it may just mean that you allow yourself more flexibility and freedom in what you do.
Con: Early Withdrawal Penalties
One of the biggest downsides to retiring too soon is that you can incur penalties if you withdraw early from certain retirement accounts such as your 401(k). Although there are exceptions, it’s generally best to try not to withdraw from your retirement accounts unless you have no other options.
Deciding how you are going to fund your retirement is something that should start early. Ideally, in your 20s and 30s, you’re putting money aside and accumulating significant savings that can help bridge the gap between early retirement age and full retirement age.
Advantage: Travel
According to the AAG Retirement Survey, the most anticipated retirement activity for Millennials and Gen Xers is travel. In fact, 35% of millennials are hoping to travel to Europe and 39% of Gen Xers are looking forward to traveling to the United States. So if jet-setting is your goal in your golden years, it might be a good idea to hang up your scorecard sooner rather than later.
The older you get, the harder it can be to travel, especially overseas. However, young retirees who hope to become frequent travelers will need to make sure they have enough money in the bank. Traveling is expensive and the last thing you want to do is run out of money a few years after retirement.
Con: Health insurance costs
One of the main reasons people continue to work until age 65 is the cost of health care. Pre-retirees face the harsh reality of the cost of individual health insurance plans. Depending on where you live, monthly premiums can cost anywhere from $500 to $1,000 per month. Without a stable income, trying to afford decent health care can become unmanageable. Retirees who can wait until age 65 can get low-cost coverage through Medicare.
Retiring early doesn’t have to be out of reach, but it takes a lot of planning to get it right. Start now by drawing what retirement means to you, then figure out how you will pay for it.
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This article originally appeared on GOBankingRates.com: Pros and cons of early retirement
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