3 Ways Retiring Early May Actually Backfire on You
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J. David Herman
5 min read
Dreams of early retirement often go something like this: You ditch your job before the traditional retirement age of 65, sometimes well before. You no longer need to work. If you do go back, it’s doing something you enjoy, on your terms.
You have all kinds of time to do whatever you like, from sleeping late to playing golf to seeing friends to traversing the world. You do all this with (hopefully) a lot of years of life left.
Financially, you’re all set. Your health is still good. Everything is awesome.
In reality, early retirement isn’t always that simple — or always the correct decision. There are financial, social and other types of factors to consider.
“Yes, things can go wrong if you retire early,” said David John, a senior policy analyst for AARP. “There is risk in everything.”
When you leave the workforce earlier than planned, you decrease your earning time and increase your spending time. Even if you do have a good-sized nest egg and a strong spending plan, you never know how that will turn out.
“That’s No. 1, 2 and 3 when it comes down to it,” John said when asked about the biggest potential pitfalls of early retirement.
“Discovering that the amount you need to spend is higher than you expected. That’s where inflation comes in. Discovering that the way you structured your retirement left you vulnerable to market volatility.”
Julie, the otherwise anonymous creator of the One Frugal Girl blog and an early retiree herself, concurred.
“There are plenty of things that occur that can make your savings not enough,” she said. “It’s also easy to get off-track. You have to have a pretty big buffer, because you never know what’s going to happen.”
If you quit early and plan to remain out of the workforce, there are numerous financial factors to keep in mind – and not just the loss of a steady paycheck.
For starters, retirees have a tendency to reward themselves with trips and other goodies in the early days of retirement. So make sure you’ve planned for that.
You should also consider the effects of drawing Social Security at say, age 62 rather than 66 or 67. That means your benefit will be smaller, and there are also inflation-related implications that many fail to consider.
“In an inflationary environment, Social Security is one of the few benefits that has an inflation protection,” John said. “If you file earlier, that means less of that protection.”
He also advises caution around dipping into that 401(k) earlier. You may be leaving a substantial amount of earnings behind.
“One thing that hits in terms of early retirement is that with your 401(k), you can get some of your highest growth in later years of employment,” he said. “The way you succeed is having that interest on interest on interest.”
Other concerns include becoming too risk-averse when it comes to your investments. It’s possible to put too much of your money into safer but lower-earning investments, which may end up hurting you. John also stresses the importance of just knowing thy financial self.
“You have to have a pretty good idea of what you spend,” he said. “It’s surprising how many people don’t have a handle on that.”
2. You and Your Partner Diverge on Your Lifestyle and Spending
Not flying solo? Even if you and your partner are aligned on early retirement during the “early” part, it doesn’t always stay that way.
“Sometimes a couple is not on the same page,” Julie of One Frugal Girl said. “One of them is thinking, ‘I want to retire early, I want to quit the 9-to-5.’ Then, one of them is thinking, ‘I don’t get to travel enough. I want to remodel the house.'”
“Or they travel the world for a year, then they get bored,” Julie added.
Finances aside, it’s also worth considering that suddenly having someone home most of the time, maybe for the first time in a long journey together, is a big adjustment. Results may vary.
3. You Miss Work and the Social Contacts
Unless a bunch of your friends are retiring early at the same time, you may not have quite as many social engagements lined up as you’re hoping.
“People say ‘I’ll do all the things,” Julie said. “I’ll have lunch with Susie.’ Susie is still at work. They think, ‘I’ll travel the world with my friends.’ Your friends are still at work.”
Leaving your day-to-day interactions with at-work friends could also be challenging. You may of course still find time to see those friends, or you may make new friends.
John shared that the subject came up multiple times during bus rides into Washington D.C. for work, earlier in his career. For whatever reason, those bus rides included cautionary tales around retiring early.
“The people who retired early often found that they lost purpose,” John said. “They lost social contacts. A lot of our day is connection to the people we work with. One guy went back to work, basically because he was alone.”
“Another guy regaled us with stories about all of the things he was going to do. After some months of catching up on sleep, I think he was a golfer … he was terminally bored,” John said. “He ended up going back to work at a non-profit.”
For some early retirees, a sense of purpose can be fleeting. Julie, a former software developer who has achieved financial independence, has been helping out at school libraries and considering a second career involving library science.
“If you retire early, you have to find an area where you’re needed and wanted,” she said. “It’s not just sitting on the beach drinking Mai Tais.”
