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Early Retirement Can Create a Financial Crisis


Not many people would pass up the opportunity to retire early. In fact, there’s an entire movement built around the idea of early retirement – Financial Independence, Retire Early (FIRE).

Need help planning for retirement? Consider working with a fiduciary financial advisor.

But as nice as early retirement sounds, it comes with two compounding problems. First, investors have less time to save and allow their investments to generate compound gains. Second, they’ll depend on the money those investments produce for even longer than they would if they continued working.

A new research report – “Hiding Behind the Averages” – from Allspring Global Investments puts that reality into perspective. The report finds that retiring three years earlier than expected significantly increases the chances of not meeting retirement income needs.

“A key takeaway from our research is retirees are doing well but near-retirees are struggling and concerned,” said Ron Cohen of Allspring. “The three biggest areas of concern we found revolved around taxation, Social Security and Medicare, and these topics are ripe for guidance and education.”

How Early Retirement Increases Risk

Early Retirement Can Create a Financial Crisis

The study finds that a retiree planning to replace 80% of their working income would see the probability of hitting a financial shortfall increase from 13% if they retire at age 65 to almost 35% if they retire just three years earlier at age 62. Adjusting to a lower replacement rate for pre-retirement income – from 80% to 70% – reduces the overall risk of a shortfall but the trend holds firm. Instead of a 5% potential shortfall by retiring at age 65, the risk rises more than 20% if retirement happens three years earlier.

That risk is all the more concerning because many retirees end up leaving work early not because they want to or can afford to, but rather because of a job loss or health issue.

However, the study found that the risk of running into a financial shortfall was greatly reduced if retirees didn’t leave work entirely but continued to earn income by working just 10 hours a week. In that case, the shortfall risk fell from 12% to 5%. Retirees who remain active also see an improvement in their overall health and well-being, which can reduce their medical costs.

Other Retirement Considerations

Early Retirement Can Create a Financial Crisis

Social Security and Medicare benefits also are important considerations when deciding when to retire, the study found. Three-quarters of near-retirees who were surveyed as part of the study said collecting both types of government benefits will influence when they stop working. Of retirees, 60% said their Social Security benefits were an important consideration for the timing of their retirement, and 57% said Medicare was a factor.

Also on Social Security, a third of the near-retirees said they already were drawing a monthly Social Security check even though they were still on the job. Upon retirement, 44% of retirees said they immediately began collecting benefits, while 60% of near-retirees planned to do the same.

While deciding how and when to collect Social Security benefits and making Medicare selections are daunting challenges, half of near-retirees rely only on themselves to understand these complicated federal benefit programs. The near-retirees reported that 48% of them want help enrolling in Medicare, while 47% said they weren’t confident that they’d be able to get all the Social Security benefits to which they are entitled.

The survey, conducted by Escalent during August and September, polled 1,504 working Americans (with an average age of 60) and 1,254 retired Americans (with an average age of 70).

The Bottom Line

Early retirement sounds great, but it takes lots of planning to make it a reality. That’s because retiring early can come with a significant risk: running out of money. A recent study found that a person who intends to replace 80% of their pre-retirement income and retire at age 62 is nearly three times as likely to run out of money in retirement than if they retired at 65. However, adjusting your income replacement goal and working part-time in retirement can significantly reduce this risk.

Retirement Planning Tips

  • If you’re 50 or older, consider supercharging your retirement savings with catch-up contributions. In 2023, the IRS allows people who are 50 and older to save an extra $7,500 in a 401(k) or workplace account, as well as $1,000 in an individual retirement account (IRA). That means you can contribute up to $30,000 to a 401(k) and $7,500 to an IRA in 2023.
  • Finding a qualified financial advisor to help you plan for retirement doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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