6 challenges to consider if you plan to retire before age 65

Someone who listens to financial expert Clark Howard’s podcast recently asked about early retirement.

Her husband, a few years older than her, hopes to retire at 62, leaving a health insurance gap before becoming eligible for Medicare.

She expressed some concern about the need to purchase health insurance for the two outside of her husband’s job.

This got us at Team Clark thinking: What are some of the challenges of retiring before 65?

It is a common desire. More than half of Americans planned to leave the workforce before age 65, according to a 2019 American Advisors Group survey.

But taking early retirement can be difficult financially, socially and in terms of health.


1. Medical insurance and expenses

The bad news: Paying for health insurance on your own in your 50s and 60s before Medicare eligibility costs a bundle.

Your exact cost will vary depending on location, age, and a number of other factors. But monthly premiums can easily reach $ 1,000 and more as you approach normal retirement age.

Let’s say you retire in 2022 at age 60 and pay $ 25,000 for health insurance the first year. Medical inflation tends to be high, so let’s increase your annual costs based on a 5% price increase. You would pay $ 138,140.79 for five years of health insurance before becoming eligible for Medicare.

Double that cost for you and your spouse and your bill is over $ 275,000.

Fortunately, there are a number of silver liners available.

Massively higher premiums for people approaching retirement age were previously worse, Clark says. Now, under the Affordable Care Act, you are eligible for exchange grants on Healthcare.gov. And you’re not skewered (like you used to) for pre-existing conditions.

You can also predict the costs to a certain extent. Go to the site now, says Clark, and calculate how much it would cost you to buy your own insurance this year.

You can choose a lower level of coverage to protect your portfolio. You may also be able to join a religious cooperative for health coverage. But Clark notes, “These policies often won’t cover critical illness … but they will cover routine care at a much lower monthly premium.”

Overall, when it comes to paying for your own health insurance in your 50s and 60s, “I want to tell you, this isn’t a walk in the park,” says Clark.


2. Loss of income and / or identity

Personally, I think the adage “Do what you love and you will never work a day in your life” is a myth.

For example, I love ice cream. But if you forced me to eat ice cream more than 40 hours a week, 50 weeks a year for 40 years, I wouldn’t like ice cream that much.

I guess for most people the biggest incentive to work is to earn an income. Fewer people would continue to work if they obtained sufficient financial security.

However, it’s hard to feel 100% financially secure, especially when the future is so unpredictable. Earning a large and substantial income is a great form of security.

Plus, if you retire early, you’re giving up what could be top years in terms of earning potential – not to mention more years of potential correspondence with a 401 (k) company.

As humans, many of us are programmed to feel good about a hard day’s work. This is even more true if you feel like you are in a respected field or if you derive a great deal of your identity and self-confidence from what you do.


3. Potentially lower social security benefit

If you were born after 1959, you will be considered “full retirement age” at age 67. But you will have to wait until age 70 to start receiving Social Security to receive your maximum possible benefit.

However, you can start receiving social security benefits from age 62. You will sacrifice the amount of your benefit in order to get a fixed income sooner.

If you retire early and need the extra cash to, say, pay for your health insurance until age 65, you could be sacrificing the amount of money you get from Social Security in the long run.


4. Inflation and increased spending

The money saved in retirement will not have the same purchasing power in your later years.

This is true no matter what age you retire. But the earlier you retire, the more time inflation has to eat into your income, assuming your portfolio isn’t structured to outpace inflation. (This is one of the reasons Clark recommends target date funds.)

According to the Denver Post, inflation of 2% for 40 years will require you to spend 220% more money to maintain your purchasing power. It is the difference between buying something for $ 100,000 now or the same for $ 220,000 four decades from now.

Some people also maintain a higher burn rate in retirement than when they were employed. If you hope to travel, eat out, and enjoy the good life with the extra time you have, you could be spending more per month than before retirement.

It is essential that you take inflation into account and allow for a margin of error for your planned spending.


5. Increased potential for financial crisis

The markets are collapsing. Natural disasters happen. Unforeseen circumstances arise.

The longer you live, the harder it is to predict what might happen like a financial crisis. Even insurance companies, with untold amounts of data and actuaries to model from, struggle to financially model three and four decades into the future.

The “4% rule” is a popular retirement philosophy. It is based on historical data representing a 30-year retirement. You may need to be even more careful and spend almost 3% of your investment portfolio per year the sooner you retire.


6. Health impact

“Early retirement can be a risk factor for mortality, and extended working life may offer survival benefits for American adults,” according to a 2016 study from the National Center for Biotechnology Information.

The National Bureau of Economic Research conducted a study in 2008 that found that retirement leads to decreased mental health and mobility as well as more common medical conditions such as heart disease and stroke.

“Use it or lose it” may not be true in all aspects of life, but it is clearly true when it comes to mental and physical well-being.

Medicare claims also tend to increase with age. A large percentage of us will eventually need some form of long-term health care. The younger you are when you retire, the less you can consider and financially prepare for this kind of event.


Other potential challenges for pre-retirees

  • Penalties for early withdrawal. Generally, if you withdraw from a retirement account such as a 401 (k) before you are 59 and a half, you will have to pay a significant penalty. If you’ve conscientiously put a huge percentage of your retirement money into one of these accounts, it can be difficult to retire early without needing to access it.
  • Spouse overload. Being at home all the time can be a huge adjustment for one or both partners, especially if one or both are retiring from a desk job.
  • Others stay busy. You can expect to spend a lot more time with your friends, neighbors, or family members. But just because you’ve freed up your schedule doesn’t mean that they also have more free time.
  • No more risk in the market. To counter inflation (and historically low interest rates today), you may need a more aggressive investment strategy than your peers who only retire at 65 and over. If your income is not the same, your risk tolerance may change despite the need to stay invested in the stock market.
  • Lack of routine. It is possible to miss the daily routine and purpose that comes with work. Also, if you are bored and decide to work again in your 50s or 60s, it may be more difficult for you to find a job.

Final thoughts

Apart from a bigger pile of money than you initially think, there may be another key to early retirement. And that is to have a plan for what you want to do with your time. It can mean hobbies, family time, charity work, getting involved in a church, or a combination of things.

I thought a pre-retiree explained it well to Business Insider:

“Basically, if you have plans that will keep you busy in retirement and you initially hated your job, retirement is probably going to be great for you. If you have no idea what to do in retirement, it could be hard on you (and your health).

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