Retirement can mean different things to different people.
Some people are forced into early retirement for various reasons, usually budgetary. Millions of Americans were forced to retire early during the pandemic.
For others, early retirement seems to be a goal within itself.
Some aspire to the FIRE movement, standing financial independence, retire early. FIRE adherents are determined to retire as early as possible, in their 40s or 50s or earlier if possible.
If you are considering early retirement, then you should have a sizable amount of savings and a matching budget for your lifestyle. Otherwise, you could lose money, end up working again, or lose purpose.
Here are four reasons why early retirement can be a bad idea.
You will spend a lot on health care
If you wait until you are 65 to retire you can apply for Medicare to help pay for medical care in you old age.
The typical American pays more than $10,000 annually for medical care. That estimate is projected to increase to $15,000 annually by 2023.
Private insurance premiums range from $350 to $450 a month for healthy middle-aged applicants. Unless you are retiring rich, you might be better off keeping a job with insurance.
You’ll lose out on years of compound interest
The average interest rate for a savings account ranges between 0.40% to about 0.60%, depending on where you bank. Investments return more.
Let’s imagine that you manage to save $250 monthly, or $3,000 annually, from your paycheck from age 24 to 55. That amounts to $93,000 over 31 years.
If you never withdraw money, have an average interest rate, and get nice returns on investments, your $93,000 may double or better due to compound interest, and more if you invest.
You lose out on years of interest payments by retiring early.
You could outlive your savings
A retirement fund must pay for your annual living expenses until you die. And you could easily outlive your savings and be back at square one.
The average human being lives to age 80. Considering modern medical advances, you could live into your 90s if you maintain a healthy lifestyle.
If you retire at 65, your retirement fund must last 15 to 20 years. But if you retire at age 55, your retirement fund will have to last at least 25 years or more.
Your may lose purpose
What will you do with so much free time? If you retire at age 55 and live to be 90, then you will be retired for 35 years.
What will be your purpose in life? Will you work part-time? Do consulting work? Travel? Sit at home?
Going from a lifetime of full-time work to sudden retirement can be psychologically traumatic. A vocation can double as an identity for many people. What are you if you do nothing for 35 years?
Don’t retire early for its own sake or just because you can. Think about what will give your life meaning for the next three decades, or more, of retirement.