Many individuals aspire to reach the stage in life where they no longer have to work. However, retiring early, whether by choice or necessity, can have significant implications for your financial situation and health insurance.
According to recent studies, a considerable number of workers retire earlier than they had initially planned. In a survey conducted by Allspring Global Investments, 37% of respondents reported retiring sooner than expected. Similarly, the 2023 Employee Benefit Research Institute/Greenwald Research Retirement Confidence Survey revealed that 46% of participants retired earlier than intended.
One of the most significant financial setbacks resulting from early retirement is the potential depletion of one’s retirement savings. By leaving the workforce prematurely, individuals may miss out on valuable years of contributing to Social Security, particularly if they are at the peak of their earning potential. Furthermore, they may fail to accumulate sufficient funds in accounts such as their 401(k) or IRA. In some cases, individuals may be forced to tap into their nest egg ahead of schedule, leading to a reduction in compound interest and equity returns.
While some workers choose to retire early because they have achieved their financial goals ahead of time, the majority do so due to factors beyond their control, such as layoffs or health concerns affecting either themselves or their partners. According to the aforementioned EBRI survey, out of the 46% who retired early, 35% attributed their decision to health problems or disabilities, while another 31% cited changes within their company.
Nate Miles, head of retirement at Allspring Global Investments, highlights the challenging circumstances faced by those who retire early: “You have less time to save, and more time to live off it, so you’re getting hit on both sides.”
Considering these challenges, it becomes even more crucial to save as much as possible during your working years. Recognizing this need, the Internal Revenue Service allows individuals aged 50 and over to make “catch-up contributions” to their 401(k) accounts. In 2024, the maximum catch-up contribution limit is an additional $7,500, bringing the total allowable contribution to $30,500 for those in this age group. If you are turning 50 at any point in 2024, you can begin making catch-up contributions now.
In the event that you are compelled to retire early and your health permits, taking on a part-time job can help bridge the financial gap until your planned retirement date. Even if it does not cover all of your expenses, the income from a part-time job could enable you to withdraw less from your retirement accounts and delay claiming Social Security benefits.
Retirement and Social Security
The decision of when to start taking Social Security benefits is a recurring topic of debate among retirees. For individuals born in 1960 or later, the full retirement age is 67, entitling them to 100% of their benefits at that point. The age differs slightly for those born before 1960. However, claiming benefits at the age of 62 results in a permanent reduction of 30% compared to the full retirement age amount. On the other hand, delaying until age 70 increases the benefit to 124% of the full amount.
It’s important to note that this decision isn’t binary. Every month of delay in claiming Social Security can result in additional funds in your monthly benefit check.
Health Insurance Considerations
Retiring before the age of 65 poses additional considerations, particularly regarding health insurance coverage until Medicare eligibility kicks in. Individuals who are laid off may qualify for Cobra coverage for up to 18 to 36 months, but typically at the cost of premiums plus an additional 2% administrative fee.
With the implementation of the Affordable Care Act, also known as Obamacare, individuals can explore insurance plans available through HealthCare.gov. These plans may offer more affordable options, especially since government subsidies have been expanded until the end of 2025. However, it’s important to recognize that these plans often come with high out-of-pocket costs. For marketplace plans this year, the maximum out-of-pocket limit is $9,450 for individuals and $18,900 for families.
Personal Experience
Sue Shearer, an experienced registered nurse in the Seattle area, initially planned to retire at the age of 62 and rely on her husband’s health insurance until he retired at 67. However, when her husband decided to retire at 65 (given that he is two years older), she reconsidered her plans and chose to remain employed.
According to Sue Shearer, “It made more sense to keep working, save money, and maintain my own health insurance.” Now at the age of 64, she’s glad she decided not to retire early.