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For some, early retirement is a dream. For others, it’s a disaster. Some people want to retire early, while others are forced to due to layoffs and a tough job market. Either way, if you’re looking at the possibility of retiring early, here’s an overview of the possible consequences—both financially and on your health.
Financial Consequences of Early Retirement
On Social Security
The earliest you can begin to withdraw Social Security benefits is age 62. The earlier you withdraw benefits, however, the lower your monthly payments will be. The amount of money you’re owed on Social Security is calculated based on your earnings over your working life. Those who qualify for Social Security receive a statement every year detailing how much money they would receive if they retired that year—and you can check your statement for a realistic assessment of your Social Security earnings. You can also use the Social Security Administration’s online calculator.
Most pensions offer two payment plan options: withdraw your money in one lump sum, or get regular smaller payments. Depending on your pension plan, there may be penalties for retiring early—or for taking a lump sum as opposed to a monthly withdrawal. If you take the regular payment option, you’ll have help in budgeting your retirement—but you can’t get to all your funds at once in case of an emergency.
Lump sum payments require you to budget very carefully, and will probably need to be rolled into an IRA or another retirement account to avoid the withholding fees—which can sometimes be as high as 20%. If you roll over into an IRA, be aware that most IRA’s won’t let you withdraw money until age 59 unless the money is needed for medical expenses, home purchases, or educational expenses.
On Private Retirement Accounts
If you take the early distribution option before the age of 59.5 from a private retirement plan such as an IRA, 403(b) or 401(k), you may be subject to a 10% tax in addition to regular income taxes. This may also apply to Roth IRA’s, even if you’ve held the account for over five years and even though withdrawals from Roth IRA accounts are generally supposed to be otherwise tax-free.
You may be able to avoid this penalty in certain circumstances. And the penalty is larger for some accounts that you’ve only held for a short time. For example, if you have a simple IRA and have held the account for only two years or less, the penalty is a 25%–not 10%–penalty tax.
Health Consequences of Early Retirement
Retiring early can have either a negative or positive effect on health. For some, retirement can lead to deterioration and depression—either mental or physical. This can be mitigated for some by continuing to work part-time or by continued education and volunteer work. Studies show, however, that retirement can also be good for your health—if you retire with the sufficient means and resources to support yourself well into old age. In all, studies suggest that it’s the circumstances under which you retire—not the age at which you retire—that has the strongest effect on individual health.
Retiring early can be a great thing for some—and a problem for others. Whether you choose to retire early or have it forced upon you, however, retiring early can have real financial—and sometimes health-related—consequences. Be sure you have enough financial resources to support you well into old age—and be very careful not to overspend. Research the ways in which early retirement could impact your income taxes, pension, and Social Security payments—and talk to a financial advisor. If you do, you’ll have a much better chance of retiring under optimal circumstances.