The Retirement Corporation of America

The Financial Aspects Of Early Retirement

There is a crucial question to ask when you're thinking about retiring early: Can I afford it?

The whole point of building a budget is to help you figure out how much it will cost you to live in retirement. Elsewhere in this lesson, you will be asked to start projecting how much you will have to live on after retiring. Almost certainly your calculations will point to a budget gap—with your projections calling for spending to outrun income. If that's the case, you can:

• Decide to keep working longer, to increase your potential retirement income.
• Decide to retire early, by scaling back your projected retirement spending.
• Split the difference—retire early from full-time work, while keeping income flowing in through a part-time job.

The cold, hard reality is that early retirement—no matter how good it sounds in theory—sometimes can deliver a financial blow you may never recover from. Consider these points about the financial side of retirement:

#1: The longer you work, the bigger your retirement nest egg will grow. That one should be obvious. Let's say you are currently saving $20,000 a year toward retirement, with the money invested in tax-sheltered retirement savings plans. You give up plans for early retirement and decide to work three years longer. That's another $60,000 in your nest egg. Invested to earn 8 percent a year compounded, over 10 years that $60,000 will grow to $129,536—money that early retirement would have cost you.

#2: The longer you work, the bigger your pension will be. Company pensions typically are paid on the basis of years on the job and income in your last working years. The longer you work and the more you earn in those last years, the bigger your pension will be. Other things being equal, each year you defer retirement will add substantially to your pension benefit.

#3: The longer you wait, the bigger your Social Security benefit will be.
You can begin drawing benefits at 62, but you'll only get 80 percent of the benefit you're due, unless you wait until your normal retirement age, when it reaches 100 percent. The maximum your spouse can receive, if you file for a combined benefit, is 50 percent of your benefit. In other words, you get less by starting to collect benefits at 62, and so does your spouse.

#4: Wait a little longer and your Social Security benefit will be even more. Thanks to the Delayed Retirement Credit, you will increase your benefit if you delay collecting until after your normal retirement age. Each year you delay, the amount is increased. However, even if you do decide to delay receiving Social Security benefits past your normal retirement age, you can still apply for Medicare at age 65.

The amount by which your benefit increases each year you delay retirement, depends on the year of your normal retirement age. Here's how that works, based on your year of birth:

Year of Birth     Yearly Rate of Increase in Benefit for Each Year Retirement Is Delayed

1931-1932        5.0%
1933-1934        5.5%
1935-1936        6.0%
1937-1938        6.5%
1939-1940        7.0%
1941-1942        7.5%
1943 or later     8.0%

Summing up, you pay a high financial price for taking early retirement. Unless you are aware of the cost, and have cast your retirement plans accordingly, you could wind up in a deep financial hole.