Should I Retire Early? The Pros, Cons, and Hidden Costs [Video]

Retiring early might be your goal, or it might seem out of reach. In this video, we explore the financial pros and costs, as well as the hidden costs we see as financial advisors when clients retire early.

Video Transcript

Early retirement sounds like the American dream, but before you hand in your resignation, here are the trade-offs you should think through.

Hello, my name is Michelle and I’m a financial advisor here at Financial Design Studio. We help business professionals retire in a tax efficient way. If retirement is getting close for you, we have a free retirement guide that you can download, which is linked below.

One question we hear quite a bit is should I retire early? And the answer depends on much more than whether you have enough money.

What Do You Lose By Retiring Early?

First, let’s make a list of the things that you lose, or maybe the cons of retiring early.

Contribution Years

You’ll have fewer years where you’re contributing to your retirement accounts. Now, this may seem really obvious, but it is important to remember that each year that you’re adding money into those accounts. So now if you’re thinking of early retirement, you need to make sure that you have enough saved for both this early retirement, in addition to maybe the rest of your retirement years that you planned on.

Compounding Years

You’re going to have more years where you’re actually drawing from these investments. This means not only will you not be replenishing your accounts by contributing, but the compound growth will start to decrease. There will be less growth each year.

When people watch their investment accounts over the years grow, it’s very common that they will actually see their 401k grow much quicker. And sometimes they have this tendency to think, well, my 401k has better investments. But what they forget is they might be adding 20, 30, more thousand to that account every year, in addition to the growth that they’re getting. You need both contributions and compounding.

Healthcare

Now, one of the other biggest factors as something that you lose from your employer that you’re getting today is this health care. And healthcare is a really high cost that you have to cover until age 65 when you can start using Medicare. So if you’re retiring early, let’s say you’re planning to retire at 60. There’s five years where you need to cover the cost of that health insurance before Medicare starts. And so that’s where that can be a really large amount, monthly, annually. So again, it’s just something you need to plan for.

Social Security

Social Security is based on the years that you’re working. Retiring early could mean a decreased benefit in two ways. Either way, if your plan expects you to receive a higher benefit, this could mess up your retirement plan. Social security pulls from your top earning years. If you cut your career short, you restrict how much that benefit could be.

Or, maybe you start taking social security immediately when you are eligible at age 62. You will get a lower benefit since the government assumes you will be using it for more years. As a reminder, age 62 is the youngest that you can take Social Security, and the oldest is age 70. So anywhere in that window is when you can start your Social Security retirement benefits, but not before then. And after then, it doesn’t make sense. need to be taking those social security benefits once you reach age 70. We have a video on when early retirees should take social security benefits, which you can find here.

What Do You Gain By Retiring Early?

So now let’s make a list of the things that you gain or the benefits, the pros of retiring early. And then you can compare this to the cons of retiring early!

Relief from a Stressful Job

Now, one of the biggest reasons that we see people even considering the idea of retiring early is to step away from a very stressful job. And these are people who are working much more than 40 hours a week. Maybe there’s a lot of travel that they have to do. They really just don’t want to be away from their family. Or it’s just taking more toll on them health-wise.

A Healthy & Able Body

In line with that, maybe you want more years with a younger and able body to enjoy retirement. As a financial advisor, I see two different groups of retirees.

One, they do retire young. So their bodies and minds are healthier. It’s because they retired younger that they are able to travel and do these activities. They’re able to enjoy years of their retirement before they start having health concerns.

The other is someone who waits until a lot later to retire, usually because they enjoy what they do. But then when they retire, their bodies are older. These people spend their retirement years at doctor’s appointments and things like that. Maybe they didn’t take care of themselves while they were working or the stress over the years took its toll.

So that is very common that I kind of see these two different groups of retirees, and it’s not always dependent on the age they retire, but it does somewhat seem correlated. There is certainly some truth to that, and maybe some wisdom that you want to think about.

Young Grandkids

And then also your kids are probably having kids. Maybe you want to enjoy that time with the grandkids while they are still young. Additionally, maybe their kids need help managing the kids needs. And we will hear from many retirees they are taking kids to softball games, baseball games, swim meets, whatever that is. They’re helping because maybe their kids just need help and they want to pour back into their family.

Lower Income Years

Something else that you gain, that’s more of a financial planning piece, is low income years. If you retire early, you don’t have a paycheck anymore, but you also haven’t started receiving social security or hit Required Minimum Distribution years yet. This can really help with tax planning.

When you have low income years, there are opportunities to take some of your retirement income now rather than in later years. And from a financial planning perspective, retiring early if you weren’t expecting to, could actually help make your plan even better. This could be things like saving in advance into an HSA or making Roth Conversions. There are lots of strategies, but to know which is right for your retirement plan, that’s why you work with a financial advisor.

Example of Retiring Early

So let’s talk through this decision of whether you should retire early.

First, you want to consider the financial impact And here’s what I mean: here’s an example.

• Let’s assume that you have a portfolio, just for our example case, of $1,000,000.
• And let’s assume that each year you’re gonna get 7% growth from that portfolio. So you’re earning $70,000 each year.
• Now let’s assume that you’re someone who likes to travel because again, you’re retiring early, you like to travel, you really want to enjoy life to the fullest. And so let’s assume that you’re spending $10,000 per month in retirement. That’s $120,000 each year.
• When you net your growth minus your spending, you are actually short $50,000 from portfolio income.

Now, this isn’t a bad thing as long as your portfolio is large enough to sustain these withdrawals that you’re gonna need to take. How many years can you afford to take that $50,000? This is a crucial part of any retirement plan.

When we start to work on a plan, people will say, “We don’t know what we spend. We’re saving money, we’re paying taxes, but there’s really nothing extra left beyond that.” So we can assume that is what they’re spending. But going into retirement, they’ll want to start adding things, maybe like some travel and fun activities. That’s the reason it’s so important for retirees, especially early retirees to understand their expenses.

If you don’t know what you’re spending, then it’s going to be really hard to make sure that your plan is going to work. A lot of times we say that we want to plan to fail on the screen instead of real life. Nobody wants to plan to go back to work once they’ve retired, especially if you’re retiring early.

Don’t Underestimate the Personal Impact

With that said, you don’t want to overlook the personal impact. Sometimes the “financial best” answer isn’t what’s best for you. Like we mentioned, when you retire early, now you’re younger, you have more energy, you have more freedom to do things.

This is where every person or every couple has to make this decision for themselves once they’ve looked at the numbers. Is it worth a tighter budget for more years to enjoy? At the end of the day, it’s up to you!

Your Next Steps

Retiring early can feel like a permanent decision, something you don’t want to mess up. That’s why people nearing retirement work with financial advisors like us who manage investments alongside comprehensive planning. This is how you retire with confidence.

And if you want our team of financial advisors to support your retirement plan, this is what we do best. Our team specializes in tax efficient retirement planning for individuals with executive compensation. So you stay on track all year, every year, reach out to our team at to schedule a 30 minute consultation.

We’ll see you there or in the next video!

Bonus: Our Free Retirement Planning Guide!