3 Unexpected Problems With Early Retirement

A lot of people push themselves to save money aggressively during their working years so they can kick off retirement ahead of schedule. And if the idea of early retirement sounds good to you, you may be maxing out your 401(k) or IRA in the hopes of pulling it off.

But you should know that there are certain challenges you might face as an early retiree. Here are three you should think about carefully before moving forward with those plans.

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1. You could be penalized for tapping your savings

It can be beneficial to save for retirement in an account like a traditional 401(k) or IRA. That way, you can enjoy tax-free contributions and tax-deferred gains.

But if you tap one of these accounts before turning 59 and 1/2, you'll typically face a 10% early withdrawal penalty. And this holds true even if you can show the IRS proof that you've left your job and are officially retired.

Now there is one potential exception. If you have a 401(k) and you leave the employer sponsoring that plan in the calendar year you turn 55 or later, you may be eligible for penalty-free withdrawals. But unless that applies to you, you could be looking at harsh penalties just to access your money.

If you know ahead of time that you want to retire early, it could pay to keep some of your savings in a taxable brokerage account. You'll lose out on certain tax breaks, but you won't risk being penalized for accessing money that's yours.

2. You might struggle to cover the cost of health insurance

Many seniors are able to afford health insurance because they're eligible for Medicare at 65. But if you're retiring early, it may be way too soon to sign up for Medicare. And that means you'll have to cover the cost of health insurance yourself.

Now the amount of money you'll be looking at will hinge on factors that include your specific age, where you live, and how you decide to access insurance. But unless you're able to join a spouse's health plan, your costs could be quite high.

Meanwhile, retiring early puts you at a greater risk of depleting your nest egg in your lifetime, since your money has to last longer. If you're forced to withdraw a large chunk of your savings to cover health insurance for many years, that only adds to that risk.

3. You could end up bored and miserable

A 2024 MassMutual survey found that most people are happier since retiring. But 8% of respondents said they're less happy in retirement.

Granted, that's a pretty small percentage. But if you're someone who thrives on being busy, you could end up a part of it if you retire early.

Of course, retiring at any age means giving up your job and routine, which could lead to you feeling bored and unhappy. But retiring early means having to grapple with that situation even sooner. And if you retire at an age when you still have a lot of energy, you may find yourself overwhelmingly restless in the absence of having a job.

Before you retire early, think about what it means in terms of your savings, costs, and day-to-day routine. You may find that you're better off working a bit longer or scaling down to part-time work for a few years as a compromise.

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