6 Challenges To Consider if You Plan To Retire Before 65

Someone who listens to money expert Clark Howard’s podcast recently asked a question about early retirement.

Her husband, older than her by a few years, hopes to retire at 62, leaving a health insurance gap before they become eligible for Medicare.

She expressed some concern about needing to buy health insurance for both of them outside of her husband’s job.

It got us thinking at Team Clark: What are some of the challenges of retiring before age 65?

It's a common desire. More than half of Americans planned to exit the workforce before 65 years old according to an American Advisors Group survey in 2019.

But retiring early can be challenging financially, socially and in terms of your health.

1. Medical Insurance and Expenses

The bad news: Paying for health insurance on your own in your 50s and 60s prior to Medicare eligibility costs a bundle.

Your exact cost will vary by location, age and a number of other factors. But monthly premiums can easily reach $1,000+ as you approach normal retirement age.

Let’s say you retire in 2022 at age 60 and pay $25,000 for health insurance the first year. Medical inflation tends to be high, so let’s increase your annual costs based on 5% price increases. You’d pay $138,140.79 for five years of health insurance before you become eligible for Medicare.

Double that cost for you and a spouse and your bill becomes more than $275,000.

Thankfully, there are a number of silver linings.

The massively higher premiums for people approaching retirement age used to be worse, Clark says. Now, under the Affordable Care Act, you may qualify for subsidies on the exchange at healthcare.gov. And you don't get skewered (as you used to) for pre-existing conditions.

You can also plan on the costs to some extent. Go to the site right now, Clark says, and calculate how much it would cost you to buy your own insurance this year.

You can choose a lower level of coverage to protect your wallet. You may also be able to join a religious co-op for health coverage. But Clark notes, “Those policies many times will not cover a major illness … but they will cover routine kind of care at a much lower monthly premium.”

Overall, when it comes to paying for your own health insurance in your 50s and 60s, “I want to tell you, it’s not a walk in the park,” Clark says.

2. Loss of Income and/or Identity

Personally, I think the adage, “Do what you love and you’ll never work a day in your life” is a myth.

For example, I love ice cream. But if you forced me to eat ice cream for 40+ hours per week, 50 weeks per year for 40 years, I wouldn’t love ice cream as much.

I assume that for most people, the biggest incentive to work is to earn income. Fewer people would continue to work if they achieved enough financial security.

However, it’s hard to feel 100% financially secure, especially when the future is so unpredictable. Earning consistent, substantial income is a nice form of security.

Plus, if you retire early, you’re giving up what could be prime years in terms of earning potential — not to mention more years of a potential 401(k) company match.

As humans, many of us are wired to feel good about putting in a hard day’s work. That’s even more true if you feel you’re in a respected field or if you derive a lot of your identity and self-confidence from what you do.

3. Potentially Smaller Social Security Benefit

If you were born after 1959, you’ll be considered “full retirement age” at 67 years old. But you’ll have to wait until 70 to start drawing Social Security to receive your maximum possible benefit.

However, you can start getting Social Security payments as early as 62 years old. You'll be sacrificing the amount of your benefit in order to get some fixed income sooner.

If you retire early and need some additional cash to, for example, pay for health insurance until you’re 65, you may be sacrificing the amount of money you receive from Social Security in the long run.

4. Inflation and Increased Expenses

The money you’ve saved when you retire won’t hold the same purchasing power in your final years.

That's true no matter what age that you retire. But the earlier you retire, the more time inflation has to eat away at your earnings, assuming that your portfolio isn't structured in a way that will outrun inflation. (That's one of the reasons Clark recommends target date funds.)

According to the Denver Post, 2% inflation for 40 years will force you to spend 220% more money to maintain your purchasing power. That's the difference between buying something for $100,000 now or the same thing for $220,000 in four decades.

Some people also maintain a higher burn rate in retirement than they did while they were employed. If you’re hoping to travel, eat out and enjoy the good life with the extra time you have, you may spend more per month than you did prior to retirement.

It’s crucial that you account for inflation and build in a margin of error for your planned expenses.

5. Greater Potential for Financial Crisis

Markets crash. Natural disasters happen. Unforeseen circumstances arise.

The longer you live, the harder it is to predict what may happen that qualifies as a financial crisis. Even insurance companies, with untold amounts of data and actuaries from which to model, have difficulty financially modeling three and four decades into the future.

The "4% rule" is a popular retirement philosophy. It's based on historical data accounting for a 30-year retirement. You may have to be even more conservative and spend closer to 3% of your investment portfolio per year the earlier you retire.

6. Health Impact

"Early retirement may be a risk factor for mortality and prolonged working life may provide survival benefits among U.S. adults," according to a 2016 study by the National Center for Biotechnology Information.

The National Bureau of Economic Research conducted a 2008 study that found that retirement leads to declines in mental health and mobility as well as more frequent medical conditions such as heart disease and stroke.

“Use it or lose it” may not be true in every facet of life, but it’s demonstrably true when it comes to mental and physical well-being.

Health insurance claims tend to rise with age as well. A large percentage of us will eventually need some form of long-term health care. The younger you are when you retire, the less you may consider and financially prepare for that sort of eventuality.

Other Potential Challenges for Early Retirees

  • Early withdrawal penalties. Typically, if you withdraw from a retirement account such as a 401(k) before you're 59½, you'll owe a major penalty. If you've dutifully put a huge percentage of your retirement money into one of these accounts, it may be difficult to retire early without needing access to it.
  • Spouse overload. Being home all the time may be a huge adjustment for one or both partners, especially if one or both is retiring from an office job.
  • Others remain busy. You may anticipate spending a lot more time with your friends, neighbors or family members. But just because you've cleared your schedule doesn't mean they have more free time as well.
  • More risk in the market. To counteract inflation (and historically low interest rates at present), you may need an investment strategy that's more aggressive than your peers who don't retire until 65+. If your income isn't the same, you may find your risk tolerance changing despite the need to stay invested in the stock market.
  • Lack of routine. It's possible to miss the daily routine and purpose that come with work. Also, if you get bored and decide you want to work again in your 50s or 60s, it may be more difficult for you to get a job.

Final Thoughts

Outside of a larger pile of money than you may initially realize, there may be one other key to retiring early. And that’s to have a plan for what you want to do with your time. That can mean hobbies, family time, charity work, getting involved in a church or a combination of things.

I thought one early retiree articulated it well for Business Insider:

“Basically, if you have plans that will keep you busy in retirement and you hated your job in the first place, retirement is probably going to be great for you. If you have no idea what you might do in retirement, it might be rough on you (and your health).”

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