Early Retirement: What You Need to Know

Highlights:

• The decision to retire early isn't always voluntary and can take us by surprise due to an unexpected layoff or opportunity to take a severance package.
• Before you decide to take early retirement, check your financial savings.
• Review your spending to develop a budget to determine your needs.
• If you are considering early retirement, make a plan to change your lifestyle to include new hobbies or interests.
• When thinking about voluntary early retirement, don't forget the additional costs and needs for health and medical needs and costs.

Life events sometimes push many Americans into early retirement. For some, it is a result of unexpected layoffs or job eliminations. For others, it is simply a decision to speed up their planned retirement to avoid working in a tumultuous economy or changing workplace.

What age is early retirement?

According to the Social Security office, full retirement age is considered 65, although there are different options for early retirement age adjustments. How early you can retire is a decision you make based on your personal circumstances. If you choose to retire early or are in a position to take extreme early retirement, whether it's involuntary or voluntary early retirement, your life and financial needs will change.

Voluntary early retirement

If the opportunity to retire early comes your way, perhaps as your employer is downsizing or changing the requirements for an official retirement, you may want to seize it. But before you voluntarily step away from your employer, consider the following:

1. Check your retirement savings.
   Double check your retirement savings to make sure your finances (cash and investments) are sufficient to power you through two (or even three) decades in retirement, depending upon your early retirement age. This will help determine how early you can retire.
    
2. Calculate how much you'll spend in retirement.
   Even if your investments have performed well, early retirement can eat through your savings if, for example, you're paying out of pocket for health insurance before Medicare kicks in. Make sure you understand what your needs and wants are, and how they translate into actual out-of-pocket spending before deciding to step back from a full-time paycheck.
    
3. Reevaluate when to collect Social Security benefits.
   You can start collecting Social Security at age 62, but you only get full benefits if you wait until you reach what's known as your full retirement age (usually 66 or 67, depending on the year you were born). For every year you wait past your full retirement age, your benefits will increase by 8%. On the other hand, if you begin collecting early, your monthly benefits will be reduced until you reach your full retirement age. Basically, leaving the workforce early can significantly decrease your Social Security income throughout retirement.
   
   As you evaluate your options, be sure to ask yourself these questions: Is retiring early worth the loss of these future benefits? What age is early retirement? Can you wait to collect Social Security until you're able to claim the full amount? How will your retirement income (and spending) be affected by your decision to retire early?
4. Consider the impact of early retirement on your mental health.
   It is challenging for many to leave behind the structure and socialization of work. But retirement also brings options for travel and social activities. It's important to consider how you will acclimate to the retirement lifestyle and meet new people.
   
   Before you leave the workforce, picture what your retirement will realistically look like right in the short term. Do you have a good support system? Will you have alternative ways to socialize? Will you be okay without the structure of a full-time job?

If your retirement is not voluntary

If you're retiring because you were laid off or returning to work could endanger your health, consider the following:

1. Know your rights.
   People over the age of 60 are generally at higher risk for medical complications, causing many older Americans concern about going back to their physical workplace. More companies are asking employees to return to the office, which means for some, they may no longer work remotely. Before you tell your employer that you aren't returning to the office, you may want to consult a qualified attorney first to learn about your rights.
   
   According to information from the U.S. Equal Employment Opportunity Commission, the Federal Age Discrimination in Employment Act doesn't require employers to accommodate employees' age — even though older people have disabilities and are more at risk of contracting illnesses. But you may be able to seek accommodations under the Americans with Disabilities Act (ADA). It might be possible to take a leave of absence for medical conditions. You can learn more about ADA guidelines here.
    
2. Create a plan to pay for health insurance.
   Most people rely on their employers for health insurance before switching to Medicare at age 65. If you were (or will be) laid off before the age of 65, you may need to pay out of pocket for a private plan. If you previously received health insurance through your employer, you should be able to buy COBRA continuation coverage for 18 months after termination at your former employer's group rate, though you'll be responsible for paying the entire premium yourself. You may also be eligible for assistance through the Affordable Care Act, which you can explore in more detail at healthcare.gov.
    
3. Consider a temporary retirement.
   Your retirement doesn't have to be permanent. Some people work for years in one field or career and then take time off for a while. That may last anywhere from a few months to several years, depending on the individual and their finances. If you aren't financially or mentally ready to retire early, you can take a few months to recharge your batteries and think about what you'd like to do next. In the meantime, consider taking a class or two to brush up on existing skills—or learn some new ones. You might also devote some of your free time to volunteer work. Staying active and engaged until you return to the workforce will help you feel better about your situation and may open up some new opportunities.