Robert Johnson, a professor of finance at Creighton University’s Heider College of Business, retired from a career in financial education in 2018 but recognized that he wasn’t comfortable spending his retirement years as if he were on perpetual vacation.
Johnson says that while playing golf, reading for pleasure and having completely unstructured days sounds terrific, the novelty wears off quickly, particularly for people who find purpose in their work.
“That doesn’t mean you shouldn’t consider retiring early, but you need to map out how to occupy your days,” he says.
Retiring in your 50s sounds great in theory, but it can come with a few obstacles, the biggest of which could be boredom. “A non-financial reason for one to rethink retirement in their fifties concerns purpose,” says Johnson.
What’s more, if you don’t plan carefully, your early retirement can also include many additional expenses that you won’t have if you wait.
Before you join the Great Resignation permanently, carefully evaluate your finances with a financial planner. You may find that an arrangement in the gray area between all work and no work — a pre-retirement, sabbatical, “workcation,” call it what you will — could be more of what you’re after.
Why You Might Want to Rethink Retiring
Here are six reasons why you might want to rethink retiring in your 50s:
1. Fulfillment. In all likelihood, you are going to get bored, says Taylor Jesse, CPA, CFP, director of financial planning and an investment advisor at Taylor Hoffman in Richmond, Virginia. “You might enjoy doing nothing but sipping margaritas on the beach for a year or so, but after the initial ‘honeymoon’ period wears off, I’d be willing to bet that you’ll want more out of life.” Jesse believes humans have an innate desire to find purpose in their lives through meaningful work.
“Maybe that means cutting back your hours at work starting at 55 or changing careers in your fifties to pursue something you’re more passionate about or volunteering more with a local charity,” he adds, “but thinking that you’ll quit any kind of work cold turkey and be happy for the next thirty years should give you pause.”
Johnson founded a business with a handful of friends in a similar position. The biggest advantage was being able to choose whom he worked with. “I work only with people I like,” he says. “I believe if people worked with people they liked, doing what they loved, they wouldn’t consider it work.”
Health Insurance Headache
2. Medicare. Once we leave the workforce, most of us will lose health insurance through employment. And most people aren’t eligible for Medicare until age 65 unless they have a long-term disability. If you retire in your 50s, that leaves quite a gap in health care coverage, one you will have to shoulder.
While the Affordable Care Act (ACA) did enable people under 65 to find health insurance even with a pre-existing condition through their state marketplace, the policies available are typically high-deductible plans. They could tide you over a few years before Medicare eligibility, but when thinking about a gap of 10 or more years, your health insurance and related out-of-pocket expenses could add up quickly. The good news is that the ACA recently changed under the Biden administration to limit the cost of health insurance to 8.5% of your income.
“You may also qualify for subsidies (premium tax credits) that make self-purchased coverage more affordable than a lot of people expect it to be,” says Louise Norris, a licensed broker, and analyst for healthinsurance.org. “If you’re retiring early, you might find that your income dips enough to make you eligible for substantial subsidies,” she adds.
Another option is COBRA, which allows you to keep your former employer’s health care insurance but requires you to pay the full premium yourself and expires after 18 months.
Have You Saved Enough?
3. Savings. Your savings have to last a lot longer if you retire at 55 rather than at 70. You may not have saved enough to sustain yourself through the prolonged retirement that follows an early retirement. According to a study by the Employee Benefit Research Institute, only 42% of workers 55 and older have confidence that they will have enough money to live comfortably in retirement.
This leaves a large portion of near-retirees feeling anxious about their ability to cover basic expenses. If you’re unsure about your retirement savings, it may be worth delaying the date by at least a few years. Working longer postpones the need for you to start withdrawing your savings and gives you more time to contribute to and grow your nest egg, which can help provide greater financial security in retirement.
4. Retirement Accounts. You will have difficulty withdrawing money from your retirement accounts if you retire before 59 1/2. Early withdrawals from IRAs and 401(k)s result in a 10% tax penalty unless you qualify for one of a handful of exceptions. Recent IRS rule changes make it easier for people below 59 1/2 to withdraw from some retirement savings accounts without a penalty by using a Substantially Equal Periodic Payments plan, but just because you can withdraw doesn’t mean you should.
Do the Math on IRA Withdrawals
Taking what’s referred to as the SEPP or “72(t) exception” allows you to take money from qualified accounts before 59 1/2; the amount you can withdraw is determined using one of three methods based on age, lifespan and interest rate. Such transactions are complicated, risky, and may lead you to taking out too much of your money too early. Plus, you’re still responsible for ordinary income tax on withdrawals.
For instance, if you had $1 million in a 401(k) at age 50 and apply a SEPP rule, you may be able to withdraw up to $60,300 annually. You’re also obligated to stick with those withdrawals for 10 years. But by 60 you’d have depleted your account of well over half its total, leaving you with $500,000 and 20+ more years of retirement.
5. Social Security. Since benefits are based on the average of as many as 35 years of earnings, retiring early is likely to prevent your highest earning years from being used to calculate your monthly benefit. At the same time, Social Security will reduce your benefit if you ask to receive benefits before what it considers to be your “normal retirement age,” which is based on the year you were born. If you apply to receive benefits three years before your normal retirement age, your monthly check will be reduced by 6.67%; if you apply four or more years early, your benefit will be reduced an additional 5% for each year.
Benefits of Being Busy
6. Shorter Life Span, Earlier Cognitive Decline. Some research suggests that people who stop working before age 65 have a shorter life span and earlier cognitive decline. “Continuing to work into your sixties, seventies and even eighties, keeps you active and engaged in society, warding off cognitive decline,” says Maria Shriver, journalist, author and founder of the Women’s Alzheimer’s Movement.
“Studies show that working and sharpening our skills as we age decreases people’s risk of dementia, including Alzheimer’s disease,” adds Shriver, who also co-founded and is the CEO of MOSH, a maker of nutrition bars. “The forced interactions we encounter in workplace settings, such as team meetings, watercooler talks and meeting customers, help boost our well-being and mental health, which is vital at any age.”
Before thinking of retiring in your 50s, weigh all financial and emotional issues carefully.
