| Given that there are risks of retirement in | | | | if they might need it sooner than later. |
| general, it is no surprise that there are risks | | | | Retirement income risk |
| associated with early retirement in particular. | | | | Since early retirees have an increasingly higher life |
| However, early retirement is typically far riskier | | | | expectancy, much can happen to their retirement |
| than retirement at the full retirement age. In | | | | income in that period. The combination of inflation |
| some cases, early retirement is involuntary or | | | | and taxation significantly erodes retirement |
| even ideal. It is clear that those who retire earlier | | | | savings and income. This suggests that earlier |
| than the full or normal retirement age bear | | | | retirees' income may not keep pace with living |
| burdens that are peculiar to early retirees. | | | | expenses in the latter stages of retirement, which |
| Increased longevity risk | | | | increases the income risk significantly. |
| All retirees bear the risk of outliving retirement | | | | Inaccessible state/retirement benefits |
| savings, especially if they do not plan for | | | | When you retire before the full or normal |
| retirement properly. However, early retirees | | | | retirement age, some retirement benefits may |
| typically face a longer retirement period with | | | | not be available. Even if they were, you would |
| lower retirement income. The other risks of | | | | receive a lower nominal benefit because your life |
| retirement tend to compound longevity risk as | | | | expectancy is longer. Age is a significant factor in |
| well. Those who retire between 62 and 65 may | | | | the retirement decision, since it can affect your |
| have a retirement period of 18-25 years (on | | | | defined benefit, tax burden and even your annuity |
| average). However, the earliest retirees might live | | | | benefits- to name a few. The relatively low |
| up to 36 years on average! | | | | availability of replacement income for early |
| Opportunity cost | | | | retirees is a surmountable problem, but a critical |
| Opportunity cost is the cost of a decision in | | | | early retirement issue nonetheless. |
| terms of what you forego by making that | | | | Tax risks of taking Social Security benefits earlier |
| particular decision. The earlier you retire, the | | | | Early retirees who receive retirement income |
| higher your opportunity cost of early retirement is | | | | from sources other than Social Security have a |
| going to be. You might forego the income you | | | | higher tax liability arising out of existing tax |
| would have enjoyed from working longer and | | | | legislation. Since this fact exposes early retirees to |
| higher retirement benefits, for example. Increased | | | | additional taxation before the full retirement age, it |
| longevity makes opportunity cost even higher for | | | | is better to delay taking Social Security benefits, |
| early retirees; this is one reason for many baby | | | | until the full retirement age. The distribution of |
| boomers' decision to work longer. | | | | retirement income has a clear tax implication. |
| Loss of employer-sponsored benefits | | | | While the tendency of early retirees is to grab all |
| While working, you may enjoy | | | | their retirement income available, this can |
| employer-sponsored benefits such as health | | | | augment their tax burden significantly. |
| benefits and savings plans. Some employers offer | | | | Social and psychological risks |
| coverage for retirees as well, but this is not often | | | | Those who dream of early retirement sometimes |
| the case. When you take the decision to retire | | | | base their dream on push factors. The major |
| early, you should factor in these benefits as part | | | | push factors are that their job is too stressful or |
| of your decision. At best, you should have a | | | | they do not want to work for too long. Relying |
| suitable alternative to benefits lost, especially | | | | on push factors can create a void in that such |
| health coverage and income, when you retire | | | | retirees may not properly plan for taking |
| early. | | | | retirement early. They do not know how they |
| Debt-servicing risks | | | | would fill the gap in a meaningful way. This can |
| Many retirees find themselves entering the | | | | lead to an aimless, sedentary lifestyle, particularly |
| retirement phase in debt, whether the debt is a | | | | when funds are limited and the retirement reality |
| mortgage or consumer loans. Since retirement | | | | comes to bear. Retirees must be able to cope |
| income is normally fixed, the burden of the debt | | | | properly with being out of the workforce. Many |
| increases over time and refinancing options | | | | retirees enjoy working or switching jobs to a |
| become far less attractive. While some retirees | | | | part-time endeavour that they truly enjoy to |
| might seek to pay the balance of debt with lump | | | | avoid socio-psychological retirement issues. |
| sums and gratuity benefits received, even that | | | | The good news is that while the risks of |
| may not be a wise move, since they forego the | | | | retirement are more burdensome to early |
| benefits of investing that lump sum wisely and | | | | retirees, they are not necessarily insurmountable |
| deplete their retirement savings - without knowing | | | | obstacles to a happy and secure early retirement. |