Northeast Planning Associates, Inc.

121 Shattuck Way, Suite 16,

Newington, NH 03801

What Happens If You Retire Earlier Than Planned?

June 04, 2024

According to the Employee Benefit Research Institute’s latest update to its 30+ year survey of workers and retirees, there is a gap in expected retirement ages vs. actual retirement ages. While the median expected age of retirement was 65, the actual median age of retirement is 62.

There obviously can be a variety of reasons for this gap. But instead of diving into that, let’s focus on some tangible steps to help prepare for the possibility of an earlier retirement than you may have anticipated.

Health Care Costs

Age 65 is a common retirement age because that’s when individuals are currently eligible for Medicare. That means, if someone retires early, whether planned or involuntary, increased health care costs are something requiring a plan. A financial planner can run projections assuming earlier retirement before 65 and an increased health care cost during those few years.

Social Security and Pension Benefits

What to do with any Social Security or pension benefits is another consideration of early retirement. Some pension benefits may offer a reduced benefit before age 65, so analyzing the impact of a reduction will be a key piece of the retirement planning puzzle. While pension benefits vary in their provisions, Social Security retirement benefits are very consistent in how they operate. The reduction in benefits if collecting prior to one’s full retirement age (age 67 for most) is 5/9ths of 1% for each of the first 36 months before full retirement age, and 5/12ths of 1% for each month more than 36 months. The below chart provides an example:

You will receive this percent of your primary Insurance Amount (PIA) if you retire at age:

Year of  Birth

62

63

64

65

66

1957

72.50%

77.50%

83.30%

90.00%

96.60%

1958

71.60%

76.60%

82.20%

88.80%

95.50%

1959

70.80%

75.80%

81.10%

87.70%

94.40%

1960 or later

70.00%

75%

80.00%

86.60%

93.30%

 

Retirement Savings

Of course, there is also the question of retirement savings and income needing to cover more years of retirement. This highlights the importance of saving as much as possible for retirement, because plans don’t always work out quite as we hoped. Let’s look at the following example:

John and Jane are both 50 years old. They both plan to work until they are 65. In working with their financial advisor, they determine that they will need approximately $1.5 million saved for retirement to meet their needs in 15 years. They began saving late, so they only have $250,000 saved.

Based on an 8% growth rate of their investments, they estimate they will need to save approximately $26,000/year or just over $2,160/month for the next 15 years. If they are forced to retire early at 62, however, they will have three fewer years of savings and three more years of withdrawal needs from their assets. At age 62, at the projected savings rate, they would have just over $1.2 million saved, which is well short of what they might need, possibly resulting in a lower standard of living than they may have hoped.

This is not a comprehensive list of considerations when early retirement is on the horizon, but these give a good sense of how a decision (or unforeseen situation) can have a ripple effect on your financial future. It’s also hopefully a good indication of the work we do for and with clients every day.