The 6 Biggest Issues with Early Retirement: Will These Happen to You?

When you're slogging away in a cubicle at work, it might sound like a dream to wake up when you want, read a book in a hammock, putter around in the yard, etc. (You know, the things that retired people do.)

Almost half of Americans (49.9%) expect to retire before they turn 62, according to the Federal Reserve Bank of New York. The reasons? Check out a few, according to The Economist:

• A roaring stock market
• Rising house prices 
• The COVID-19 pandemic changed some Americans' priorities 
• Possibly falling life expectancy 

However, it might not be what it's cracked up to be, both emotionally and financially. What are the downsides of retiring earlier? Let's walk through a few money-related reasons to consider working longer and one giant emotional reason.

Issue 1: Your Social Security benefits will be smaller.

Your birth year signals your "full retirement age." If you were born in 1955 or later, your full retirement age can range between age 66 and 2 months up to age 67 for those born after 1959. Those born before 1955 have already reached age 66 and full retirement age.

The downside to taking Social Security early: When you take it out early, you automatically lock into a lower monthly payout for the rest of your life. Social Security payouts rise by 8% per year. You get an extra 2/3 of 1% for each month you delay after your birthday month, which means you get an additional 8% for each full year you wait until age 70. 

Issue 2: You'll have to spread your retirement savings out over a longer period of time.

When you don't have regular paychecks coming in, you need to withdraw money from your assets. A sustainable withdrawal rate refers to the estimated percentage of savings you can withdraw each year throughout retirement (without running out of money, of course).

Many experts recommend withdrawing no more than 4% to 5% of your savings in the first year of retirement, then adjusting for inflation every year after that.

A Morningstar study found that for a 30-year retirement period with a 4% withdrawal rate, there was only a 50% chance that funds would last. The amount you should withdraw depends on a lot of different factors, including the size of your nest egg, investment allocation, lifespan, and more.

So, consider what will happen if you retire at 40 and live until you're 99.

Issue 3: Rising health care costs will shortchange you.

It's not just that rising health care costs "can" affect you — rising health care costs will affect you. 

For Americans between ages 65 and 74, health care remains the fourth-highest spending category after housing, transportation and food. The Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics says that for those 75 and older, health care costs shoot up to second place on the priority list.

It's easy to think you're in good shape with health care costs when you retire at 50 — because your health is probably still pretty good.

Issue 4: Inflation could draw down your portfolio.

A survey from Global Atlantic Financial Group demonstrates that investors aged 59 to 75 are concerned inflation could devastate their investments. In fact, a total of 71% of investors said they believe rising inflation will take a bite out of their retirement savings and undo all the compound interest they were able to build. 

Unfortunately, even a medium rate of inflation can have a significant effect on retirement savings. Let's say you save a $1 million nest egg for retirement. Based on the prevailing advice about withdrawing 4% per year, you could withdraw $40,000 during the first year of retirement. If inflation grows 2%, you would withdraw $40,800 in retirement.

Issue 5: Long-term care expenses could decimate your investments. 

Actually, this can become an issue whether you retire early or not, but it's worth bringing up because the reality is that long-term care can take a huge toll on your retirement savings. 

Location does make a difference as to where you get care and also depends on the level of care you need. The monthly median costs of a semi-private room in a nursing home facility costs $7,756 and $8,821 for a private room, according to the Genworth Cost of Care Survey.

The solution: Get long-term care insurance coverage between the ages of 60 and 65. Americans over age 70 file more than 95% of long-term care insurance claims and those older than 81 file seven in 10 claims, according to AARP and the American Association for Long-Term Care Insurance.

Issue 6: Having a lack of long-term goals could affect you.

Transitioning from a job (especially from a full-time job) to a life of leisure can cause you to feel stagnated and on the extreme end, depressed, particularly if you retire when you're young. 

It's important to have some long-term goals, even if they aren't money goals. Whether you dive into a hobby with gusto, volunteer, create art or spend some real quality time with your family, you need to make sure you have long-term projects that can keep you busy and give your life purpose and meaning.

By the way, you might not think that making money "counts" as becoming an early retiree. However, that's not true. Many retirees call themselves retired even though they may make money through a side hustle, by maintaining a blog or another method of making money.

Consider the Big Issues Before You Choose Early Retirement  

In addition to making sure that you have all of your financial ducks in a row, you need to have at least one (or several) long-term projects to keep you busy in early retirement.

You can't take this innate human trait away: We all feel better when we're setting benchmarks for ourselves, or at least making progress on something, whether that's pottery, joining a movement, building a new business, and more.

While it's true that you don't really have any idea how you'll feel until you actually retire, try to foresee all the hang-ups you might have before you wriggle out of your suit for the last time.