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THE EFFECT, IN $s and ¢s Financially
speaking, the biggest downside of retiring early is having less income. The most
obvious reason is that you're not working. But retiring early can also mean a reduction
in the retirement income on which you were planning.
To begin with, you'll accumulate fewer years of contributions to your retirement
plan. Since you typically earn the highest salary at the end of your career, retiring
early may mean losing contributions based on those amounts. The consequence is usually
a smaller pension check than you might have received had you stayed longer.
If all or part of your pension comes from a traditional plan, the amount may also
be reduced to offset the greater number of years you are expected to collect - though
that policy isn't the same with every employer. Sometimes a pension is based on
your salary and the number of years you've worked rather than your age when you
retire. In other cases, you can retire with full benefits at age 55.
If you apply for Social Security at 62, the first year you're eligible, you'll receive
a smaller benefit each year for life than if you begin collecting at the full retirement
age. People born before 1938, for example, collected 80% of what they would have
been eligible for had they started benefits at age 65. But people born in 1938 or
later are eligible for a smaller percentage at age 62 because the age at which full
benefits are paid has increased (It's 66 for people born in 1943 and later, and
67 for people born in 1960 and later). You can find the specific percentage you'd
qualify for, based on the year you were born, on the Social Security website, www.ssa.gov.
THE INVESTMENT DIFFERENCE Choosing
to retire early can also have an impact on your investments. You'll have to stop
adding assets
to certain tax-deferred accounts when you're no longer earning a salary. You may
have less money to invest in the ones that don't have contribution restrictions.
And if you start drawing retirement income from your accounts, they will have less
time to grow undisturbed.
One solution is to continue to invest even after you're eligible
to withdraw or actually begin withdrawing. You can reinvest your earnings in individual
securities
or purchase a
variable annuity, also referred to as a flexible premium annuity.
And, if it's financially possible, you can postpone withdrawals from tax-deferred
plans. With a traditional IRA, for example, you can wait until you are 70 1/2, and
with a Roth IRA
there's no required beginning date.
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When you think retirement,
you may think 65. Since the 1930s, when Social Security was introduced and employee
