When is the best time to retire? The answer is different for everyone. Many factors affect decisions around retirement timing—such as health, job-related stress, the desire to travel or just relax, or the need to support parents or other dependents. Plus, it can be a little unnerving to face several decades without a professional identity and the social interactions that are part of a career.

Additionally, the financial risks associated with retirement are significant. Worries you may have as you contemplate retirement include:

• Running out of money (longevity)
• Whether you need to work full-time or part-time to live comfortably (according to T. Rowe Price's Retirement Saving & Spending Study, roughly 20% of retirees work either full-time or part-time.¹)
• Increasingly expensive health care costs as you age
• Long-term care decisions and expenses
• Finding ways to stay productive

These, and other concerns can greatly impact retirement decisions. This may be even more true if you've been offered an early retirement package. Should you accept? What are the potential dangers? Can you overcome the pitfalls?

Leaving employment

Perhaps the first consideration should be, can you afford to leave your full-time job? Do you have enough money to fund extra years without a regular income? Other questions to think about include:

• Can you afford self-paid health insurance premiums between the time you leave the workforce and when you can file for Medicare coverage?
• If you have received an early retirement offer, how many of these questions does the offer answer?
• In addition to any up-front payments will the offer include extended healthcare coverage and any increases to your long-term retirement benefits? Remember, the fewer years you work, the more years you have to self-finance during retirement. Can you afford those extra years?

Social Security and pension benefits

Social Security benefits are another potential concern. If you stop earning a regular income, you also stop contributing to your Social Security retirement benefit account. This may mean lower lifetime payments. Use the Social Security benefits calculator on the Consumer Financial Protection Bureau's website to determine your potential retirement income benefit now, if you retire early, or if you wait. How much of a difference to your ongoing income stream will retiring early make?

The same consideration exists for pension plan benefits. Most defined benefit pension plans base retirement benefits on a formula that includes years of service. Fewer years means less money. Does your early retirement offer include compensation for lost years in the benefit formula?

Health care before Medicare

Regarding health care benefits, can you qualify for non-employer provided coverage, and if so, what will the monthly premiums be? It’s not unusual for older people to pay monthly health insurance premiums in the $1,000 range (maybe a little less or a little more). If you have any major health-related issues, the cost can be much higher.

You will probably be able to continue your employment-based insurance coverage under COBRA, or similar state benefits, for 18 months. The cost will be 102% of the cost while you were employed, and remember, there will be no employer offset. You will pay the full premium. After COBRA, how much of a gap will there be between then and when you reach age 65 and can file for Medicare benefits? Be sure you can qualify for any required coverage and determine the drain on your budget.

Drawing down retirement savings

If you plan to access IRA or qualified plan benefits and you are younger than 59 ½, you may be facing a 10% tax penalty on amounts you withdraw. Remember, too, that whatever you withdraw will be taxable. With the penalty, that may mean you will have an effective tax rate of 30% or more on any withdrawals. That should be part of your decision-making process.

Maintaining social connection

Social connection is vital to our mental health at every age adn stage. How much will you miss your workmates and the interaction you share? Most people do not maintain connections with coworkers after leaving the job. Do you have a support network to help you through the adjustment?

Consider, too, what you will do with your newly free time. How will you spend your days? Do you have a plan to remain active? Many people plan to work part-time to help provide money and fill some of the extra time during “retirement” days. Doing this may also help provide beneficial social engagement. 

As you consider these things, how does it make you feel about early retirement? If you were able to provide positive answers to most of the questions you may be ready to make the leap.

However, if your answers were not so positive, it may mean delaying retirement for a bit if you can. Sometimes, even a little more time in the workforce can make a big difference in how you live later on.

For job-hunting help, see our 7 effective job-search strategies for older adults, or learn about the Senior Community Service Employment Program (SCSEP). 

Want more retirement planning tips?

• Get 7 tips to max out your Social Security benefits.
• Discover 5 simple ways to build your retirement confidence.
• Explore the top 6 financial myths about retirement.

Sources

1.  T. Rowe Price. New Report on Why Recent Retirees Want to Return to Work. September 19, 2023. Found on the internet at https://investors.troweprice.com/news-releases/news-release-details/t-rowe-price-new-report-why-recent-retirees-want-return-work