How to Determine if Retiring Early Is Right for You - Quicken Loans Zing Blog

If you have the chance to retire early, should you take it?

Each person’s financial and home situation is unique. You need to consider how retiring early will affect your financial as well as psychological well-being.

Why Would Early Retirement Even Be an Option?

There are a few common scenarios where an early retirement might be a viable option:

  • Your company is downsizing, and there are rumors afloat that your department will be taking a hit. It may be better for you to “cash out” now, as your future earnings could be in jeopardy.
  • Your family member’s care needs have increased, and your ability to focus on work while providing care is compromised.
  • Your work life is less satisfying, and an early retirement suddenly seems much more acceptable than the continuous rat race.

Financial Considerations

Be sure to explore these financial considerations before making your decision:

  • Income: Determine how much your pension, savings and annuities can generate monthly and yearly. If your retirement is “too early,” you may not be able to tap into your pension plans without major tax consequences. You also won’t have access to Social Security at first.
  • Pension payouts: Pension payouts increase with seniority. If you’re offered an early retirement, your employer may also accelerate your seniority so that you receive a payout corresponding to a later retirement.
  • Cash payout: Your employer may offer a cash payout for early retirement, including severance pay.
  • Second career: Lots of early retirees find employment after taking a buyout. Consider the job market in your community, but be realistic: Will you find work easily? What will you be paid?
  • Expenses: What do you spend on housing, food, transportation and other lifestyle costs? Would any of these expenses decrease if you quit working? Consider the savings from skipping a long commute and maybe even getting rid of one of your vehicles, as well as work-related expenses like clothing, conferences and entertaining. Also itemize what expenses would increase, like travel and relocation costs.
  • Housing issues: Will you be paying off a mortgage soon? Can you use the retirement cash buyout to pay off or pay down your home loan? This could diminish future monthly expenses. There will be tax consequences, however, as mortgage interest is tax-deductible.
  • Health insurance: Will you be able to stay on the company health insurance plan until you’re eligible for Medicare, and what will it cost you? Will there be any changes in coverage? If you can’t stay on your prior health insurance plan, what will a comparable plan cost you in the marketplace? An independent health insurance consultant can guide you through these calculations. (Be mindful of changes that may be made to the Affordable Care Act, which impacts the cost and availability of health insurance plans that aren’t employer-sponsored.)

An independent financial planner can be extraordinarily helpful as you evaluate the financial aspects of retiring early. Sometimes, the company will offer financial planning advice. However, it’s important to be sure this person has your best interests in mind.

Psychological Considerations

  • Your enjoyment of work and identification with your job position: If you still find your work satisfying and engaging, can you handle being away from the office? Retirement can be lonely as people disengage from their “daytime family” and carve out new routines. Are you a flexible person who is ready for this significant change? Are you ready to just be you and not your job title?
  • Your future work environment: What will your work life be like if you refuse the buyout? Will you be able to handle future job insecurity? Will you still receive the same assignments at work? Will your job title or job duties change? Will your relationship with your supervisor be adversely affected?
  • Whether a second career is realistic: If you’re planning to start a second career, do you have the ability and the stamina to become a job hunter again?
  • Your home life: How happy are you at home? What is your relationship like with your significant other and can you handle being together all the time?
  • What you’d do with your time: Can you envision how you would fill your days, including your social life, your volunteer life or even a new unconventional second career, or does this line of questioning terrify you?

Coming to terms with the psychological aspects of early retirement requires self-evaluation and reflection, which can be helped along with the advice of close family members and friends. Meeting with a mental health care professional is also a good idea, as it is during any significant life transition.

Evaluating your early retirement options can be complex. Make the decision deliberately with input from financial planners, health insurance consultants, mental health professionals and those closest to you.

Are you considering an early retirement? What’s helping you make an informed decision? Let us know in the comments below!

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