21 Aug 2020 What Happens When You Retire “Early”

The idea of retirement, that you come to live a life of relative independence without working, is quite new in human history and even today is not a universal reality by any means. But in the US, in the year 2020, retirement is a reality—or at least a goal—for many people, and the questions of how to retire sustainably, confidently, and with purpose are central to our work here at Beacon.

One of the most interesting things about the concept of retirement is the way that the when of retirement became culturally defined over time. How did age 65 become a sort of default in the minds of so many? Much of the history of this goes back to Otto von Bismark in late 19^th century Germany, the advent of Social Security in 1935 and the setting of what is known as the “Full Retirement Age,” and other government and corporate pensions that were more widespread in decades past than they are today. Most of these pension programs, both state-run and privately run, pegged “retirement” at the age of 65, and while 65 meant something entirely different to someone whose life expectancy was 70 years (as it was for an American male in the 1960s) than it means to someone with a life expectancy of 90, the power of anchoring is undefeated. 

So if we take it that age 65 is the somewhat arbitrary default for when retirement happens, then that sort of automatically splits retirees into three broad groups—those who retire “on time”, those who retire “late,” and those who retire “early.” Again, entirely arbitrary, but that’s where we are. And today I want to look at the last group. 

At the outset, let me say that there are a whole bunch of reasons why someone might retire early. Perhaps they are forced to through bad health or job cuts, perhaps they hate their work and have saved hard to be able to stop it as soon as possible, perhaps they love their work but are wanting to pursue another career path without being reliant on a paycheck, or maybe they simply had the luxury of pursuing financial independence and valued that more than working. None of these reasons is “wrong” or “right” on their own. They just are. What I’m interested in for purposes of this blog is not why someone retires early, but rather, what happens when they do.

One set of things that happens when someone retires “early” is, at the risk of stating the obvious, financial in nature. This list is not exhaustive, but I think captures the most significant considerations.  

• Healthcare costs. If you retire before Medicare starts (which starts when? You guessed it, age 65) and don’t have the ability to jump on a working spouse’s group coverage, you will have to pay for some form of health insurance. This is not likely to be cheap! 
• Double-ended candle burning. If you retire “early,” you by definition have fewer years to grow a nest egg that you rely on for a longer period of time. In other words, if you start work at 22, plan to retire at 60, and expect to live until 90, you will have roughly 38 years to build assets that you need to live off of for 30 years. Whereas if you retire at 65 you will have 43 years to build assets that you need to live off for only 25 years. 
• Greater exposure to stock market volatility. Given that Social Security and other pensions (should you be lucky enough to have one) are designed to heavily favor waiting until 65 and beyond to start drawing them, those who retire early will need to have their portfolios carry a heavier load until the pensions kick in. This is related to the previous point but different. What I mean is that Social Security is guaranteed income that offsets the amount of withdrawals required from a portfolio, allowing for some flexibility in those withdrawals to account for whatever is happening in the stock market at that time (I.e., delaying or reducing distributions when the market is down). But if Social Security hasn’t kicked in yet, and you’re relying solely on your portfolio to support yourself, then you don’t have the luxury of timing your distributions based on what’s happening in the stock market. 

The other set of things that happens when someone retires “early” is not directly financial at all.   

• More time. If you stop working earlier rather than later, it stands to reason that you have more time on your hands to do with as you please. Whether an “early” retiree finds this to be exciting or not depends largely on the circumstances leading up to retirement and the planning (or lack thereof) that made preparations for that increase in free time. The folks that we see handle this dynamic most healthfully tend to strike a good balance between leisure (golf, beach, mountains, entertainment) and unpaid work (gardening, volunteering, grandparent duties) and who regularly assess those rhythms and ask whether they need to be adjusted.
• More freedom. You have more time because you don’t have a boss or you don’t have a company to manage, but it goes further than simply having fewer constraints on your time that keep you from certain activities. It also means you have more agency to choose the activities you will use the time for. Retiring early doesn’t give you more than 24 hours in a day, but it might mean you have fewer excuses for using those 24 hours in ways that aren’t life-giving to you.
• Same humanity. Retiring early is no panacea. Certainly if you are retiring from work you hate there will be an immediate positive impact related to reduced stress and anxiety, but the other issues and difficulties of life are still hanging around. Retiring at 60 or 65 or 70 doesn’t change that. The more you can go into retirement with eyes wide open to the work you might need to continue to do relationally, emotionally, and physically, the better off you’ll be. 

There is no “correct” way to do retirement, and certainly no “correct” time to retire. There are only the values you share with your community, the goals that spring from those values, the way you prioritize the goals, and your response to life when plans don’t go according to plan. All along the way you’ll find this dynamic of purely financial considerations and purely non-financial considerations, and while no one ever gets it perfect, we think having a trusted advisor asking good questions along the way is key, whether you want to retire early or not.