There was a time when a person worked until the age of 65, said their goodbyes to their coworkers, and then embarked on their golden years of retirement. Times have changed and these days, many people find themselves working well past 65, either because they actually enjoy working, or because their financial situation necessitates that they remain employed as long as they can. Not everyone falls into one of those two buckets, however, and some people even face the opportunity to retire “early”.
Early retirement occurs when an employee decides to leave work before the age at which he or she becomes eligible to collect retirement resources such as Social Security, a company pension, or distributions from a 401(k) or other retirement plan.1 The reasons that may lead you to opt for early retirement can be voluntary or involuntary. Perhaps you have accrued a significant amount of savings, or you’ve cultivated a second source of income, one that may even be developed into a part-time business or a full-time career. Or maybe you wish to keep working but only part-time or with more flexible hours.
On the “involuntary” side, you may be facing health issues that make it difficult to remain on the job. Or, you may be approached by your employer to accept an early retirement incentive package. Employers may resort to this tactic as a means to cut costs and encourage highly paid employees to leave their payroll. It’s worth noting that early retirement affords people the opportunity to get involved in activities that might be too challenging later on. So, you may want to consider that incentive package because you can’t predict what your health situation may be like if you wait to retire.
Whether the opportunity is prompted by voluntary or involuntary forces, there are a number of issues to consider when deciding how you should proceed.
If you’re considering early retirement, consulting with a financial advisor is one of the most important steps in the process. An advisor can help you determine your overall readiness for retirement. Your financial advisor will conduct a comprehensive examination of all your retirement resources, including a 403(b), 401(k), or other retirement plan, a pension plan, a spouse’s retirement plan, and any other tax-deferred or taxable resources you may have. Most importantly, the advisor will calculate the tax impact of your employer’s offer. Depending on your age, withdrawals from your retirement plan may be subject to a 10% penalty on top of regular income taxes if you are under 59 ½.2
When faced with the decision of taking early retirement or remaining in the workforce, both options need to be thoroughly vetted. The upside is having the chance to begin a new phase of your life, perhaps pursuing experiences you’ve only dreamed about until now. However, you’ll want to make sure you’re financially prepared to take the leap. Retiring early requires careful planning and a financial advisor can evaluate the impact on your long-term plans and help you prepare for a fulfilling retirement experience, regardless of when you plan to launch it.
1”Early Retirement is an Option for Some Employees” by Susan M. Heathfield
2”Should You Accept an Early Retirement Offer?” by Roger Wohlner