Friday, September 17, 2010

Early Retirement can be Expensive

Early retirement is sometimes considered the holy grail of personal finance. However, early retirement also has its disadvantages in the form of opportunity costs. In terms of the financials, retiring early is usually not a good choice unless one is within a few years of the normal retirement age. Here are some of the opportunity costs I've experienced:

  • Wages. A year's compensation is lost for every year prior to 65. For many people, the early retirement time will be among the highest paying salary years. At the median household income of $52,000, retiring at 55 would mean forgoing over half a million dollars in income.

  • Retirement income or savings. My retirement savings has been reduced at least the contribution amount to the defined contribution plan. In my case, the company's contribution was approximately 25% of salary. Those with pension plans will receive reduced monthly payments. In addition, Social Security retiree payments will be reduced.

  • Job training. In the three years since retirement, I'm sure my experience and skills need to be updated. At five years, I would expect to be significantly out of date. The cost of maintain skills on my own can be costly.

  • Based on the financials, I should not have taken early retirement. The opportunity cost of retirement in my forties was extremely high. Fortunately, retiring early is more than a pure financial decision. In our case, lifestyle also was a major factor. So while the loss in compensation was high, the lifestyle changes made early retirement worth the cost for us.

    For more on Reaping the Rewards, check back every Friday for a new segment.

    This is not financial advice. Please consult a professional advisor.

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