The writer suggested that his research into the topic showed that the answer, more often than not, is "don't do it." That's probably correct, "more often than not", but maybe a better way to say it is that retiring early is probably riskier than most people realize.
There are at least three major financial challenges of retiring early. First, although no healthy person knows how long he or she will live, retiring early increases the expected length of retirement and the number of years we spend in retirement is the greatest unpredictable determinant of retirement cost. (The amount we spend can be a greater factor, but unlike life expectancy and other key factors, spending is at least somewhat within our control.)
It is also a major factor in determining a sustainable withdrawal rate.
When you retire early, you add more years of retirement expenses and, as a result, you add more financial risk. You have to spend a smaller percentage of your retirement savings portfolio annually to mitigate that risk.
Second, retiring early ends savings contributions when they will typically be greatest. Third, retiring early means drawing down savings until Social Security benefits or pension income kicks in. This places additional stress on savings early in retirement that increases the risk of outliving your savings.
Let's look at longevity and sustainable withdrawal rates first.
Longevity risk is the risk that a retired household will outlive their retirement savings. The major factors contributing to longevity risk are how long retirement lasts, how much we spend each year of retirement and how aggressively we invest.
We predict how long retirement might last using life expectancy calculations at our retirement age. We can predict a median life expectancy, and we can also calculate the probability that we will live to some advanced age, such as 95 or 100. A 65-year old American male retiring today, for example, has a median life expectancy of 83 years (86 for a female) and a 6% chance of living to age 95 (13% for a female).
A retiree who decides to retire early increases the risk of a long, costly retirement. The 60-year old male in this example has a 6% chance of surviving a retirement of 30 years or more. Deciding to retire five years early at age 60, however, creates a 6% chance of a 35-year retirement and more than triples the risk of a 30-year retirement from 6% to 19%.
Retiring early has an obvious upside. A retiree who doesn’t live long after retiring will enjoy a longer retirement by doing so. The longevity risk of early retirement is that the retiree might turn what would have been a long and expensive retirement into one that is even longer and more expensive. Turning a 5-year retirement into a 10-year retirement by retiring five years early probably won't cause problems, because the retiree should have planned for an even longer retirement. But, turning a 30-year retirement into a 35-year retirement just might. Of course, the retiree has no way of knowing how long retirement is actually going to last.
The table below shows the cost of retirement to age 95 with spending of $80,000 annually and discounted at a rate of 2% per year. Column three shows the percent increase of the cost incurred by retiring 5 years earlier than the previous row's retirement age and column 5 shows the probability that an American male retiring at that age would survive to age 95 or beyond. For example, retiring at age 65 would cost 14.7% more than retiring at age 70 and retiring at age 60 would cost 11.6% more than postponing retirement to age 65, assuming both retirees survive to age 95.
The table above shows near-worst case cost, a retirement to age 95. For comparison, the table below shows similar costs assuming the retiree lives to the median life expectancy for a U.S. male at that retirement age in 2015. For example, retiring at age 60 would cost 16.7% more than postponing retirement until age 65, assuming the person lived to his median life expectancy at the retirement age.
Notice that the costs of retirement are lower than in the previous table because expected years in retirement is smaller, but the percent increase in cost from earlier retirement is greater. The chart below shows the probability of a retiree experiencing a long and costly retirement as a function of retirement age. For example, an American male retiring at age 60 has about a 19% chance of a retirement lasting 30 years or more, but that probability for the same person retiring at age 65 is only about 6%.
Reducing the amount of annual spending that is sustainable increases the amount you need to save for retirement. The annual sustainable spending rate grows quadratically as the length of retirement becomes shorter. (All sustainable withdrawal calculations in this post use Milevsky's formula for sustainable spending without simulation (PDF) and assume a maximum 5% portfolio failure rate and a 40% equity portfolio with real mean return of 4.6% and standard deviation of 7%.)
An American male retiring at age 60 has a life expectancy of about 22 years and can spend about 3.6% of his retirement savings portfolio annually. Retiring at 70, he has a life expectancy of about 14 more years and can spend about 4.3% of savings annually, about 20% more. To support $50,000 annual spending from savings, the retiree at age 60 would need to save about $1.39M, while the retiree at 70 would need to save $1.163M, or 16% less.
So, those are the first couple of challenges with retiring early, whether voluntary or not. You risk adding years to a retirement that you couldn't have known in advance was going to be a long, expensive one and with that increased longevity risk, you need to save more before retirement or spend less after. Expected retirement costs more because it lasts longer, but also because it is riskier.
This is a consideration for fortunate workers who have a realistic option of retiring early, but it is a severe penalty for workers who have not adequately saved and find themselves leaving the workforce before they had planned. For workers between these two extremes, this demonstrates the value of working even a few extra years.
Next, I'll look at the second factor, Retiring Early: Lost Savings.