6 Mistakes To Avoid When Retiring Early

The New York Fed’s Survey of Consumer Expectations found that the percentage of Americans who plan to work past 62 fell from 56% to 46% from 2014 to 2024. The average expected likelihood of working beyond age 67 was only 34.2% as of August 2024.

With the number of early retirees increasing, it is even more critical for people to make productive decisions and avoid pitfalls.

6 Early Retirement Mistakes

Some retirees are well-prepared, having saved and invested with enough discipline to retire on their terms. For others, early retirement is not a choice but the result of layoffs, health issues, or caring for aging parents. As many know painfully well, being a full-time caretaker is nearly impossible while holding down a career.

Early retirement expectations don’t always align with reality, leading to added stress. A recent Schroders survey revealed that only 4% of retirees say they are living their dream retirement, while another 4% say it’s more of a nightmare. While a large portion falls somewhere in between, 53% land in one of the less-than-satisfied categories.

There are six mistakes early retirees can avoid to help increase their chances of happiness.

Mistake #1: Not Considering A Phased Retirement

Most retirement planning assumes a black-and-white approach: you work until a set date, then stop entirely. However, jumping from full-time work to full-time leisure can be financially risky and psychologically jarring. A phased retirement—gradually scaling back hours or shifting to part-time work—can ease this transition while providing additional financial stability.

How To Avoid This Mistake:

• Explore part-time, consulting, or freelance work before fully retiring.
• Reduce work hours gradually instead of stopping cold turkey.
• Consider taking on work that aligns with your interests or passions to keep a sense of purpose.

Mistake #2: Not Planning To Live Near Your Adult Children

Surveying nearly 2,000 American retirees for What The Happiest Retirees Know revealed that retirees who live near at least 50% of their adult children are two to five times more likely to be happy. Being geographically distant from family can lead to social isolation and missed opportunities to be present for grandchildren and life events.

How To Avoid This Mistake:

• Factor in your children’s and grandchildren’s locations when planning where to live in retirement.
• When considering a move, explore communities that make building a new social network easy.
• If relocating is too tricky, ensure you have a plan for regular visits and meaningful communication.

Mistake #3: Failing To Establish Multiple Streams Of Income

Relying solely on one or two sources of retirement income—like Social Security and a 401(k)—can leave retirees vulnerable to financial instability. The happiest retirees tend to have multiple streams of income, which can provide flexibility and peace of mind.

How to Avoid This Mistake:

• Diversify your income sources: Social Security, investment dividends, rental income, part-time work, pensions, and annuities are some examples.
• Build a mix of taxable and tax-advantaged accounts to optimize withdrawal strategies.
• Consider generating rental income, even if it’s from renting out a portion of your home.
• Remember that multiple sources of income enhance financial security because if one source dries up, you have others to rely on.

Mistake #4: Waiting Too Long To Start Collecting Social Security

Conventional wisdom suggests delaying Social Security until age 70 to maximize benefits. While this can be effective for some, early retirees often benefit from claiming sooner to reduce the strain on their retirement savings.

How to Avoid This Mistake:

• Assess your withdrawal strategy and determine if starting Social Security earlier (such as at 62 or 63) could reduce your reliance on savings.
• If waiting until 70 requires withdrawing more than 4%-5% of your portfolio annually, consider claiming earlier.
• Balance the trade-off between receiving smaller checks sooner versus larger checks later.
• Understand that while waiting until 70 maximizes monthly benefits, pulling heavily from savings in the meantime can sometimes drain your financial resources too quickly.

Mistake #5: Failing To Plan For Health Insurance Costs

Health insurance is a major expense for early retirees, as Medicare doesn’t kick in until age 65. Many underestimate the cost of private health insurance or the complexity of selecting a Medicare supplemental plan.

How to Avoid This Mistake:

• Work with a health insurance specialist to compare plans and estimate costs.
• Consider Health Savings Accounts (HSAs) while still working to build tax-free funds for medical expenses.
• Research COBRA, ACA marketplace plans, or employer-sponsored retiree health plans as potential options.
• Be aware that Medicare only covers about 80% of healthcare costs. To avoid unexpected expenses, choosing the appropriate supplemental plan is essential. The average cost of a Medicare supplement plan for most Americans is around $150 to $200 per month, depending on the level of coverage and location.

Mistake #6: Supporting Adult Children At The Expense Of Your Own Retirement

Many retirees find themselves financially supporting their adult children longer than expected. While it’s natural to want to help, excessive financial support can jeopardize your own financial security.

How to Avoid This Mistake:

• Set clear financial boundaries for your adult children.
• Encourage financial independence instead of ongoing financial assistance.
• Recognize, as my research showed, that retirees who spend over $2,000 monthly on adult children are significantly more likely to report unhappiness.

Bottom Line

As factors such as government buyouts or significant corporate layoffs continue to create the conditions for more Americans to consider retiring sooner than they would have otherwise, the need for thoughtful planning has also increased.

Easing into retirement can help maintain financial and psychological stability. Proximity to family can potentially boost happiness. Establishing multiple income streams can diversify your income sources and hopefully fortify your financial security. Electing to collect Social Security at the most strategic moment can help preserve your assets. Factoring in future health insurance costs can help you pay for healthcare expenses before Medicare funds are available to subsidize. Setting healthy boundaries for financially supporting adult children can help prevent you from draining your own nest egg too quickly.

Life is unpredictable, but charting a course to avoid some of the more ubiquitous hazards can increase the probability of balance and happiness for those who exit their primary working years a little earlier. Everyone deserves to enjoy retirement, even when that comes sooner than you think.

This article is provided for informational purposes only and should not be regarded as personalized investment advice. Investors should seek advice from a qualified financial advisor about their specific situation prior to implementing an investment or retirement strategy.