The thought of early retirement is very alluring, especially when retirement is so close you can easily envision it. But early retirement is not unlike the Song of the Sirens. It can pull you into the rocks or sail you through a shortcut to happiness that you likely richly deserve after a life spent working hard. Before you allow yourself to be swallowed up by too many daydreams and not enough critical forethought, consider the pros and cons of taking early retirement.
Reduced Earning Years
Retiring early means reducing the number of years you’re actively earning income—with multiple ramifications. That means fewer contributions to retirement accounts, less time for investments to grow, and fewer opportunities to boost savings. Missing even five years of peak earnings can change retirement projections significantly. For small business owners, leaving early may also mean stepping away during the years when their business is most profitable, potentially reducing both salary and eventual sale value.
The Social Security Question
Social Security benefits are one of the most critical financial levers in retirement. Claiming them before full retirement age results in permanently reduced payments. For example, retiring at 62 rather than 67 can cut monthly benefits by up to 30 percent. That reduced income must be replaced from other sources, which can strain personal savings. On the other hand, some retirees calculate that starting earlier helps them collect for a longer period, especially if health concerns limit longevity. The decision comes down to balancing current needs against long-term security.
Healthcare Before Medicare
One of the hidden costs of early retirement is healthcare. Medicare doesn’t begin until age 65, so anyone retiring before then must find alternative coverage. Marketplace plans can be expensive, and private coverage even more so. Premiums, deductibles, and out-of-pocket expenses can eat into savings quickly. Business owners who retire before 65 may also lose access to group health benefits they provided through their company, leaving them to navigate the individual market. This cost alone is often a deciding factor for whether early retirement makes sense.
The Longevity Challenge
Money has to last as long as you do, and leaving the workforce early means stretching assets over a longer retirement. Someone retiring at 55 could face 30 to 40 years of living expenses. Inflation, market volatility, and unexpected emergencies only add pressure. Without careful withdrawal planning, even substantial savings can dwindle faster than expected. Working with a CPA or financial planner to model different scenarios—optimistic and pessimistic alike—can help reveal whether the numbers hold up.
Tax Implications of Early Withdrawals
Retiring early often means tapping into retirement accounts before age 59½. Doing so can trigger early withdrawal penalties in addition to ordinary income tax, unless exceptions apply. Even without penalties, drawing income earlier can push you into higher tax brackets in the years you’re still paying down debt or covering dependents’ expenses. On the flip side, leaving the workforce early may create windows of lower taxable income, which can be used strategically to convert traditional retirement funds into Roth accounts at a lower tax cost.
Impact on Business Succession
For business owners, the question of early retirement carries added complexity. Exiting the company earlier than planned may mean selling at a discount, passing leadership before the next generation is ready, or missing the opportunity to capture higher valuations in stronger markets. Business succession is rarely a quick process, and early retirement can force rushed decisions. A CPA can help structure buy-sell agreements, valuations, and tax strategies to preserve as much wealth as possible during the transition.
Housing and Lifestyle Adjustments
Though money is the central issue, lifestyle choices inevitably tie back to financial planning. Downsizing to a smaller home, relocating to a state with lower taxes, or cutting back on discretionary expenses can help savings last longer. Some retirees choose to stagger expenses—handling home renovations or major purchases while they’re still working—so that those costs don’t hit their retirement accounts too early. These adjustments make financial sense because they directly influence cash flow needs in retirement.
Opportunities for Semi-Retirement
Not every early retirement decision is an all-or-nothing choice. Some individuals step back from full-time work but continue part-time consulting or project-based roles. Business owners may keep a seat on the board after selling or gradually shift responsibilities while drawing reduced income. This semi-retired model provides income that supplements savings, reduces the draw on investment accounts, and softens the tax impact of a complete withdrawal from the workforce.
The Psychological Side, With Financial Consequences
It’s worth noting that early retirement also comes with non-financial adjustments. While the main focus here is money, how you spend your time affects your finances, too. Boredom or loss of structure can lead to overspending on a daily basis, which is like unplugging the drain hole on your coffers.
Balancing Pros and Cons
On the positive side, early retirement means enjoying more years of health and freedom, reducing work stress, and gaining flexibility to pursue other interests. On the negative side, it brings reduced Social Security benefits, higher healthcare costs, fewer earning years, and the risk of running out of money. For small business owners, the stakes are even higher since the timing of retirement often influences both the business’s value and the owner’s personal wealth.
The Role of Professional Guidance
Ultimately, early retirement is a numbers game that benefits from professional oversight. CPAs can evaluate tax implications, model different retirement ages, and assess how savings, investments, and business assets align with long-term goals. What looks possible at first glance may carry hidden risks without a detailed financial analysis. Conversely, creative tax and investment strategies may make early retirement feasible for those who assume it’s out of reach.
In the end, the choice comes down to preparation. With the right planning, early retirement can be more than a dream—it can be a financially sound reality. Without preparation, it risks becoming a costly mistake. Taking the time now to review your situation with a CPA ensures that whichever path you choose, it’s one built on a solid financial foundation.
by Kate Supino