Early Retirement Pitfalls - and How to Avoid Them

Steering clear of the biggest early retirement mistakes

Woman looking at computer with shock.
Watch out for these early retirement pitfalls. Medioimages /Photodisc /Getty Images

Early retirement may have been forced upon you, or perhaps you are lucky enough to purposefully choose to leave the work force early. Either way, if you retire early, to make sure your money and income lasts as long as you need it to, you need to avoid several common mistakes.

Here are four early retirement pitfalls to avoid.

Pitfall 1: Relying on Factors Outside Your Control

If your early retirement plan only works if your investments earn 7% a year, inflation stays under 3%, your company pension plan pays full benefits forever, your health insurance costs never go up, and your home continues to appreciate in value, then you could end up in trouble.

You must not rely on factors outside your control.

How to Avoid It

Count on your ability to adapt. Be willing to adjust spending and lifestyle if some of the outside factors don’t turn out just as planned. Keep current on skills you can use to earn part-time income on the side. Set aside extra savings, not just the bare minimum that makes your plan work. Review your plan and income projections annually so you know if adjustments need to be made.

Pitfall 2: Spending Too Much Too Soon

Spending more than planned is like taking an advance on your paycheck. It will catch up with you later. Your early retirement plan should specify exactly how much you can withdraw from savings or investments each year, and you must stick within those limits. Many early retirees spent too much too soon, and now they are headed back to work.

How to Avoid It

Develop a detailed budget before you retire early. Make sure you add in all the “one time” expenses that seem to occur each and every year; things like home and auto repairs, medical expenses and travel.

Some people create a “replacement fund” and set aside monthly income into a separate account that they can use when so-called "unexpected expenses" come up. If you withdraw funds from investment accounts, set up your monthly or bi-monthly withdrawal as an auto deposit and treat it just like your paycheck – as if there no additional money available – only the amount that is deposited.

To help you prepare, don't forget to utilize a retirement expense worksheet and go through the steps to estimate retirement expenses as soon as possible. Although no plan is foolproof, realistic expectations will help prepare you for an outcome within your control.

Pitfall 3: Taking Social Security Too Early

Although available at 62, new research shows, particularly for married couples, working out a strategy where one of you delays the start of your social Security benefits to a later age makes your money last longer. Taking Social Security early can often hinder your overall retirement plan.

How to Avoid It

Develop a plan as to how and when to collect your Social Security benefits. Run an analysis on Social Security benefits before you collect. The best way to do this is to play around with an online Social Security calculator that shows you how to optimize benefits, or find a financial advisor who has an intricate knowledge of Social Security to help you with this.

Too many people take Social Security at age 62 and leave money on the table. They look at it as "take the money and run" instead of viewing it as a way to protect themselves from running out of money at an older age. 

Pitfall 4: Too Much Time, Too Little Money

Having a lot of free time sounds like a dream come true, which is why most people shoot for early retirement in the first place.

For some, though, extra time means more time to spend money carelessly. Shopping, travel, arts & crafts, home decorating, and expenses associated with hobbies can add up.

How To Avoid It

Make sure you know what you want to do with your time before you retire. Do you have a list of things you have always wanted to do? See? Learn? Help out with? Write all these things down. You may be not be able to do them all at once, but perhaps each year of early retirement can be devoted to a new item on your list. The key is finding things you can be passionately involved with; things you care about.

Having time is a real joy, and it only makes sense you use it to do things you enjoy and can reasonably afford. This includes hobbies, volunteering, helping out family or doing something new, even part-time.