Why retiring early could be an expensive mistake: After wave of middle-age workers quit their jobs after pandemic – experts warn they now risk outliving their 401k

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Greg Wilson may only be turning just 44 later this month – but he has already given up working for good. 

The married father-of-three retired when he was just 42 years old, after a 22-year-long career in financial services.

And he is one of millions of employees who fled the workforce during the pandemic after lockdown made them re-evaluate their priorities. 

But is retiring early a good idea? CNBC’s Mad Money host Jim Cramer once warned that employees who retired too young could ‘pay for it for the rest of their life,’ adding workers were ‘betting about how long they’ll live.’

And as figures show only 29 percent of Americans are on track to cover all their living expenses in retirement, a host of other experts are also calling for caution. 

Greg Wilson, pictured with his wife Erin, son Jonathan and twin daughters Elizabeth and Allison, retired at 42 years old

Leaving the workforce early means you miss out on maximum benefits in retirement, experts warn

For Wilson, leaving the workforce was always his main priority. 

‘I wanted to retire early so I could spend my time with my kids instead of at work,’ he told Dailymail.com. 

‘I maxed out my 401k, and I bought rental houses. I created two buckets – one to get me from age 40 something to 60 and another to get me from 60 until death.’

Wilson, who lives in St Louis, Missouri, did not make $50,000 a year until he was in his thirties, but now he is enjoying the freedom that comes with early retirement.

He is among those inspiring the FIRE movement – although he says he had never heard that phrase before he retired himself. 

Financial Independence Retire Early (FIRE) is a lifestyle movement with the goal of acquiring financial independence and leaving the workforce early. 

The model became particularly popular among millennials in the 2010s, gaining traction online. 

And it gained further prominence during lockdown.   

According to research by the Federal Reserve Bank of St. Louis, around 2.4 million additional Americans retired in the first 18 months of the pandemic – making up the majority of the 4.2 million people who left the workforce between March 2020 and July 2021.

Some of those were forced to retire early due to a poor labor market. 

But there are pitfalls when leaving work young, with many people not realizing how much money they might need to see them through later life. 

And an early exit could mean a poorer retirement – and the risk that your nest egg could run dry entirely. 

Fidelity found that a meagre 29 percent of people are on track to cover all of their expenses in retirement, down from 38 percent in 2020

Joel Schiffman, from Schroder Investment Management,  has warned that retiring later means you will not receive the maximum monthly benefit in retirement 

According to the US Census Bureau, almost half of workers are not saving enough for retirement. 

For the second year in a row, working Americans aged 45 and older say on average it will take about $1,100,000 of savings to retire comfortably, according to a Schroders 2023 US Retirement Survey released in April.

However only 21 percent of people expect to reach that benchmark.  

Some 59 percent say they expect to have less than $500,000 saved, and 34 percent predict they will have less than $250,000 in savings. 

And a report last month by the US’s largest 401k plan provider Fidelity Investments found that a meagre 29 percent of people are on track to cover all of their living expenses in retirement – down from 38 percent in 2020.

A separate Fidelity report found the average value of a 401k pot sank by 20 percent from $130,700 in the last quarter of 2021 to $103,900 in the same period last year.

The drop was attributed to turmoil in the stock market and inflation.

While the rate of US annual inflation has cooled to just below 5 percent, it remains stubbornly high compared to the Fed’s 2 percent target.

As a result households have been forced to dip into their savings – or even accrue debt to cope with the soaring cost of living. 

Alongside concerns around keeping up with the rising cost of living, experts warn that early retirement can also mean you miss out on the maximum Government benefits. 

Retirement expert Joel Schiffman said: ‘What you want to do in theory is accumulate enough assets so you can defer taking social security as long as you possibly can.’

You can start claiming Social Security benefits as early as age 62, but it will result in a lifetime reduction in payments, 

The reduction depends on your full retirement age which varies depending on your birth year. 

For example, those born in 1937 and earlier have a retirement age of 65 while those born between 1943 and 1954 have a full retirement age of 66. 

Those born in 1960 or later have a retirement age of 67. 

So, if somebody whose full retirement age is 67 retired at 62 they would only receive 70 percent of the benefit they are entitled to.

And the Government will pay those who delay their retirement – thanks to a credit created by Congress in 1972.

For example, somebody with a retirement age of 67 can receive 124 percent of their benefit if they don’t sign up until they turn 70. 

Retirees should also be aware that they cannot enroll in Medicare coverage until 65.

Schiffman, who is Head of Strategic Partnerships at Schroder Investment Management, continued: ‘For every year that you do take that benefit, you deprive yourself of the benefit of maxing out at age 70.

The issue is compounded by the fact that it is harder than ever to save for retirement.

Red-hot inflation and the soaring cost of living has meant that many workers have already been forced to ‘unretire’ and head back to the office after finding they cannot rely on a fixed income. 

An estimated 1.5 million retirees re-entered the labor market in the year up to May 2022, according to an analysis of Labor Department data by Indeed economist Nick Bunker for The Washington Post

Despite this, Wilson does not regret his decision to retire early, and says that he and his wife Erin do not spend any less than they did when he was still working. 

The couple have bought money investment site ChaChingQueen.com and Greg started his own site DadisFIRE.com which details his journey to early retirement. 

For Schiffman, the most important thing when it comes to retiring is meticulous and careful planning. 

‘Everybody needs to have a plan and not enough people have taken the necessary steps to creating a retirement plan. It gives you something to aim for and increased the likelihood of achieving your goals,’ he said.