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Effects of Early Retirement on Pensions

Effects Of Early Retirement On Pensions

Individuals work hard throughout their lives in order to save the necessary financial resources that will allow them to retire. In general, most employees retire around the age of 62. However, more and more employees are choosing to retire before the average age of retirement. While there are some early retirement benefits that are associated with retiring prematurely, there are also numerous complications that may accompany this decisions.

If an individual does not develop an adequate early retirement plan, he/she may not have the finances that are necessary to support himself/herself through the duration of his/her retirement. An early retirement plan should take into consideration the finances that are currently available in an individual's account, the funds that he/she will require throughout the duration of his/her retirement, and any early withdrawal penalties that he/she will face. If an individual fails to address all of these considerations when establishing an early retirement plan, he/she may experience financial hardships later in life.

As noted, there are numerous early retirement benefits that may cause an individual to consider retiring prematurely. The most obvious advantage of early retirement is the free time an individual will obtain. With the accumulation of this free time, an individual will attain the ability to pursue hobbies and activities that he/she enjoys. Also, early retirement will provide individuals with more time to spend with their family.

In most cases, individuals spend the majority of their time working so that they are able to relax and enjoy life once they reach the age of retirement. The prospect of one day being able to partake in the activities one desires without the stress that is generally associated with employment allows employees to endure the monotony or anxiety that often accompanies a daily job. Another reason that employees sometimes consider early retirement is they are offered early retirement benefits. In many cases, early retirement benefits will include a substantial sum of money.

In other instances, it may involve extended health coverage. Employers often offer older employees early retirement benefits in order to reduce company spending. Generally, older employees are being paid relatively high salaries because they have worked with the same company for numerous years. If an employer can convince older employees to retire early, he/she can reduce spending and free up finances to hire younger employees.

Despite the fact that early retirement benefits are often inciting, it is essential for an individual to carefully consider his/her financial situation and to develop an effective early retirement plan before accepting an offer. Although early retirement is often perceived as a dream come true, it is important for an individual to understand the potential negative consequences of this course of actions. Withdrawing money from a retirement fund or a pension plan before it has matured usually results in penalty fees.

In most cases, if an individual begins withdrawing money from his/her retirement funds before the age of 59½, he/she will be required to pay a 10% penalty on the funds that he/she is entitled to. A 10% penalty is a large portion of an individual's savings. For example, if a retiree has saved $50,000 throughout the duration of his/her employment, he/she will be required to pay $5,000 in penalty fees for making an early withdrawal. This penalty fee will be on top of the tax an individual will be required to pay.

Imaginably, there are some exceptions to this financial penalty. For example, an individual may be permitted to make an early withdrawal if he/she experiences severe medical problems or becomes disabled. However, most individuals who retire early will face these penalty charges. Another common consequence associated with early retirement is that an individual's savings will be depleted before he/she dies. Therefore, he/she will experience financial difficulty and may have trouble making essential choices when it comes to

NEXT: Employee Retirement Income Security Act

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