Many people expect to be able to retire early, but their expectations of what they will receive in terms of their company’s retirement benefits and Social Security may be too optimistic.  Let’s look first at company retirement benefits.

An increasing number of companies are telling their employees to finance a greater percentage of their retirement income out of their own savings.  Currently, only about 20% of all private sector workers have an employer-sponsored pension, according to an AARP Bulletin (April 2004).

Even employees who work for a company that has a pension plan need to be aware that a large portion of their pension benefits will be earned during their last several years of work.  The following statements were made in an article in The Wall Street Journal (4-17-95):

Many people can increase their pension checks by 25%, 50%, even 100% – just by staying on the job a few more years.

Delaying retirement typically boosts the pension payout because participants accumulate more years of service and may also see an increase in the ‘final pay’ used in the pension formula.  Moreover, most pension plans have a provision that reduces the payments to employees who retire early – typically, before age 60 or 62. . . . Delaying retirement shrinks or eliminates that early-retirement penalty.

Most employees probably don’t realize how large the reduction in their pension income will be if they retire several years early.  The following example illustrates the potential impact of early retirement on pension income:


  • Employee wants to retire at age 55.
  • He can expect annual pay increases at least somewhat above the rate of inflation, if he remains with the company.
  • His pension benefits will be reduced 5% for each year he retires before age 62.
  • He would receive a pension credit of 1.5% for each additional year he works for the company.


  • The salary base used to calculate the employee’s pension benefits will probably be at least 30% to 40% lower, if he retires at age 55 rather than at age 62.
  • The penalty against his pension benefits will be 35% (5% x 7).
  • He will lose annual pension credits totaling 10.5% (1.5% x 7).
  • Therefore, by retiring at age 55 rather than at age 62, the employee will receive pension benefits that are roughly 60% to 65% lower – for the remainder of his life!

Furthermore, because many employees change jobs at least several times during their working career, a large percentage of them are not able to accumulate as much in pension benefits as they would if they remained with the same company. Assuming the same pay increases and identical pension plans at each of the companies for which he can work, the employee will receive significantly higher pension income by staying at the same company rather than changing jobs.  And the greater the number of companies for which he works during his career, the lower will be his pension income.   (Of course, the results could be much different if the employee is able to substantially increase his income by changing jobs or if he will benefit from more generous pension plan provisions by going to work for a different company.)

What about Social Security?  According to the Social Security Administration, Social Security replaces only about 40% of the average worker’s pre-retirement earnings.  And proposals to bolster the long-term financial condition of the Social Security program could reduce even this meager percentage.  Nevertheless, for many of the elderly, Social Security is their major source of income (i.e., it accounts for more than half – and, in some cases, all – of their retirement income).

Now let’s consider savings to supplement to these other sources of retirement income.  According to The Wall Street Journal (9-28-08), of the workers aged 55 or older . . .

  • 28% have saved less than $10,000
  • 8% have saved $10,000 to $24,999
  • 7% have saved $25,000 to $49,999
  • 16% have saved $50,000 to $99,999
  • 18% have saved $100,000 to $249,000
  • 23% have saved $250,000 or more

Furthermore, a subsequent AARP Bulletin (December 2010) indicates that 49% of workers aged 55 or older have saved less than $50,000, a significant increase from the 43% indicated by the figures shown above.

Even if these people will get pension benefits, they probably are not saving enough for retirement.  For them, a comfortable early retirement is not likely to become a reality.  And even many people who have been saving significantly more may discover that they cannot afford early retirement.  As people live longer, inflation becomes a growing problem.  In 10 years, an annual inflation rate that averages about 4% will increase living costs by almost 50%.  The cost of health insurance is an especially important consideration.  Retirees who don’t have any health insurance coverage benefits through their former employer may have to pay expensive premiums until they qualify for Medicare at age 65.

Furthermore, people can’t even be sure they will be able to continue working at their job until they reach regular retirement age.  Companies are frequently laying off employees in order to reduce expenses.  In addition, many people develop health problems that prevent them from continuing to work as long as they would prefer.

An article in The Wall Street Journal (4-11-04) states,

[T]he strategy of delaying retirement to make up for a savings shortfall . . . often gets waylaid by layoffs or health problems, either your own or a family member’s.

[One study] found consistently that two in five retirees left the work force before they expected to, often due to health problems or because their office or plant closed its doors.

Another Wall Street Journal article (4-9-08) says,

[W]orkers are continuing to postpone the date they plan to retire, often with the hope of padding their nest eggs.  The typical worker expects to retire at age 65; 20% plan to work into their 70s.  But the typical retiree surveyed actually retired at age 62, with just over half of the workers retiring sooner than they had planned.

The solution is that people need to learn to spend less and save more.  Otherwise, they will have to accept the fact that they really can’t afford to retire — at least, not early.  [To learn how to calculate the amount of money that you and your spouse are likely to need to supplement your other sources of retirement, please see our article entitledSufficient Savings.”]