5 Potential Drawbacks of Early Retirement - CalPERS PERSpective (2024)

If you’re hoping to make the most of your golden years, here are some items to consider before submitting that retirement application.

1. You’re Not Yet Eligible for the Full Employer State Contribution to Your Health Benefits in Retirement

Since health care is one of the largest expenses in retirement, waiting to become eligible for the full employer contribution amount may be a smart money move. First, make sure you know your employers’ contribution to your monthly health premium once you retire. Employer contributions in retirement vary from state and public agencies to schools.

Eligibility and vesting determinations are also driven by a variety of factors, such as first date of employment, position or status held in the last appointment prior to retirement, and amount of accrued service credit. These factors may change over the course of an individual’s career. To learn more, plan to attend one of our CalPERS Benefits Education Events online or in person or view our Guide to Health Benefits Into Retirement (PDF).

2. Your Social Security Benefit Will Be Smaller

If you’re eligible for Social Security, every year you retire before the full retirement age you will receive a reduced benefit. For example, if you were born in 1960 or after, your full retirement age is 67. Let’s say you plan to retire at 62, which is the minimum age to claim retirement benefits under Social Security. This means your monthly benefit would be reduced by 30%. If you were to wait until age 65, it drops down to a 13.33% reduction. Make sure to calculate the differences in benefit amounts so you’re aware of what the best option is for you.

3. You’re in Debt

Aiming to be debt-free in retirement should always be a goal. Using a portion of your retirement funds toward debt repayment pushes up your living costs, which means you’ll have to build a larger sum to cover early retirement costs.

We recommend watching our video on Managing Debt, from the Planning Your Financial Future series, for a quick rundown on the basics that’ll set you up for success. Additionally, our article on How to Plan Your Retirement Lifestyle covers some crucial questions you’ll want to ask yourself during the retirement planning process.

4. You May Need to Cut Expenses on Extra Activities

While a cost-of-living adjustment (COLA) typically begins the second calendar year of CalPERS retirement, the annual rate of inflation and existing retirement law could affect the onset of your adjustment. While it’s hard to predict what inflation will look like when you retire, the 40-year high we’re currently in might be a good time to reflect on how you plan to cut expenses to added retiree activities, such as travelling, eating out, and hobbies.

5. Your Retirement Account Will Have Less Time to Grow

If you’re signed up for a CalPERS 457 Plan through a participating agency, the good news is you won’t be penalized for withdrawing money before the age of 59½, unlike with a 401(k) or 403(b), which will typically charge a penalty fee of 10%. However, you’ll still be responsible for owing income tax on all withdrawals, regardless of age, which will mean a smaller nest egg. Make sure to look at your plan’s agreement and make note of any additional stipulations.

Figure Out What Works Best for You

If after reading this article you realize you’re not ready to retire, there are still ways to plan for the retirement freedom you desire.

You may be eligible to purchase service credit. Review the information on our Service Credit webpage to learn more.

And, if you’re still in need of some form of income stream but want the retiree benefits, you might consider being a retired annuitant for a CalPERS employer, working for a private industry employer, or another public pension system. Keep in mind there are restrictions. For example, CalPERS disability retirees cannot be employed in the same position from which they retired or in a position which includes duties or activities they were restricted from performing at the time of disability retirement. Read Employment After Retirement (PUB 33) (PDF) for important details.

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