Retiring Early is Only Going to Get Harder


Photo by Tax Credits on Flickr

My neighbor retired from being a corrections officer at the age of 55. That was 30 years ago. He’s still retired and is doing well enough to maintain his lifestyle. However, after asking him how he put his retirement together, I was disappointed in my knowledge that it would be a path I could not follow.

He lives mostly off of his state pension and social security. Not a crazy recipe for those that retired 30 years ago, but they are hardly optimal for me today. The truth is, a lot has and is changing with regards to how people get retirement income and those changes will create challenges for those looking to retire early.


State Pension Changes

Private pensions are almost unheard of these days and government pensions are following in their wake. It isn’t a big surprise. State governments have long made promises that they could not keep to their employers. However, as pensions become more restrictive, it is important to note that early retirements are in the legislative crosshairs.

Just last week, the State of Washington passed a reform on state pensions which penalizes early retirement. For those retiring before 62, 55 and 50, the state progressively reduces pension benefits. If you plan to retire early from your State employment, you might need to consider making up for pension losses in your early retirement plan.

Social Security Changes

Just this year Canada changed the age for those looking to collect on the country’s equivalent social security program OAS. They added two years to the benefit age requirements going from age 65 to age 67. If Canada can increase retirement age, so can the US. Especially since raising retirement age is often used as a potential solution in Washington.

Two years probably doesn’t sound like much, but to a young professional starting out, it can be more than you think. Social security benefits are usually adjusted to inflation, so while annual benefits might be an annual benefit of $10-15 thousand today, it could be $40-50 thousand by the time you are retirement age. It’s a large potential loss for those who still have a long way to go for early retirement.

Increasing Taxes

There seems to be one thing both political parties agree on: something needs to be done with deficits, but that something is disconcerting for those seeking early retirement. Politicians on the left and right are talking about new tax structures to raise revenue. The good news is that no one is talking about raising income taxes on the middle class, but the bad news is that other tax raises are being considered.

Most of our retirement incomes are built around the income tax system. We pay income tax on interest and defer tax benefits on Roth IRA plans. However, what happens if several years down the road, government introduces a heavy new VAT, sales tax or carbon tax? Our retirement income which was once taxed through income taxes would now be subject to a second round of taxation be it consumption, production or carbon emissions.

It seems as though this blog’s job is getting more difficult, because retiring early is progressively getting harder.