There is no strict legal definition of early retirement, as a mandatory retirement age is illegal for most occupations in the United States. Individuals can begin receiving Social Security benefits from 65 to 67 years of age, depending on year of birth. Therefore, early retirement is often defined as choosing to leave the workforce prior to the age at which one is eligible for Social Security benefits. Individuals in their 30s and 40s are considerably less likely to retire early than those who are 50 and older. The concept of early retirement as a transition into unemployment is misleading, since many individuals who “retire” early continue to participate in the labor force, at least part time.
Individuals may choose to retire early for a number of reasons. Obsolete skills, job dissatisfaction, or chronic health problems may contribute to the decision to retire early. People may retire early because they wish to travel, spend more time with family, do volunteer work, or pursue alternate careers. If they are unable to find other jobs, older workers who have been laid off from jobs may retire sooner than they had planned. The choice to retire early is facilitated by having adequate financial reserves or attractive alternatives to work.
Employees may retire early because they have been offered generous financial incentives by their employers to do so. Some employers, in an effort to cut costs, offer employees the opportunity to retire early on a voluntary basis. Although a company’s up-front costs associated with an early-retirement program are high, payroll costs are decreased over time. Because voluntary job cuts are seen as more humane than involuntary cuts, companies sometimes offer early retirements to avoid bad press and negative employee reactions associated with forced layoffs. Early-retirement incentives are generally offered only to employees who meet certain age and length of service requirements, such as a minimum age of 50 years and 10 years of service. Early-retirement incentives, sometimes called “buyout packages,” might consist of lump-sum payments, monthly retirement benefits over a period of several years, full pension payments ahead of schedule, Social Security bridge payments, and health and life insurance.
When offering early-retirement packages, companies must follow guidelines set forth by the Age Discrimination in Employment Act (ADEA), which prohibits discrimination against employees who are 40 and older.
The Older Workers Benefit Protection Act, an amendment to the ADEA, permits early-retirement incentive plans as long as they are voluntary. The company cannot coerce, threaten, or pressure employees into accepting an early-retirement offer. Eligible employees must be given adequate information about the terms of the offer and a reasonable period in which to make a decision. Early-retirement incentives must be offered to groups of employees rather than an individual employee but can be targeted to specific departments or facilities. A drawback of voluntary early-retirement programs, in comparison with involuntary job cuts, is that the best employees might choose to leave while more poorly performing employees stay.
For individuals, drawbacks to early retirement are largely financial and health related. Because of increases in life expectancy, retirees, especially women (who live longer than men), require significant financial reserves. Health insurance costs may rise dramatically if the retiree’s former company provides less generous benefits or charges higher premiums in comparison with regular employees or drops coverage altogether. Early retirees should seek financial planning to ensure adequate cash reserves and insurance coverage following retirement.
It is important to recognize that early retirement does not always mean going from full-time employment to being unemployed. Increasingly, the trend is for individuals who retire early to seek bridge employment and work longer after retiring early. Early retirees may work in part-time or temporary jobs, become self-employed, or be rehired by their former employers as consultants. Retirees may seek bridge employment to provide income to compensate for lower wages in retirement, although bridge employment tends to pay less than the retirees’ previous jobs. Individuals whose identity is strongly tied to work are less likely to retire early, but if they do so, they are more likely to seek bridge employment, which can help smooth the transition from career to retirement and offset social isolation that may occur in retirement. A form of bridge employment is phased retirement, in which longer-tenured employees, rather than leaving their companies entirely, are given shorter work hours and less responsibility as they gradually phase into full retirement.
Some experts believe that the trend toward early retirement is ending and that the twenty-first century will be characterized by later, not earlier, retirement. The average retirement age for men in 1950 was 70 and decreased to 62 in 1985. In 1985, the trend toward early retirement began to decrease, and labor force participation for men 60 and older increased significantly more than earlier trends would have predicted. Women’s retirement patterns have followed a similar trend. One factor in later retirements is the shift away from a manufacturing economy with jobs requiring heavy physical labor toward a service economy with jobs that can be done by employees with more diverse physical abilities. Another factor in the trend away from early retirement is the increasing use of defined-contribution pension plans, such as the 401(k). Traditionally, employers have offered defined-benefit plans, in which an employer promises to pay retirees a guaranteed amount. In a 401(k) plan, the retirement benefits received depend on the investment performance of the stock market, so that employees cannot accurately predict their retirement incomes. Therefore, employees may be reluctant to retire early if they perceive that their future retirement benefits are less secure and reliable.
Early retirements are less prevalent when the labor market is strong and unemployment is low. Because of this, some experts believe that the trend away from early retirements is temporary, resulting from the rapid economic growth of the 1990s, and that the average age of retirement will again decline in the future.
- Clark, R. L. and Quinn, J. F. 2002. “Patterns of Work and Retirement for a New Century.” Generations 26(2):17.
- Feldman, D. C. 1994. “The Decision to Retire Early: A Review and Reconceptualization.” Academy of Management Review 19:285.
- Feldman, D. C. and Seongsu, K. 2000. “Bridge Employment during Retirement: A Field Study of Individual and Organizational Experiences with Post-retirement Employment.” Human Resource Planning 23(1):14-25.
- Ruth, J. P. 2001. “Should You Retire Early?” Advisor Today 96(11):26.