You might dream of stopping work at 60 or even 55. That sounds nice: more time, more freedom. But there are hidden costs — especially in taxes, health care, and benefits — that many people don’t see until it’s too late.
Health Insurance Before Medicare
One big surprise is—you don’t get free health insurance until age 65 (Medicare). If you retire earlier, you must cover your own health care.
- A 62-year-old enrolling through the ACA marketplace could pay about $1,116/month for a “Silver” plan (no subsidy) on average, or ~$857/month for a cheaper “Bronze” plan.
- If you retire at 62 and pick a more generous plan or live in a pricey state, costs can be even higher.
- These premiums are recurring — they eat into your retirement savings every single month.
So while you think, “I’ll save my money for travel,” you may find much of it goes just to stay insured.
Early Withdrawals & Penalties
Often people tap their retirement savings early because they think, “I’ll need the money.” But withdrawals before age 59½ often come with a cost.
- If you take money from an IRA or qualified retirement plan before 59½, there is generally a 10% penalty on top of ordinary income tax, unless you qualify for an exception.
- Some exceptions do exist (e.g. for certain disabilities, first home purchase, substantially equal periodic payments), but they’re tricky to apply correctly.
- Studies show that early withdrawal penalties push people to adjust their behavior. One paper estimates that about 5.2% of gross first withdrawals are altered because of penalty rules.
- Many people don’t even report the early distribution correctly. The U.S. Treasury found in one year about 6.2 million early distributions, but 2.8 million weren’t reported properly, meaning $11.4 billion in unreported income.
In short: withdrawing early can cost you in taxes, penalties, and lost growth over time.
Social Security & Tax Traps
Retiring early affects how Social Security and taxes play together.
- If you claim Social Security early (before full retirement age), your benefits may be reduced by up to 30% permanently.
- Meanwhile, withdrawals from your retirement accounts (plus any other income) may push more of your Social Security benefits into the “taxable” zone.
- Higher income early on can also trigger IRMAA surcharges—extra Medicare premiums—later when Medicare kicks in.
So, trying to access your benefits earlier may reduce your lifetime income and increase your tax burden.
Sequence of Withdrawals & Lifetime Cost
How and when you withdraw money matters a lot.
- Drawing heavily from tax-deferred accounts early (when you retire early) can shrink your base for future growth.
- Example: Suppose you retire at 60 and start withdrawing $60,000/year from your tax-deferred accounts vs. waiting until 65 and withdrawing later. The early withdrawals reduce compounding and may leave your portfolio far smaller in your later years.
- That difference in balance can lead to thousands (or tens of thousands) less in income later.
Early withdrawals can be like cutting branches before the tree grows full — you lose future fruit.
Smarter Ways to Bridge the Gap
If you’re thinking of retiring before 65, here are smarter moves to reduce risks:
- Use taxable or Roth accounts first, before touching tax-deferred ones. That keeps your tax-deferred balances intact longer.
- Part-time work or consulting can help cover insurance costs or reduce how much you withdraw.
- Roth conversions during “gap years.” Convert portions of your traditional IRA into Roth when your income is lower so future withdrawals aren’t taxed as much.
- Delaying Social Security. If you wait beyond your full retirement age, your benefit grows, which helps make up for earlier gaps.
- Shop health plans carefully. Pick a plan that balances premium and coverage. Try to factor in subsidies.
These strategies don’t eliminate the risks, but they soften the blow.
How Can I Manage My Hidden Costs?
Retiring early can feel like a great goal, and it can be — if done carefully. But don’t let the hidden tax and benefit costs surprise you later. Health insurance, early withdrawal penalties, and Social Security timing all matter.
Think of it like a seesaw: the higher you swing early, the bigger the chance the other side will pull down hard later. Planning ahead gives you more control — and helps you retire early without regrets.
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About the Financial Planning Author
Alexander Langan, J.D, CFBS, serves as the Chief Investment Officer at Langan Financial Group. In this role, he manages investment portfolios, acts as a fiduciary for group retirement plans, and consults with clients regarding their financial goals, risk tolerance, and asset allocation.
With a focus on ERISA Law, Alex graduated cum laude from Widener Commonwealth Law School. He then clerked for the Supreme Court of Pennsylvania and worked in the Legal Office of the Pennsylvania Office of the Budget, where he assisted in directing and advising policy determinations on state and federal tax, administrative law, and contractual issues.
Alex is also passionate about giving back to the community, and has participated in The Foundation of Enhancing Communities’ Emerging Philanthropist Program, volunteers at his church, and serves as a board member of Samara: The Center of Individual & Family Growth. Outside of work and volunteering, Alex enjoys his time with his wife Sarah, and their three children, Rory, Patrick, and Ava.
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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice.
Please consult legal or tax professionals for specific information regarding your individual situation.
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