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Why ‘early retirement is one of the worst money mistakes’ you’ll regret, says Harvard economist

As an economist, it’s not in my DNA to draw blows. So I want to be honest: for most Americans, early retirement is not just a decision to take the longest vacation of their lives – it’s one of the biggest money mistakes they will regret.

The reason is simple: We as a group are miserable savers, which makes early retirement unaffordable. Financially, it is generally far safer and far smarter to retire later.

According to a report from the Boston College Center for Retirement Research, half of today’s working families risk a significant drop in living standards associated with retirement. The share would fall by about 50% if all workers were to retire two years later.

Of course, there are situations where early retirement is a good option. Some people have carefully planned and can afford to buy more free time. Many have no choice; they run out of physical or mental steam. Others find their jobs automated or outsourced.

Yet nearly two-thirds of people – between the ages of 57 and 66 – choose to retire early of their own free will, despite having spared almost nothing. And most of them are able to work without a disability, which would prevent them from staying on the job.

The baby boomer’s retirement debacle

Social security is not something to write home about

You can not expect to die

Most people’s lack of savings reflects a lack of focus on life expectancy, which is routinely used to set one’s planning horizon. It will half of the 50-year-olds live after 80 years. A quarter will reach the age of 90.

To understand what adequate savings actually entail, take Jane, a single 40-year-old Louisian. Jane, who plans to retire and take social security as a 62-year-old, earns $ 75,000 a year and has $ 150,000 in her savings account – an inheritance from a rich uncle.

Jane could live to 100. Like the rest of us, Jane can not count on dying on time. She has to plan to live to her maximum age, because she can.

Jane has not saved anything. She counts on Social Security and her 401 (k), with its $ 150,000 balance, to which she and her employer contribute 3% annually to maintain her pension. Jane is miles from base. Her retirement may last longer than she works. If she turns 100, she will have to save 28% of her home pay each year through retirement!

What if Jane takes Social Security at 70? Good move! This increases her life expectancy by over 10% and lowers her required pre-retirement savings rate to 16%. And if she plays the odds of dying young and plans to lower her standard of living by 1.5% annually from 80? Now her required savings rate is 13%.

Unfortunately, Jane saves nothing. If she continues to do so, her standard of living after retirement will be half her standard of living before retirement!

Yet Jane is actually in better shape than many others. About a third of workers in the private sector have no pension scheme. And a quarter of those who do fail to attend, even to the point where they get their free employer match.

The answer is to postpone retirement

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