Opportunity cost represents the value forfeited when one option is chosen over another. For example, shares of Tesla were trading at $250 this time last year. Today those same shares are worth $1,500. The opportunity cost of spending $1,000 last summer instead of investing it in Tesla is $5,000
Whether we realize it or not, we face opportunity costs every day. The opportunity cost of eating a steady diet of fried chicken is the health benefits you would enjoy if you ate healthier fare. The opportunity cost of your failure-to-launch adult child living in the basement is the income and independence he or she would experience if they would step away from the game controller and go find a job.
There is a clamor today for early retirement. It lives and breathes in the FIRE movement (Financially Independent, Retire Early). Thanks to Covid, this phenomenon has become even stronger. After working from home, people have gotten a taste of retirement and they want more. Some fail to realize the opportunity costs associated with early retirement.
Early retirement’s biggest opportunity cost is lost wages. People who retire early miss out on the income they would have earned had they kept working. Based on the average U.S. annual income of $63,000, retiring early is equivalent to buying a new Mercedes each year and pushing it off a cliff.
Another opportunity cost is increased healthcare expenses. Most people’s medical insurance comes by way of their employer. Most employers pay much if not all of the premiums. The minimum eligibility age for Medicare is 65, which means those who retire early must foot the bill for medical insurance until they reach 65.
No one has a crystal ball or knows what the future will hold. This is particularly true when it comes to retirement. We do not know what the economy will do, what changes may take place in the tax code, or how long our health will hold out.
One thing we do know is the longer you work, the more money you make. Social Security was never intended to be a retiree’s sole source of income. It’s up to us to save for retirement in order to supplement our Social Security retirement benefits.
Here’s another cliff analogy: retiring early is like jumping off a cliff. There is no undo button. Actually, there is, but with each passing year it becomes less effective. You can go back to work, but if you have been out of the workforce for many years it’s unlikely you will earn what you did before.
The fact is, by the time you realize you didn’t save enough money, it may be too late. You’ve been out of the workforce for too long and nobody wants you. You are perceived as rusty and out of touch with the latest technology. Not only that, but even if you did manage to find someone willing to hire you, your health may have deteriorated to a point where you are no longer physically able to work.
Retiring early is not all it’s cracked up to be. Those who take the plunge increase their level of uncertainty and decrease their lifestyle both before and after retirement. It requires a lifetime of scrimping and saving and missing out on things in order to save like crazy before retiring, followed by more of the same after retiring. If you are wealthy, go for it. Otherwise, it’s likely you will be better off taking the traditional retirement route.Photo credit: Pixabay