‘Life happens’: New England couple with state pensions had their early retirement shattered by sudden medical expenses and inflation — 3 ways to prepare your nest egg for the unexpected

The dangers of early retirement

Many Americans aim to retire early so they can enjoy their post-work lives while they’re still healthy and mobile. But the average age of retirement is only increasing. According to Gallup’s annual Economy and Personal Finance survey, the average U.S. retirement age was 61 as of 2022.

But that number may shift in the coming years. Gallup reports that nonretirees plan to end their careers at age 66 on average. And there may be a reason for that. Rising costs and the goal of maximizing retirement income have more people rethinking early retirement for fear of seeing their finances take a quick turn for the worse.

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Such is the plight of Nina and James — a pseudonymized New England couple profiled by Business Insider — who retired at the ages of 60 and 56, respectively. As state workers, the pair was entitled to pensions that provide guaranteed income, plus some Social Security. But a series of unplanned events put them in a tough financial spot.

In 2019, Nina suffered a heart attack, which ate away at some of the couple's savings. James was then hospitalized with medical issues of his own. And in 2021, inflation began surging as the U.S. economy staged its pandemic recovery, making it harder for the couple to keep up with basic costs.

"You might think you have a nice amount of money and things are going to go smoothly,” Nina said. “But life happens."

Nina and James also received very little income from Social Security due to the Windfall Elimination Provision, which reduces those benefits for some retirees with state pensions.

"We've worked so hard, and we're being thrown crumbs now," Nina added.

Situations like these can leave you questioning whether a pension always leaves you better off.

Why inflation hurts retirees in particular

The past three years have seen a rampant rise and fall in inflation. And while that's been difficult for consumers on the whole, retirees have perhaps had to bear more of its brunt.

The median retirement savings account balance among Americans aged 55 to 64 was just $185,000 as of 2022, according to the Federal Reserve. Among those aged 65 to 74, the median balance was $200,000. And a recent AARP survey found that 20% of Americans aged 50 and over have no retirement savings at all.

For this reason, many retirees become heavily reliant on Social Security to keep up with their expenses. And while those benefits are eligible for an annual cost-of-living adjustment (COLA) that's indexed to inflation, those boosts often fall short.

The nonpartisan Senior Citizens League reported last year that Social Security recipients had lost 36% of their buying power since 2000 due to inadequate COLAs. As of 2023, the typical beneficiary would've needed an additional $516.70 per month to maintain the same level of buying power as in 2000.

And speaking of Social Security, the Windfall Elimination Provision has the potential to whittle down benefits substantially. Nina and James only receive a combined $682 in Social Security each month. That's well below the average $1,924.35 retirement benefit in October 2024.

James, however, is entitled to a state pension of about $40,000 per year that's eligible for a 3% annual increase. That’s considerably more than the roughly $23,000 per year in Social Security retirees receive on average.

All told, the pressure put on savings, inadequate Social Security income and the potential for emergency expenses makes early retirement a risky prospect — and older workers recognize that.

Prudential reports that one-third of 55-year-olds are postponing retirement due to inflation and higher living costs. But even those who retire at a more traditional age run the risk of an income shortfall.

Read more: 5 ways to boost your net worth now — easily up your money game without altering your day-to-day life

How to survive a financial shock in retirement

Whether it’s inflation, a medical emergency or an unplanned home or vehicle repair, no retiree is immune to financial surprises. But there are steps you can take to manage one more easily.

First, you can aim to boost your retirement savings and set yourself up with at least one year’s worth of living expenses in cash. This gives you the ability to leave your investments alone during periods of market volatility.

Secondly, you can plan to postpone your Social Security claim if that’s doable. You can file as early as age 62, but your monthly benefit will be reduced if you sign up before reaching full retirement age, which is 67 for anyone born in 1960 or later. You can also boost your benefit by 8% per year up until age 70 by delaying your filing beyond full retirement age.

It’s also worth remembering that Medicare likely won’t pick up the tab for all of your healthcare expenses. Eligibility begins at 65, but it may be a good idea to purchase Medigap (supplemental insurance) as soon as you’re able to for covering deductibles and coinsurance you’d otherwise have to dip into your savings for.

Prioritizing fixed savings contributions that take inflation into account can help make strategies like these more attainable.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.