Many people dream of retiring early. In a survey conducted by the American Advisors Group (AAG), 52% of respondents said they aimed to retire before age 65, and 46% said they would quit their jobs immediately if they won the lottery.
Globally, there is a growing number of people pushing to retire in their 30s or 40s. They are part of the FIRE (Financial Independence, Retire Early) movement. But if you want to retire that early, have you considered the implications of having 40 to 50 years of life ahead of you in which you won’t work and earn an income?
Here’s what you ask yourself before you take the step to retire early.
Do I have enough money to retire?
Retiring early means your retirement funds have to last longer. Maybe you’re not aiming to retire in your 30s, but even if you retire at 55 (the age at which most pension benefits can be accessed), you will need to live off that pension for 20-30 years.
An elderly couple smiling as they review their retirement accounts, representing the trust that clients have in the bank.
If you plan to retire at the U.S.’s full retirement age of 67, you can follow the “rule of 25” principle to estimate how much you’ll need if you live for 25 years. Calculate your annual expenses and times it by 25. For example, if your living expenses amount to $40,000 per year, you must save $1,000,000 before retiring.
If, however, you want to retire at 55, you may need to multiply your annual expenses by 30 or 35 years. This means you need a baseline retirement savings of $1,400,000.
Most people who use the rule of 25 principle also apply the 4% rule to their retirement planning. This refers to the percentage of your retirement savings you can safely withdraw each year without the risk of running out of money.
The 4% rule takes into account the U.S. stock market and inflation rates. The U.S. stock market typically grows at an average rate of 7% per year. If you withdraw 4% of your income per year, that should leave you with a 3% buffer to keep up with inflation.
You can use a retirement calculator to work out how much you need to retire early.
Do I want to retire?
Reaching financial independence early is great, but does that mean you want to retire? Would you prefer to continue working?
Many proponents of the FIRE movement don’t retire when they reach financial independence. They continue to work not because they must but because they choose to. Should they wish to retire at any time, they can.
For many people, their work gives them a sense of purpose and a structure to their day. Think carefully about whether you’re ready to exit the workforce. Ask yourself the next question to determine whether early retirement is right for you.
What will I do with all that free time?
The earlier you retire, the more time you’ll have on your hands. If you don’t have much to do, the days could drag on endlessly for many years.
So before you retire, think about how you plan to occupy your time during your retirement years. You could:
- work part-time
- pursue a passion project
- take up a new hobby or sport
- travel
- volunteer in the community
- mentor others
- start a blog or write books
Retirement is the start of a new chapter in your life. If you retire early, you’ll be young enough to enjoy an active life. As you grow older, you can scale down your activities.
Will I feel socially isolated or bored?
If your partner and many of your friends are still working, you could face many days with no one around during the day to interact with. Loneliness could affect your mental wellbeing. How will you counteract that?
You could move to a 55-plus retirement community. These retirement communities accept residents as young as 55 and offer lots of activities such as sports, fitness, dance, games, arts and crafts, and social events and excursions. You’ll be able to meet new people and engage in a variety of social activities.
If moving isn’t an option, is there a local community group, fitness club, car club, book club or tabletop game group you can join? If not, perhaps you can start one.
Am I able to cover medical expenses?
If you’re a young retiree, you may still be in good health. But as you age, that could change.
When you turn 65, you’ll be eligible for Medicare. But until then, can you afford private health insurance or pay your medical expenses out of pocket?
Healthcare in the U.S. isn’t cheap. If you are hospitalized, undergo an operation or develop a chronic illness, the treatment costs could run into hundreds of thousands of dollars. According to Fidelity Investments, the average couple age 65 can expect to spend around $315,000 on health care expenses during retirement.
You should factor medical expenses into your retirement calculations. While it’s hard to pinpoint a number as you can’t anticipate the health issues you may face as you get older, you should try to plan for it. If you don’t, unexpected medical expenses could deplete your retirement savings.
Other options to consider are:
- Staying on your employer-subsidized health insurance, if that’s possible.
- Being added to your spouse’s health insurance plan.
- Joining a healthcare plan through the Affordable Care Act (ACA).
Should I relocate?
When you retire, do you want to move to a different city or the countryside? Are you considering immigrating to a new country?
Retired people relocate for different reasons. Some seek a warmer climate, while others want a lower cost of living. Moving to a cheaper state could reduce your living expenses, which works in your favor. However, it could also lower your quality of life to a level you’re not willing to accept. It can be a challenge to strike a balance between the two.
Let’s say you’re thinking of moving from New York to Hawaii, two of the most expensive states in the country. Both states have high property prices, but a move may save money in other areas. For instance, home insurance in Hawaii is cheaper than in New York. The quality of life in Hawaii is also better, with less crime and better weather.
Am I prepared for the unexpected?
While you may do everything you can to prepare financially for retirement, external factors could throw a spanner in the works. An economic recession, stock market crash, civil unrest or political instability could negatively impact your retirement investment.
The earlier you retire, the greater the chance of experiencing an economic or political crisis during your retirement years. It’s wise to have a contingency plan in place to cater for unexpected events.
You could take the following steps:
– Increase your retirement savings so that you have a financial buffer to support an economic downturn which usually coincides with a sharp rise in inflation.
– Consult with a financial planner who can help put a plan in place to protect your retirement savings. This may involve switching to a lower-risk investment fund or spreading your retirement savings across multiple funds so that you don’t have all your eggs in one basket.
The pros and cons of early retirement
If you’re well prepared, retiring early offers some great benefits. However, there are some drawbacks to be aware of. Weigh up the pros and cons to help you decide whether retiring early is the right move for you.
The Pros:
Your well-being may improve. With less job stress, rush-hour traffic and office politics to contend with, your physical and mental health may improve. It may prompt you to consume less alcohol, quit smoking, eat less junk food, and exercise more.
You can pursue your interests. While employed, you may not have had time to devote to your interests. Perhaps you wanted to take up golf, learn to paint or start a music band. Now you can.
You can spend more time with your loved ones. We spend most of our adult years at work, leaving only a few hours a day to spend with family and friends. Retiring early means you can spend more time with your children, grandchildren, parents and close friends.
You can pursue professional interests. Retiring early doesn’t mean you must quit working altogether. You could start a new business, offer your expertise as a consultant or become a life coach. This shift in direction can be a rewarding way to kick off your retirement. You can still be productive but at a pace that suits you.
The Cons:
You may suffer mental or cognitive decline. If your days are devoid of structure, activities and social interaction, the lack of stimulation could lead to cognitive decline and feelings of worthlessness.
You could spend recklessly. Whereas before your days were spent working, now you may fill that void with shopping, entertainment, eating out, travel or splurging on gifts for the grandkids. If you overspend during retirement, you may burn through your savings much sooner.
You may feel disconnected from society. A job brings a social connection that some people miss when they retire. If most of your days are spent alone in your home, that social disconnect could lead to depression.
You may feel a loss of purpose. For many, their job shapes their identity and provides a sense of purpose. Without it, the days may feel empty and meaningless. That’s why it’s important to have other interests to pursue that bring meaning to your life.
Becoming financially independent gives you the option of retiring early. However, it isn’t the right choice for everyone. If early retirement is your goal, make sure you consider all the pros and cons and prepare properly.
Have enough retirement savings to cover day-to-day expenses, medical costs and unexpected eventualities.
Don’t quit today and wake up tomorrow with nothing to do. Approach your retirement with a plan on how to create a new sense of purpose that will bring meaning into your life. There’s no reason your retirement years can’t be as productive and enriching as your working years.
Most importantly, enjoy your early retirement — you’ve earned it.
Disclosure: This article is written by Deevra Norling who is a freelance content writer with 10 years of experience covering topics such as finance, entrepreneurship, small business, career, human resources, digital marketing and e-commerce.
