Although the prospect of early retirement is appealing to many people, there is much to consider before taking the plunge – and not all considerations are related to money. Savvy pre-retirees spend time running numbers, preparing for both the expected and unexpected, and trying to plan for their life after work. If early retirement is part of your financial plan, be sure to read through our list of The Good, The Bad and the Ugly, before making any moves.
Retirement doesn’t mean “the end” for everyone. In fact, more and more we’re seeing that retirement is just the beginning. Many of our clients “retire” from their regular 9-5 job that helped them accumulate wealth, in order to pursue their true passion – which can mean different things for different people. Perhaps you’re looking to spend more valuable time with friends and family, establish a successful business or organization for a cause that is close to your heart, or maybe go back to school in order to learn something new and exciting. The good thing about retiring early, is that you have more time to do what you truly love. For many early retirees, it’s not “the end,” it’s “what’s next?”
Thanks to advances in healthcare and technology, we are all living longer, healthier lives – which is great! However, longevity must be taken into consideration when planning for retirement. Retirees need to have enough assets to be able to maintain a 30-40 year retirement, or maybe more. Retiring early also means a loss of opportunity to save and accumulate assets for longer period of time.
Another challenge of retiring early is that the vast majority of people only have a plan for wealth accumulation. They also really need a plan for efficient wealth distribution to help properly manage risk and return.
From a financial standpoint, it’s important to understand all of the different variables that can impact your retirement and investments. One mistake can cost you significantly – and there’s no new income to replace what you may have lost. In addition, understanding your fixed expenses, and creating a plan to cover as much fixed expenses as possible using guaranteed income streams like Social Security, Pensions and/or Annuities is essential.
Aside from any financial aspect, retirement is an emotional decision. Having a specific plan to determine how you will spend your time, whether that includes accomplishing lifelong goals, or taking up new hobbies, can help you stay active and engaged. Retirees often don’t realize just how much free time they will have, and the importance of filling it with meaningful activities. Can you handle going from a full day of work, with a set schedule, to having no schedule and no professional responsibilities? While many are excited about the idea of having more free time, some retirees end up with a lost sense of purpose, and experience loneliness and boredom. Consider planning out specific post-retirement activities and goals to help emotionally prepare for early retirement.
In addition, many people – no matter how much they plan ahead – don’t realize how expensive retirement can be until they’re in the trenches. We have also found that retirees tend to react much more emotionally to market downturns then they did prior to retirement. This emotional component can cause retirees to make horrible mistakes at the worst possible time.
If you’re thinking about early retirement, be sure to speak with a trusted financial advisor to determine if you’re ready, both financially and emotionally, to create a successful exit strategy.