Some people love their jobs so much they never want to retire. If that’s you, you should give thanks for your incredible good fortune.
Far, far more people dream of a life when the daily commute is a distant memory in which they can spend their precious days doing whatever they please, be that starting their own business, smashing their way around the golf course or spending time with the grandchildren.
Indeed, there is a growing number of people who are decades away from traditional retirement age yet hoping to step off the hamster wheel as early as possible by adopting a radical ‘make more, spend less’ policy. The FIRE Movement – FIRE stands for Financial Independence Retire Early – is gaining popularity amongst millennials who are aiming to leave the workforce not at 50 something – the traditional age for early retirement – but in their 40s, or even 30s. Their goal of financial independence doesn’t necessarily mean that FIRE enthusiasts wish to spend the rest of their years not working but they are pursuing freedom of choice as to how, where and when they work.
If you want to have that freedom of choice before you reach official state retirement age, what can you do? Here are seven things to think about if you are planning to retire early.
Decide what retirement means to you
For our parents and grandparents the concept of retirement was simple – you worked until you reached your sixties, when you would receive a pension and live happily ever after doing whatever you liked for the two or three – if you were lucky – decades left.
Nowadays, retirement is not such a cut-and-dried affair. Early retirement for many people means leaving the corporate nine-to-five behind and earning a living from a passion or hobby. Think the banker turned barista or the policeman turned pub landlord.
Are you planning to retire early and stop working altogether or are you looking for a lifestyle change with a better work/life balance doing something that you love?
How will you spend your days?
Online businesses and passion projects can be extremely rewarding but are not always the nirvana they seem. They require a lot of planning and hard work. If you still need to earn, be aware that self-employment is no picnic. Working for yourself can be as, or more, stressful than a nine-to-five.
If you plan to stop working altogether in your 30s or 40s, you are – hopefully – going to have many years of time to fill. Perhaps as many as seven decades. That is an awful lot of time to keep busy. Do think carefully about the realities of the retired lifestyle and ensure that you have plenty of projects – hobbies, volunteering etc – to maintain an interesting and fulfilling life.
Save, save, save while working
Proponents of the FIRE movement aim to save between 50 and 75% of their income. That is an aggressive target which involves a fair amount of sacrifice and will be too much for many people. That is fine but make sure you save something.
Whether you plan to retire at 35, 55 or 65, you should be saving and investing for your retirement and the more you can save the better. The sooner you wish to retire, the more of your income you will need to dedicate to retirement saving. As a minimum, aim to save 15% of your income into your pension. By saving regularly you will be enabling time and compound interest to work their combined magic in your favour to build wealth and achieve your retirement goals.
How much will you spend in retirement?
Whenever you plan to retire, working out a budget of how much you will spend and how that expenditure breaks down is essential. You need to look at factors such as whether you will own your own home or need to rent, whether you plan to emigrate to a different country or travel the world. The kind of lifestyle you are looking for will affect how much you need to save for retirement.
How will you access your retirement savings?
Certain retirement plans will dictate how and at what age you can access funds and often there will be withdrawal penalties if you want to get hands on the cash sooner. There may also be tax considerations to take into account when tapping into a pension early. The rules vary from one country to another. If you’re serious about retiring early, it’s worth taking professional advice regarding the most tax-efficient way to save which gives you the access to your savings that you are looking for.
When you do reach the stage of retiring it is important to keep tabs on how your nest egg is faring. As you will be withdrawing part of your savings each year you need to monitor your withdrawal rate and expenditure and maintain flexibility as required.
Think about healthcare
Depending on where you are based, you could well be left without state coverage for health if you retire early. In the States for example, Medicare cover only starts when you are 65 so retiring before then leaves a coverage gap which you’ll need to fill. Do not be tempted to wing it. None of us can predict what health issues might arise in our 30s, 40s and 50s and a serious health issue if you are uninsured could blow your careful financial planning to smithereens.
Be risk aware
Any retirement plan involves financial risk but this is exacerbated if you are retiring early. Pension savings are vulnerable to two major risks: inflation and stock market slumps.
Inflation causes the value of money to fall as prices increase reducing buying power. Rising inflation can have a catastrophic effect on the value of your savings. In recent years inflation has been low and hasn’t posed much of a threat but that doesn’t mean it won’t in the future. The interest on your investments must at least keep pace with inflation if you don’t want the value of your savings to decrease. That’s why it is important to put careful thought into your investment choices.
If your retirement savings are invested in stocks, stock market slumps could also seriously derail your retirement plans especially when retirement is imminent. You need to manage downside risk appropriately by ensuring that you have a balanced portfolio matched to your risk tolerance.
There are a lot of issues to bear in mind when planning for your retirement regardless of whether you plan on working into your sixties or stepping off the hamster wheel sooner.
With so much at stake, it seems obvious that taking professional financial advice is a good idea. A professional financial planner can:
- Help you clarify your retirement goals
- Crunch the numbers with you to determine how much you should be saving
- Assist you with budgeting
- Advise on the best investment vehicles to build your wealth in the most tax-efficient manner
- Offer independent advice on health insurance and find a tailored medical plan to suit your needs and budget
- Build risk protection into your financial planning
Why would you go it alone when you can benefit from the experience, knowledge and expertise of an expert?
If you’d like assistance to realise your early retirement dream, why not contact me at email@example.com for a chat?
I am passionate about helping people from all backgrounds to make the most of their finances. I have been surprised throughout my career at just how many high earners are failing to save and invest wisely and is passionate about showing younger people in particular how to stop squandering their disposable income and instead use it to build wealth and secure their financial future.