First you gotta ask yourself: Is this what you really want?
Depending on how old you are, work could really be getting you down, and early retirement might sound awesome. It is for some: Andrew Van Fossen retired at age 37 from his management consulting job and is now, primarily, a stay-at-home dad, although he does spend some leisure time blogging about investment and finance. Of course, Van Fossen is a multimillionaire. He was making close to $200,000 per year when he realized that he not only wished to exit the rat race but also that he could because he’d planned ahead. From the moment he graduated from college and began working at a healthcare technology company, he was making smart choices about his money—smart choices like these. Within five years, he’d saved enough to get his MBA from the University of Chicago, which he parlayed into a six-figure salary. He started by maxing out his retirement fund contributions, which he invested carefully and profitably in a combination of conservative mutual finds and higher-risk equities. Van Fossen has never looked back. He was fully prepared for the more-relaxing rhythm of life that awaited him.
But here’s the rub: NOT everyone is suited to retiring early.
“Too many people rush off to a life of leisure, only to find out that they’re bored,” notes Minneapolis-based financial planner, Derek Hagen, CFP, CFA. “Retiring too early can cause regret, both financial and personal,” agrees Roger Cowen, a Connecticut-based retirement specialist. Retirees are sometimes surprised to find themselves missing the social connections, explains Cowen, as well as the sense of purpose that comes from having work-related goals.
What to keep in mind
Even if you’re certain that retiring early is the right personal decision, other factors come into play that can make retiring early a tricky move. For example:
- Health insurance, the cost of which can be significant when you’re no longer part of a group plan. When figuring out how to retire early, half of all wannabe retirees say that keeping health insurance or other benefits is a major reason they continue to work, according to Cowen.
- Financial risk, and your tolerance for it, both emotionally and financially. “Can you stomach a few recessions?” asks Craig G. Bolanos, Jr., CMFC, AIF, a Founding Partner and Chief Executive Officer of Wealth Management Group, LLC. The longer you’re retired, the greater chance there is that you’ll end up cycling through at least one market downturn. “Be honest with yourself as to whether or not you (and your portfolio) can stomach a few recessions throughout a longer retirement,” Bolanos suggests.
- The high cost of inflation. “If you retire in your 40s, you could have another 40 years ahead of you to live off your savings,” says Matt Hylland, Financial Adviser with Hylland Capital Management. “Even with modest inflation, you have to expect your purchasing power to erode over time.” So, before you make your plans to retire early, you really need to consider how much it will really cost to live several more decades. “Those who are honest with themselves have a much better chance at having a successful retirement lifestyle,” agrees Warren A Ward, CFP, of WWA Planning & Investments.
“It’s always a challenge to get someone in their 20s to think about what their 60-something self might need and want,” points out Terry Kennedy, President and CEO of Appreciation Financial, who also notes that he’s never seen anyone succeed in the process who didn’t begin planning out how to retire early at the beginning of their career. The key is taking an honest look at what you’re doing and continuing to do so every single step of the way.
How can you make it happen? According to self-declared “millionaire-next-door,” Rocky Lalvani, who is happily retired at the age of 51 (although he does provide some financial coaching at RicherSoul.com), the answer is simple: Save, save, save, and then save some more. Save it any way you can, through a frugal lifestyle, through savings accounts, tax-deferred accounts (like 401ks and IRAs), and tax-free accounts (like Roth IRAs, and HSAs). “I was able to save millions as a W-2 employee thanks to automated savings, since the day I began to work,” Lalvani says. “Having the money automatically placed in one of these accounts allowed my wealth to accumulate every year.”
“Put those pre-determined amounts aside, and don’t touch a penny until you retire,” agrees Brendan Mulloolly, CFP, Investment Advisor, who believes you can build to retiring early even without a high income, as long as you have a high savings rate. “Focus on what you can control, automate it, and let your good habits compound on themselves. Over time, you’ll be shocked at how great the outcome will be.”
“Consider your savings as the first bill you have to pay each month,” suggests Mary Ellen Garrett, Senior Vice President and Wealth Management Advisor at Merrill Lynch in Atlanta. And don’t make exceptions when you get a Christmas bonus or a tax refund, advises Jacob Dayan, CEO and co-founder of Community Tax. Instead of spending it, put that windfall into an IRA or another retirement fund, Dayan suggests.
If you get a raise, simply pretend you didn’t, suggests Andrew M. Aran, CFA and partner with Regency Wealth Management in New Jersey. If you finish paying down a loan, start putting the amount you’ve been paying all along into savings too. Instead of allowing lifestyle creep to set in as our fortunes increase, let your savings reap the benefits. “Think of it as savings creep,” jokes Lalvani. Here are some other tips for saving money, from people who happen to be great at it!