Today on Agile Finance Radio, we are going to talk about Early Retirement. This is part one of a two or three-part series where we look at if you should join the Early Retirement Club. So listen in to see if you are a candidate for taking early retirement and what it takes to join the club.
- Learn the questions you should ask before stepping into early retirement.
- Understand why your community is so important before you take the leap.
- Uncover how you are going to pay for retirement.
Learn how to create your personal financial statement.
Dig deeper into working during retirement.
Some of you may have heard of the FIRE movement, which stands for Financial Independence Early Retirement. There are some interesting thoughts out there and frankly, some extreme positions for and against the FIRE movement.
If you’ve listened to my podcast for a while, you know I don’t like to take extreme positions. I like to gather the facts and see if there is anything that I can apply to my situation. Today I wanted to start walking you through some of the thinking and conversations you should have before pulling the trigger on early retirement. It’s not for everyone.
I first started to think about early retirement back in 2007 or 2008 seriously. I read a book by Joe Dominguez titled Your Money or Your Life. It really made me start to think about things differently and begin to ask what if?
In general, retirement is a big transition, and you want to make sure you have things in place to start with a winning plan, especially if you consider an early retirement, which I think of as 60 or earlier.
Why Do You Want An Early Retirement?
The first thing to answer is, why do you want to take early retirement? There are many reasons to take early retirement, but you need to understand your motivation to do this. You must be completely honest, transparent, and authentic with yourself and your spouse if you are married.
Do you want to retire because you happened to turn 62, and that’s the earliest you can claim Social Security? Of course, that may not be the optimal time to claim social security, and you could be losing out on thousands of dollars.
Maybe you are ready for a pause in life and need a change of pace or direction. That could mean a vocation change that aligns your work with your passion. Or maybe you want to have more control over your time to spend it on things that have become important to your life stage.
So what does early retirement mean to you? Do you want to start a business? Do you want to scale back your hours and work part-time? Or are you just frustrated with where you are in life and see this as a happy solution?
Understanding the source of why you want to do this is critical. Especially if you are not happy in your current situation, you could be stepping out into something that you’re not prepared for when all you needed was a change of priorities in your work or family life.
It’s not unusual to have a few key things that are influencing your decision. For me, I felt like I had come to a point in my technology career where I had done all that I could, and the work just wasn’t as fulfilling as it had been. I knew I needed to align my work with my passion, which was personal finance.
The other thing for me was time. You all know that being in the technology industry is fast and furious and requires a significant time investment to do your job well and stay educated in all the trends and new technologies. I couldn’t commit that time moving forward, knowing that I had four kids growing up quickly, and I didn’t want to miss out on that opportunity.
Alignment of work and controlling my own time surfaced as my primary reasons to make the change. Spend some time thinking about why you want this and allow this take some though over several days or weeks.
What Will You Do With Your Time?
The next thing to consider before jumping into early retirement is, what will I do with the time? I don’t think we were created for a life of leisure in my view of a fulfilled life. Sure, it’s nice not to have to be "always-on" and connected like we were in our vocation, but there’s only so much entertainment and recreation that we can do before getting bored.
So, what will you do with your time? Don’t bypass this critical step and only think about the fun and entertainment. You will be disappointed after six to nine months. You’ll be like, is this it?
Seriously, write down a list of ten things that you will do. It can be work-related if you want to continue to do good work that helps out others. What about a charity or particular cause that you’ve always wanted to be able to volunteer your time? Could you be a mentor to the younger generation? Who can benefit from all your years of knowledge, expertise, and skills?
What about hobbies? Do you like cooking, woodworking, drawing, painting, or sports? Make sure you explore things that interest you and dedicate time to do those.
I want you to think about your time because people who have a purpose for their lives other than themselves are typically more fulfilled and happier.
This is an area that I didn’t have any trouble with, but that may not be the same for you. I knew I wanted to help people with their finances, volunteer at some organizations, and I have multiple interests in hobbies and activities that I wanted to explore.
How Will You Continue Your Community?
Let’s look at the next area and question you should be asking: how will you stay connected? One of the struggles for some people that move into retirement is their relationships. They’ve had a community through work and, for some, that made up most of their interactions with others. It can be challenging to make that transition if you don’t have a community outside your work environment.
You may think that you will stay connected to your colleges that you leave behind, but that relationship will change, and you won’t spend the time on those relationships you think. You are in a different phase of your life, and the relatability factor just isn’t the same.
Many people become lonely during retirement because they don’t have established relationships or activities that can fulfill our need to be connected. We weren’t made to be isolated and separated from others. Part of the joy of life is being connected to others to help you during your lows and celebrate the highs.
Studies have shown that people that are connected to others live longer and happier lives. That makes sense to me, and I’ve experienced that myself. If you don’t have a circle of friends outside of work that you are connected with regularly, I would pause before you leap into early retirement.
Look at your interests, hobbies, and causes you want to support and start developing those relationships before you make a move to help with the transition. Even an introvert like me needs connection with others. Don’t take this lightly for your emotional and overall well-being.
How Will You Pay For Retirement?
The final thing we are going to cover today is how will you pay for retirement? This is generally the number one question people ask or are wondering about. Some people think that they will only need half their income or even less than that to live once they retire. Maybe that’s possible but is that the quality of life you want? To live on half the lifestyle you were before?
I think you’re setting yourself up for a disappointing retirement if that’s the approach you take. I certainly wouldn’t recommend starting your plan off with that assumption. We’ll talk about some high-level things now, and then in part two or three will get into more details on this topic.
The first thing to ask is, what do I have? Meaning, what do you have that can generate an income for your retirement? This is where you get grounded in determining where you are for retirement. The best way to see your financial picture is with a personal balance sheet.
Specifically, we want to know what assets we will have available to generate an income. If you don’t have this, you need to create one after listening to the podcast. I’ll have a link to how you can create one in the show notes.
You need to identify everything that can be used as an income producer. This could be your investment accounts like a 401(k), IRA, ROTH IRA, or taxable investment accounts. Include your bank accounts, real estate investment properties, and insurance.
You’ll also want to know the amount of social security that you will receive and any potential self-employment or part-time work. Once you have all of that, add it up and see what your monthly income will be. You could use a rule of thumb number like 4% to calculate what you could take out for retirement from your investment accounts.
For example, let’s say you have 1 Million in your investments. If you take that times 4% of the 1 Million, it equals $40,000 or $3,333 per month. That number may not be right for you, but it’s a starting point and not a guarantee.
If you don’t have income that’s 70 or 80% of your preretirement take home, I’m not sure you should consider early retirement. Could you still do it, sure but it requires flexibility and potential lifestyle changes that you may not want to make.
If you don’t have any debt and have a clear picture of your expenses for the things you want to do in retirement, then that may keep the possibility open. If you aren’t up to that level of income replacement, then analyze your expenses in detail and look at what you want to carry forward and then factor in additional costs for your interests and health care as you age.
The other important thing is understanding your retirement window. At what age are you going to retire, and what age do you expect retirement to end? Obviously, no one knows when they will die, but you have to make an educated guess based on your family history and your current health. It’s better to be conservative here rather than run out of money in retirement.
We’ll spend more time on this in the next parts of our early retirement club decision. For now, if you think you’ve got a solid why for retirement, have a grasp on what you will do to fill the time, have a friend and community circle, and have assets to generate your income, then you could be a candidate for early retirement.
I hope that helps get the wheels turning on your early retirement decision. Next time we will look at some of the pros and cons of early retirement and get into more conversation about generating income.
That does it for this episode of Agile Finance Radio. Tune in next time as we discover more ways to win with money, gain at life, and ultimately retire with confidence.