Is early retirement right for you

You can have hundreds of reasons for an early retirement. Among other reasons one or more of the following situations in your life might make you long for an early retirement:

  • My work-life balance is horrible. In fact my friend (cousin, uncle etc.) died young due to the stress/long hours, I don’t want to end up like him! What you really need is a slower paced job, not an early retirement!
  • Have a job, but I cannot tolerate  - my job/office politics/co-workers/boss! Well this one is slightly tricky – all jobs/relationships come with an element of discomfort at some point or the other. Your best way forward is to grin and bear it or move on to some other job for some temporary relief, not an early retirement!
  • I need time for my round the world travel – or volunteering/ hobbies/ studies etc – and I cannot do this with my job! Well, of course you can! You can find ways to work around the constraints and demands of your job. These may not happen as often as you wish or on the days you want to, but it can still be done along with your job. Perhaps all you need is a ‘sabbatical’, not an early retirement!
  • In spite of my rich experience, I am not getting the jobs/promotions that I really want/deserve. Hmm … this is happening often nowadays, thanks to the economic crisis. This one hurts – as one of the biggest benefit of a job is the sense of ‘fulfilment’ it brings and if your job makes you feel inadequate, you do have a strong reason to get frustrated. I would still discourage an early retirement in this case. This can be solved in at least two different ways – Firstly by some expectation re-setting (consciously accepting the new reality) or Secondly by looking for an alternate job or business opportunity.

Often, a wish for an early retirement is nothing more than an expression of dissatisfaction with status-quo. Dealing with this dissatisfaction might be a better strategy, than retiring early.

There may be hundreds of reasons you can give for an early retirement, however, there is only one reason for you not to retire early – Inflation! A steady income with work/business is the easiest inflation hedge you can build.

Am I against early retirement? Hell, No! All I am trying to say is – early retirement is not easy, its probably not necessary and if taken, it must be done only for the right reason!

Why do you want to retire early

Many of us dream of an early retirement – we imagine drinking endless Martinis while lazing in the beach and outsourcing the hard work of earning money to our investments.

While these dreams are great water cooler talk or motivates you to get up on a Monday morning, you need to ask yourself honestly – what is my real reason/motivation for an early retirement?

Why is it important to understand the real reasons? Because, quite frankly, early retirement is a bad idea! Now, this is such a strong statement, so a few explanations are needed here.

  • A job gives you, the best inflation hedge. To get an inflation adjusted salary of $3000 per month, you need a corpus of at least $1.2 M (assuming a 3% withdrawal rate and a 1% real investment return)
  • Having a job, on an average, keeps you in a better physical, mental, and emotional health by giving you something worthwhile to do for 8 hours. This may or may not be true in your particular situation, but in general, there are known positive health benefits to constructive work.
  • Retiring before or during the age of peak earning potential (roughly 35-50 years) – can significantly impact the overall net worth of the individual. Do you want to retire early and count pennies for the rest of your life?
  • Your social standing can take a hit. A CxO level person or a Director understandably has better social standing and influence than a young retired person.
  • The biggest problem with early retirement is that after an extended career break, often it is next to impossible to return back to same levels of earnings – so we have smaller chance to recover from any of life’s late curve balls.
With all these odds stacked against the idea of early retirement, it is very important to understand your real motivation for early retirement. For most people, taking an early retirement is similar to treating a symptom rather than the cause of an illness. Are you interested in early retirement for the right reasons?

How much more do I need for retirement

All the retirement planning calculators I have seen try to answer -”How much do I need” question. Some assume a percentage (say 80%) replacement levels of last income or others begin with your current expenses.  Undoubtedly both methods throw a very large depressing number.

The question which you are better off asking is – If I were to retire now, what will I have every year and work on increasing this number. eg) If your retirement accounts plus investments are worth $100,000, assuming a 3% draw down for perpetual income – you are already ready to retire now at a draw down of $3000 per year!

This is a “glass is half full” view of the problem as against a “glass is half-empty” view. Of course, you may choose not to retire as $3000 is too low, but this can be more inspiring –  can you set a goal to increase this to $4000 a year?