We’ll admit it, we’ve dreamed of early retirement, but who hasn’t? It’s not necessarily related to job satisfaction, but imagining how you would spend your days if you were footloose and fancy-free can be an entertaining exercise. And we know we’re not alone: the recent FIRE (Financial Independence, Retire Early) movement is symbolic of the increased desire by some individuals to minimize their number of working years. The FIRE movement encourages living in a highly frugal manner in order to save early in life, and then retire with a minimalist lifestyle.
It may not be the ideal lifestyle for some but the reasoning behind it is the basis of financial planning: you need to save enough to cover your expenses during your lifetime. How much you need to save depends on the kind of life you want to live and, importantly, how much cushion you need to cover any unknowns. Planning for unanticipated expenses as they relate to making a decision about when to retire is a vital component to any financial plan.
Setting ambitious retirement goals is exciting and positive, as long as they are in line with your current financial position and ability to generate income/capital during your working years. There can be significant risks to retiring early, especially at an unusually early age. First and foremost, financial planning is based on a large number of assumptions, only some of which we can control. Investment returns, for example, have been strong for the past decade thanks to the market’s recovery following the financial crisis, but you can’t assume those returns will continue into the future. Markets are volatile and there can be periods of negative returns that your retirement account needs to be able to withstand.
Other assumptions include expenses – how much money do you need to cover basic costs such as housing, health care, food, clothing, etc.? And how much money do you need to enjoy your life above and beyond surviving? Do you expect to belong to a golf club? To travel the world? To pay for your grandkids’ private colleges? Even considering inflation estimates, it’s difficult to know how much these things will cost in the future or if you will even have the same goals in 10 years and beyond.
We can control our spending to some degree but unforeseen events like a car accident or heart attack can change everything in an instant. You may not have the ability to go back to work after retiring early if you are permanently disabled and require care. Health care costs in general are a particular area of concern. Without a job, you will need to buy your own health insurance until you qualify for Medicare at age 65 and we all know how unpredictable the cost of health care premiums, co-pays, etc. are over time.
Beyond investment return and cost assumptions, it is very difficult to predict how the government will change the tax structure over a long period of time. However, given the current national debt and ballooning deficit, it seems likely that rates are headed higher in the future. If you’re retiring at a fairly typical age, there is less uncertainty associated with this factor. If you choose to retire with half your life ahead of you, a lot can change.
Another government controlled and important assumption are so called entitlements, such as social security. Social security and Medicare benefits should not be considered a given and the younger you are when you retire means that you are paying into the system for fewer years, which will directly impact your potential benefit. What’s more, these benefits are at risk of changing significantly or going away entirely. The political will doesn’t currently exist to reform the system so that it’s sustainable over time but, at some point, the government will be forced to make tough decisions about the future of entitlements.
These are just some of the risks associated with the assumptions we make when creating a financial plan. It’s always important to consult a financial advisor before making major financial decisions but especially when considering an early retirement. Keeping the uncertainties in mind, there are also benefits to working later in life that may be easy to overlook or take for granted.
- Health Care
If you have a job with benefits, you likely have the ability to save for health care costs with pre-tax dollars through an FSA or HSA. In retirement, you will have to pay for health insurance with after-tax dollars. Maintaining company paid (or subsidized) healthcare premiums will significantly reduce the risks of rising health care costs and their impact on your financial plan. Rather than fully retiring, you might consider a low-stress, yet fulfilling job that provides health care benefits.
- Retirement Savings
Under current law, if you’re working and have earned income, you’re eligible to contribute to retirement accounts where your funds grow tax-free. If you’re not working, no dice. What’s more, you can contribute to a Roth 401(k) or IRA and pay current tax rates, removing the risk of higher rates in the future.
- Social Security Benefit Growth
As it stands today, if you’re still working and don’t need to start your social security benefits, you may postpone taking them until age 70 (as opposed to Full Retirement Age), allowing your benefits to increase at 8% per year so that you receive a higher annual benefit for the rest of your lifetime.
- Health Benefits
Beyond financial considerations, it’s important to note the increasing evidence that working longer may lead to better health and longevity. According to a 2015 study published by the CDC, “adults who continue working tend to be much healthier across multiple health outcomes.” These “health outcomes” include serious conditions such as heart disease and cancer. Naturally, the health benefits depend on the nature of your job and the amount of stress it generates.
There are a lot of moving parts to a financial plan and the decision to retire is a major one. These risks and benefits should be helpful considerations in that process.