Read any financial news site today and it will be full of accounts of people who worked hard to retire early. Whereas most Americans hope to retire around 65 and think of retiring at 50 as retiring early, some of these accounts feature people who have retired as early as 35. It’s pretty impressive to think that people have the ability to do that, and it can leave those of us still in the workplace feeling just a little bit envious, but is retiring early really all it’s cracked up to be?
What It Takes to Retire Early
There’s a common thread to many of these early retirement stories. In many cases, the person or people involved started out in a fairly high-paying job, such as investment banking or tech. By starting out making a lot of money but minimizing their expenses, they are able to save a huge portion of their paychecks, sometimes up to 70%.
They have also maxed out their workplace 401(k) contributions, getting the maximum employer match too. That enables them to save as much as possible pre-tax income as they can and invest it in well-performing funds. Many also saved additional money in brokerage accounts, or purchased rental real estate to bring in additional income. In other words, they were putting their money to work for them.
Many early retirees also look to cash in on their early retirement, starting websites, writing books, etc., in order to bring in additional income in retirement. That way they’re still “working,” albeit at a greatly reduced pace compared to their time in the workplace.
But the common factor to all of these early retirees is that they made their goal and they stuck to it religiously. They ignored the temptations to buy a fancy new car, go on expensive vacations, eat out twice a week, etc. They knew that if they buckled down and worked hard to make their goal of early retirement then they would still have decades of enjoyment ahead of them.
What Early Retirement Assumes
When retiring early, you’re dependent on what you’ve saved up to last you through retirement. That means that you have to have saved up a large enough amount of money that you can live off dividends and interest. And if you’re being very conservative, it means that you’ll try to open up some additional income streams in retirement, such as blogging or independent consulting.
But one of the assumptions you’ll have to make is that you won’t suffer any appreciable losses in retirement. You’ll have to hope for constant growth so that you’re not eating into your principal. Remember that if you retire at 35 you have an additional 40-60 years of life ahead of you that you need to plan for. Will your money last that long?
Many of these early retirees may have done well so far, but 10, 20, 30 years down the road will they still be retired, or will stock market crashes force them back into the workplace? Remember that the dotcom bubble saw some stocks lose three-quarters or more of their value, and stock markets overall lost nearly 60% of their value during the financial crisis. Those kinds of losses could be devastating to an early retiree.
Undoubtedly many early retirees have invested in “safer” assets, which to mainstream financial planners normally means bonds. But with rising bond yields bringing an end to a decades-long bond bubble, bond prices are decreasing. Decreasing bond prices plus the prospect of falling stock prices could put early retirees in a bind. That’s why it’s important to have a diversified portfolio that invests in a variety of assets, including assets such as gold that hold their value when the economy starts to perform poorly.
What You Can’t Do in Early Retirement
Most importantly, retiring early means that any major financial changes to your lifestyle will be more difficult to undertake. Many early retirees place great value on independence overall, not just financial independence. They want to travel and see the world while they’re young, so they either purchased a small house or continue to rent an apartment.
In many instances they also don’t have children, don’t plan to have children, or have had children and don’t plan to have anymore. But what happens if they decide that they want to have more children, want to adopt a child, or want to settle down and buy a larger house? Or what if they suddenly suffer a severe health crisis? While retiring early can be a blessing for many people, for most others being confined to live largely the same lifestyle for decades on end could feel highly constrictive.
Although early retirement isn’t the best choice for most people, there are still some takeaways that many of us can use in our own lives.
Key to being able to retire at any age is minimizing expenses. The more money you spend, the less you can save, and the higher your cost of living will be. If you cut out unnecessary expenses and live within your means, that will stand you in good stead into retirement.
Minimizing expenses will help you to maximize your savings. At a time when the national savings rate is under 7%, it’s no surprise that those who are able to retire the soonest save 50%, 60%, or even up to 70% of their paychecks. With that kind of attitude towards saving you can invest in a few years what for many people takes decades to accumulate.
But no amount of savings will help you retire if you don’t invest it wisely. While stocks can provide for significant amounts of growth during boom times, once you get close to and enter into retirement the name of the game is wealth preservation. Here you’re going to want to invest in assets that still make a return that you can live off, but that won’t be susceptible to major swings in the market.
Investing in gold, such as through a gold IRA, is one way of doing that. You can roll over existing retirement assets into a gold IRA and still enjoy the same tax treatment as a conventional IRA. Over the long term gold even slightly outperforms stock markets, giving you a stable source of income that isn’t at risk of crashing.
No matter how you choose to invest, however, the crucial step is that first one, making the decision to start investing. The earlier you start investing and the more you’re able to save, the more money you will have to enjoy a long and fulfilling retirement.