What You Should Know About Early Retirement


Fulfilling a dream of retiring early has its rewards if properly planned.

Early retirement is an enticing prospect: You can set your own schedule, pursue projects and causes that are most important to you, and spend time with family and friends in what amounts to endless leisure time.

Sounds great, right? Indeed, if early retirement were easy, most everyone would do it. But alas, it’s not. To retire early with the financial wherewithal to sustain your desired lifestyle throughout an extended period of time requires substantial resources and planning, as well as discipline. But if it’s important to you, it can be done, says Managing Wealth Advisor Warren Arnold.

The sobering reality is that for each year that you spend as a retiree before age 65, you place a double strain on your investment portfolio: You decrease your career earnings by a year while you increase the amount needed to finance your retirement by a year. For roughly the last 20 years, financial advisors have used a rule of thumb that an investor can withdraw approximately 4 percent of their portfolio to safely fund a 30 year retirement. This guide was the result of research done by William Bengen in the early 1990s. “An effect of the very low interest rate environment we have found ourselves in for the last few years has been a rethinking of the 4 percent rule,” according to Arnold, “potentially lowering the withdrawal rate.”

To make it work, consider increasing your rate of investment early in your career and making lifestyle decisions based on the amount you’ll have saved by your target retirement date, as well as your projected term of retirement. A financial advisor can help you devise a specific plan with those goals in mind.

“We can back into a ballpark number that shows what you’ll need to have a good shot at making it work,” says Arnold. “From there, we can focus on accelerating your savings and investing, and becoming more tax efficient.”

Retirement Strategies to Consider

If you plan to retire early, Arnold emphasizes three strategies to put in place now:

  1. Eliminate all debt before retirement, including mortgage payments. That way, the greatest possible share of your portfolio can be dedicated to discretionary spending.
  2. Delay major philanthropic gifts to ensure you don’t overcommit early in retirement.
  3. Layer an extra dose of conservatism on top of an already sensible plan. Because an early retirement can last a half-century, impossible-to-predict financial and life events have a way of popping up and wreaking havoc on investment accounts.

Advance planning may require lifestyle changes in the present, but the real test of your financial discipline comes in the years immediately following early retirement.

The First Stage of Early Retirement Sets the Tone

“The first stage of early retirement is like a second childhood without adult supervision,” Arnold says. “It’s like you’re sprung from a cage and can finally do what you want. People can go a little crazy and spend more than they thought they would. And nothing can derail a retirement plan more than pulling too much money out of your portfolio at the beginning.”

He recommends overbudgeting your retirement spending. If you love to golf and plan on playing three or four times per week, budget for five or six rounds instead. The same applies with vacations, eating out and spending money on your hobbies. In the early years of retirement, you’ll devote more money and energy to these activities than you think, so make sure your long-range plans can accommodate an early splurge.

Another opportunity to mitigate overspending is to find ways to occupy your time that doesn’t involve money. Examples are volunteering at a not-for-profit and pursuing what Arnold calls a “hobby job” — a vocation that sounds fun and generates income but isn’t as lucrative as your primary career (like working at a coffee shop or a music store). These are activities you will likely find meaningful, enjoyable and fulfilling, and that will distract you from the temptation of spending too much too soon.

Depending on your profession, you may also be able to continue working in your primary field on a part-time basis, either as a consultant, board member or independent contractor. The same rule applies: It’s great if you’re earning money, and it’s equally great if you’re engaged with an activity that doesn’t cost money. “If you’re not occupied, you may end up spending more,” Arnold says.

When to Test Drive Early Retirement

If early retirement is your goal, the time to begin planning is now, regardless of your age. Crafting your financial plan is only half the battle. It’s equally important to set and pursue lifestyle goals as well. If you have your eye on a particular nonprofit, start volunteering. If a certain hobby job appeals to you, start meeting people who work in that industry. If you dream of moving someplace new, start taking vacations there in all seasons to get a better sense of whether it suits you.

For those interested in an early retirement, it’s the chance to see if it truly is as fulfilling as they hoped. “You can test drive a lot of this,” says Arnold. They’ve heard the open road calling and can’t wait to get behind the wheel.