The picture that comes to mind when you hear about ‘early retirement’ is a serene one. One of relaxation, having quit the rat race, living life on your own terms and, most importantly, without having to worry about money. Ever.
But early retirement may not always be what one expects it to be.
Some people choose to retire early, while many others who don’t wish to hang their boots early are actually forced to retire. And this is the reason why even if you're not considering early retirement as a possibility, it makes a lot of sense to prepare for it anyway.
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Life’s tough lessons
At times, life just gets in the way of your plans. You may have thought that you will work till the ripe age of 60 as you love your 9-to-5 job. But as someone rightly said, everybody has a plan until they are punched in the face. So you never know when life might turn a corner.
-You might be out of a job and find it difficult to get back. The reasons could be older age, redundant or outdated skills, technological disruption, or the collapse of the sector/industry itself.
-Your health may not allow you to continue working. Or, there may be an unfortunate injury. It might seem that it won’t happen to you, but it’s not that uncommon. Most jobs are becoming increasingly stressful. So, you never know for how long one can work with those high-stress levels.
-You love your job today. But may start hating it a few years down the line. And may be you don’t have any other skills that can find you employment easily in other fields. You may still continue to work, but maybe it would have been good if you had prepared for this eventuality.
-You love your family. God forbid, but if some health condition of parents, spouse or children requires you to get actively involved in their treatment, you may have to make compromises on the job front. Like reduce working hours, look for lower-paying jobs, etc.
The idea behind presenting these terrible scenarios is not to present a bleak picture, but to make readers aware of the enormity of such situations.
It is for these reasons and possible eventualities that you should prepare for at least some degree of early retirement. That way, your ability to cope with any such situation will be much better if you have a pool of savings to fall back to.
Save up more
And there is another benefit of doing so. The math of retirement says that if you front-load (or fast forward) your retirement savings (i.e., increase savings rate), it is much easier to achieve a large retirement corpus.
Let me highlight one more thing – compare the timelines for early vs regular retirement. Let’s say you begin saving at 30 and work till 60 (regular retirement) and live till 85. So you have 30 years to save and 25 years to spend. On the other hand, in case of (forced) early retirement, you begin saving at 30 and work only till 48 (forced out) and live till 85. So, you get to save for only 18 years and need to have sufficient funds to last for the next 37 years. See the difference?
So, start preparing for an early retirement even if you don’t want to.
Side note: An emergency fund is a good buffer for a temporary job loss. But in this article, we are talking about permanent (but earlier-than-expected) stoppage of regular income. During this pandemic, I had similar discussions with several clients facing pay cuts. Most of them acknowledged that even though early retirement was not something they had on their mind, it still makes sense to prepare for involuntary early retirement now.
And how much do you need to retire early? Everyone’s retirement and early retirement is going to look a little different. There is no one-size-fits-all recipe here. So you need to do some proper math to figure things out first.
Forced early retirement is not a desirable portfolio outcome. But if you are unable to figure things out yourself, then sit with an investment advisor and talk this through. Find how much you need for regular retirement. And also figure out how much you need to save for early retirement. Then see what you can do about it.(The writer is the founder of StableInvestor.com)