Motivational speaker Zig Ziglar is reported to have said:
“There are very few unrealistic goals; there are many unrealistic time frames.”
This is nowhere more true than in retirement planning, Especially today, with the advent of the FIRE (Financially Independent, Retire Early) movement, early retirement has become a hot topic. And while early retirement is a great goal, the timeframe really makes a difference.
In other words, it’s not as simple as putting a date on your calendar. There are many nuances, subtleties, and things to think about when planning retirement at any age, and this is even more true when the goal is to retire early.
In fact, the FIRE movement offers a number of cases in point. If you do an online search for “Fire movement,” you’ll learn that there are about five different versions, each of which carries different assumptions and makes different demands of its adherents.
- Lean FIRE: for those who are planning to live “lean” in retirement: paring expenses to the bare minimum and generally “doing more with less”;
- Coast FIRE: not necessarily planning to retire at an early age, Coast FIRE disciples aim to save and invest enough that their nest egg will continue growing, even when they have stopped making contributions (they plan to “coast” into retirement);
- Fat FIRE: requires aggressive saving and investing in order to accommodate a large nest egg that will pay for lavish living in retirement;
- Barista FIRE: saving enough so that you can live comfortably on only part-time employment in retirement (working as a barista, for example);
- Cash flow FIRE: building streams of passive income that will continue into retirement, such as accumulating rental properties.
While the FIRE concept is certainly useful for setting specific goals and doing the things that lead to financial success, it is hardly a take-it-off-the-shelf kind of approach. As you can see, each of these strategies involves a completely different type of planning. And the same is true for almost anyone who is contemplating an early retirement.
Asking the Right Questions
In our financial planning practice, our job is help our clients gain an accurate understanding, not only of their goals, but also the steps and resources needed to make them a reality. This process typically involves asking a number of questions in an effort to gain clarity on both sides of the desk. For someone who wants to retire early, a few of these questions might include:
- How early is early? There’s a big difference between a C-suite executive in her early fifties with a twenty-five-year career and a 401(k) under her belt who wants to retire in three years, and a thirty-something real estate entrepreneur who wants to quit work at forty. So, the first thing we need to nail down is exactly what “early” means to you, and what sort of resources you bring to the table that can make it a reality.
- Why do you want to retire early? This really matters. If the answer is “I’m sick of my boss,” you might not really be wanting to retire early; you might be better served by finding a workplace that better meets your needs. If, on the other hand, you have core values and priorities that require your ability to devote significantly more time to them, that could be a valid reason for considering early retirement.
- What kind of retirement lifestyle do you want? Here we might refer back to the various FIRE philosophies. If your idea of a satisfying retirement is living in a tiny home and spending your days reading or going for long walks, then Lean FIRE, with its low cash requirements, may work for you. But if you plan to travel the world and take your grandkids with you, you’re going to need a different sort of plan.
Time and Risk
When it comes to the risks associated with retiring early, there is no escaping the math: the earlier you retire, the more risk you’re assuming. In other words, the longer you plan to live in retirement, the more likely it is that you will encounter events or circumstances that will disrupt your plan. The more years of retirement you need to fund, the larger the number of unanticipated factors there are that can poke holes in your financial strategy.
Because of this, most early retirees should adjust the traditional “4% rule” (the principle that using about 4% of your retirement savings each year can be expected to fund about 30 years of retirement). To adjust this rule of thumb for early retirement, for each decade earlier than the standard retirement age of 65 you plan to retire, you should probably halve the 4% rule. If you plan to retire at 55, you should follow a “2% rule”; if you want to retire at 45, you should plan to spend about 1% of your retirement savings each year. And by the way, don’t forget about healthcare. If you retire before 65, you’re not yet eligible for Medicare, and you’re likely losing the benefit of an employer plan. How much will it cost you to provide healthcare coverage during the “gap years” between the beginning of your retirement and your Medicare eligibility?
Generally, this means, of course, that the earlier you retire, the more assets you’ll need to insulate your lifestyle from the unexpected. In this connection, there’s another question that you should be asking yourself: “If I needed to reduce my living expenses by 10% or 20% for one to five years, could I do it?” This is an important question because those who retire early have a greater likelihood of needing to get through more bear market cycles, geopolitical upheavals, or even worldwide health crises. If your retirement plan can’t accommodate the potential need to reduce your spending in order to conserve resources, that can be a real problem.
Frame Risk Based on Personal Experience
It is all too easy to pay lip service to the idea of turbulence in markets in the decades to come. But there is another way of looking at the time/risk continuum: Think back on your own life, 10 or even 20 years ago. How much change have you experienced? How different is your life today than it was back then? And most important: How much of that change did you anticipate and plan for? Now, take that process and project it 10 or 20 years into the future. The inherent uncertainty of life becomes even more important to consider for those who are retired and no longer have a salary that is pegged to inflation or other economic considerations.
None of this means, of course, that early retirement is a pipe dream. It is a valid goal, and one that more and more people aspire to. But it requires careful planning, clarity around assumptions, and a strategy that will support the likelihood of success.
At Curio, we want to know about your goals. Whether you’re looking at early retirement, funding higher education for the next generation, or creating a multigenerational financial legacy, we’re here to help. Learn more by visiting our website and browsing our “Curated Curiosity” blog.
