Early Retirement

I read Kyith’s post which clearly summarize all the important factors on some of the negativity of early retirement. In The New York Times’ article “How to Retire in Your 30s with $1 million in the Bank”, it mentioned that some millennials are retiring early and embrace the FIRE movement which stands for Financial Independence, Retire Early. Do note that the median household income in USA for 2018 is approximately USD 59k. The people featured in the article are mainly high income earners with income more than USD 100k a year. They adopt saving rates up to 70 percent and adopt frugal lifestyle to achieve early retirement. The brutal fact is both of the family members need to be high income earners to achieve FIRE.

Some interesting definitions from the article. In general FIRE requires one to reduce expenses drastically to maximize saving while amassing income generating investments sufficient to support oneself.

Lean FIRE – Practice extreme frugality

Fat FIRE – maintaining a more typical standard of living while saving and investing

Barista FIRE – working part time after retiring to have some health benefits

According to YouGov survey, the minimum amount of money you will need to have to never work again as below.

Age 18-24 – GBP 4.6 million

Age 25-34 – GBP 2.0 million

Age 35-44 – GBP 1.0 million

Age 45-54 – GBP 0.9 million

Age 55+ – GBP 0.4 million

Bloomberg’s article clearly highlighted that without a gift from Bank of Mom and Dad means taking risks. S&P 500’s annualized total return of 14 percent over the past five years would only turn $600,000 into a million dollars. The person needs to have the money in the first place. A market crash in the asset bubble will dash the dreams of those who want to retire early. A 2016 Schroders study of retirement in Australia shows that not all costs can be predicted, cost of living can increase beyond our initial estimates, putting pressure on retirement funds.

Cons of Early Retirement

  • Loss of Camaraderie of Colleagues, Competitors and Client – we spend between 8 – 10 hours at work, we build friendship with our colleagues. If we retire early, the bonding between colleagues will be lost. You will not have the same topic to relate to once you retire. You will not get to interact with your competitors and clients as well.
  • Worry about Loss of Income – A steady paycheck is a comforting element for the exchange of your time at the end of every month, it provides a false of security. However, when this stops suddenly, the regular employee will be worried when the next paycheck will come in, even if there is a constant income from investment or property rental.
  • Fear of the unknown – This is a constant nudge in my mind as well, what if the company shares you bought faces new competition from Amazon, what if they cut their dividend? What if the market crash tomorrow and my brokerage accounts lose 60% of the value? What if health insurance becomes very expensive in the future?
  • A potential loss of identity – We tend to associate our identity with work. Recently, after attending a self-awareness workshop, I realise that it is important to have a purpose in what you are doing. We are not our work but we should work to make an impact to this world. Most of us when we stop working, there is a sudden free up of time and we do not know how to occupy our lives with. This is sad but it is a fact. I was spending days going to the public library to occupy my time with research and readings.
  • Earned Income as defense to life expenses – Loss of earned income means we forgo employment insurance coverage, and employer matches in retirement account (CPF in SG context). If your CPF will form part of your retirement income, reducing working years will have a significant impact on your financial benefit. If you have earned income, it will cushion against rising cost of living from utilities and food.

What are the impact factors to consider before taking the leap of faith?

  • Do you have sufficient income to cover for insurance till age 65? Have you factored in cost of health care in your expense estimate?
  • Do you have financial reserves if you retire now so that you can wait till an age when you can withdraw your CPF (Social Security) money?
  • How long do you think you will live? Read the book “The 100-year life”.
  • How much guaranteed income do you have, such as pension and annuities?
  • Do you have a financial plan for your estimated living costs in retirement?
  • How might the stock market affect your assets if there were a downturn much later in life?

Early retirement can be a disaster later in life if no proper planning is in place. Planning is crucial for success.

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