This is a 2 part series. In Part 1 I discussed how to decide if early retirement is the right option for you. In Part 2, I will discuss what are the common pitfalls that you need to be aware of while planning for and after early retirement.
Early retirement is not all roses and fairy dust. We have to work hard to achieve it. Even after retiring it is not just about kicking back on a beach somewhere and getting tanned. There are a lot more uncertainties since you will be retiring earlier than normal. And you will need careful planning with enough flexibility to allow you to both successfully retire and then stay happily retired.
I have divided these pitfalls into 2 groups – while planning for retirement and after retirement.
Pitfalls in Early Retirement
While planning for early retirement, you would have planned an idea of how your life would be. For some of us, this idea can change – especially when we let our current lifestyle grow as our income grows. Lets say initially you were ok to retire in a Tier 2 town and had planned travel only within India with an occasional foreign trip. Now you might want to plan for more foreign trips or might want a bigger house. There are only 2 ways to minimize the chances of this happening
- When you plan life after retirement try to think of what a 50 or 60 year old you would love doing with the whole of their life – not what current you wants
- Be vary of lifestyle inflation: Your lifestyle choices should always put retirement first. Avoiding bad habits now have 2 benefits – you save more now and you need less after you retire
Even after you retire sticking to your lifestyle plan is very important. Your plan should include how you are going to spend time that is meaningful for you. Are you ok to just sit home, watch TV and read books? Are you going to dedicate yourself to community service? Is a major part of your time going to be spent travelling? You have to identify the mix of all things you need to get yourself the perfect heady cocktail that will keep you interested for life.
Getting your Retirement stash ready
This is the 2nd most important item in planning for early retirement. Now that you have a good idea of what your retired life style would be, you can now start calculating how much money you need to have.
- Calculating your requirement: The retirement stash should not be just for your lifestyle, it should also include one time expenses like home repairs and health care. All expense items should have a reasonable inflation rate built it. Work out multiple scenarios to see how much of an increase you can handle with your current number. This number should be as realistic as possible and is not there to convince you that early retirement is possible. It should not be constrained by your current net worth or savings rate.
- Saving for retirement: Once you have your number and a retirement date, you need to start planning how you will achieve that number. If you need a savings rate of 70%, but are only achieving 50% think carefully if you can achieve the date. Even if your savings rate is 70% now, ensure that for the near future that there will be no extra expenses (like a wedding/child) that will drive your savings rate down.
- Investing: This is the 2nd part that impact if you can reach your retirement stash. Make sure you do not assume unrealistic returns from your investments. Your asset allocation has to match your plan. If you invest in FD and debt bonds you cannot plan for a return over 10%. You have to understand how your risk tolerance will change and plan your investment accordingly.
- Circumstances outside our control: Assume you had investments in equity and the market crashed. Your current net worth cannot support your lifestyle for your entire life. Not planning for circumstances like this can leave you without enough money or leave you unhappy with life.
- Health expenses: As we get older there are more chances of illness. Our early retirement stash should include enough to cover these expenses
- Spending early: If you had planned 1 month holiday a year, you should stick to that plan. You should not go on a 3 month holiday in the 1st year just to reward yourself. Spending money early means less investment for compounding and can leave you severely short later on
- Investing: Even after retirement, our asset allocation should be based on our expected returns. Withdrawal from the portfolio has to be planned to maintain the overall returns while minimizing impact due to income tax.
Early retirement is a concept that is difficult to explain even to your close family and friends. And this is majorly driven by discussion around money. It is well know that you will earn more in the last 10 years of your working life than you have in the previous 25. It is difficult for a normal person to understand why it is easy to give this up, because their priorities are different. You just have to be strong and not get influenced by negative opinions while at the same time accepting constructive criticism to improve your plan.
After retirement, if you do not keep yourself occupied with challenging tasks, you might envy your friends. Even though they are stuck in the rat race you were sooo happy to leave behind. On the other hand, how do we keep our friends and neighbours from hating us for living the happy life?
While saving for retirement, keep a continuous track of your assumptions (lifestyle, investment returns) and make adjustments accordingly. It is better to retire late, than realize 10 years into retirement that you need to get back to work to earn money. Life is full of uncertainties and the safest option is to have the biggest stash possible to cover all of them. But this is a trade off between working for more years to save money that you might not spend versus retiring too soon and having to cut back on some items in case of a particularly bad market crash.
What other factors do you think can impact our early retirement plans and retired life?