Many people dream of early retirement, especially if they don’t like their current job. According to a recent Gallup poll, 70 percent of workers are disengaged from their job. Basically, the majority of us don't like our current position. While early retirement is a great alternative to working in a job you hate, there are many pitfalls. Here are some early retirement mistakes to avoid:
Spending too much too early. Our life expectancy is steadily increasing, and many of us will spend 20 or more years in retirement. Spending too much money early on can greatly increase the chances of your retirement savings running out when you need it most. The 4 percent safe withdrawal rate might be good for traditional retirees, but early retirees have to be more conservative. By keeping your withdrawal rate under 3 percent in the early years, your portfolio will have a better chance of lasting much longer.
Not considering working part time. One way to reduce your withdrawal rate is to work a little bit after you first retire. Many early retirees are still young and want to contribute to society. Even if money isn't an issue, it's still good to work a little bit when you first transition into retirement. Working part time will keep you more active and engaged. Easing your way into retirement is much better than quitting work cold turkey.
Investing too conservatively. As we approach retirement, our risk tolerance decreases. Many people reduce the stock exposure in their retirement portfolio, perhaps down to 30 to 40 percent equities. However, early retirees will spend even more time in retirement, so they might be able to handle higher stock exposure.
Not considering future medical costs. Early retirees are often healthier than the typical retiree simply because of their younger age. But being a healthy early retiree can be misleading. When you're younger, you generally don't need to spend as much on health care, and you might think you'll be healthy forever. Fidelity Investments estimates that a 65-year-old couple retiring this year will need $240,000 to cover future medical costs. This doesn't even include long-term care. It will cost even more for an early retiree because Medicare doesn’t kick in until you're 65. Planning for early retirement must include the cost of future health care.
Being too passive in retirement. Sipping an umbrella drink on the beach sounds good when you're slaving away at your office, but it's an unrealistic plan for early retirees. Retirees will need to figure out how to meaningfully spend their time. A lot of time is available once you stop working so much, and not filling your hours adequately can lead to dissatisfaction and depression. It's better to plan for a retirement full of activities you like. This is why I have worked part time since retiring early. You still have time to relax, but not too much time.
Early retirement might sound good in theory, but there are many pitfalls you should be cognizant of before actually pulling the plug on work. You have to plan more carefully than a traditional retiree and be more flexible because you will spend a long time in retirement. Adequate preparation is necessary to enjoy this segment of your life without the added stress of dwindling retirement funds.
Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.