After reaching Financial Independence (FI), I am now creating an Early Retirement Plan. Below is a checklist I have compiled to help me think through the process.
Importance of Early Retirement Plan
Retiring early is a big decision! Just look around – how many people retire early. Not many, in fact, of the thousands of connections I have on LinkedIn / Facebook / etc., I know exactly four people who are planning to retire early. That is less than 0.2%!
So although I am financially independent, I am approaching early retirement with caution.
I have created a checklist to help me think through my early retirement decision. The list below may seem long, but I have tried to document all the questions / considerations I have as I am making this decision.
Some of these items require a lot of planning / thought. Even if early retirement is not something you are considering immediately, it helps to think about these items.
What is not in this Early Retirement Plan Checklist
The list does not contain the usual myths about early retirement – like you will get bored in early retirement! People who are proactive in getting to FI are likely to be proactive enough to plan their post-retirement life. So to say that a person will get bored after early retirement is just lazy thinking.
Another thing to note is that this list is not comprehensive. Although I am at FI, I have not retired yet. I will come back and update this list as I make more process on my early retirement planning.
Early Retirement Plan: Basics
Planning
Early retirement requires more planning than traditional retirement. Not just the financial aspects, but several other things. For example – where will I stay for half a century now that I am not bound by my job location? What will I do now that I don’t need to work for money? And so on. It requires more work because we are bad at long-term planning.
Avenues for Financial Advice
Traditional financial advice (financial advisors, retirement planners, annuity providers, etc.) primarily focuses on traditional retirement. Most of them do not have experience with early retirement and may not provide the necessary advice for early retirees.
Track Record
Although the FIRE movement has been around for a couple of decades, it is still relatively new. People have been doing traditional retirement for much longer! So early retirement does seem a bit riskier. There is nothing much I can do about it but plan better … which is also why I have this early retirement checklist 🙂
Withdrawal Plan
Having a saving and investment plan was critical for getting to FI. Similarly, it is vital to have a withdrawal plan for life after early retirement. I am planning out how much money I will have in which accounts, the sequence of accounts to withdraw from, the timing of withdrawals, etc.
Early Retirement Plan: Personal Considerations
Predicting My Future Self
Time horizon is obviously the most significant difference between early retirement and traditional retirement. An early retirees’ time horizon can be 50+ years. My 25-year-old self was very different than my 35-year-old self. What will I want when I am 45? How about when I am 65? Will I regret leaving my job during my peak earning years?
Spouse
Make sure your spouse is on board with your early retirement. Your spouse can either continue working or retire early, but your spouse should support your early retirement decision. Thankfully MrsFiner was all-in on my FI journey, and we are now planning out our early retirement together.
Early Retirement Plan: Job
Identity
Many people associate their identity with their work. The first question we ask someone when we meet them (apart from their name) is ‘What do you do?’. I am still not sure how I will respond to this question after early retirement.
Structure
Early retirement can seem like a stark departure for people who prefer a structure to their day. Going from knowing what you do for 40/50 hours a week to having to plan out your entire week yourself can be a big jolt. I am actively planning my life after early retirement, so I (hopefully) do not suffer from this.
Employer Support
Traditional retirement in one’s 60s is a standard process. Employers typically help out with retiree health care, insurance, and other areas. On the other hand, early retirement is something that employers may not understand (much less help out with).
Love Your Job
This one is tricky! If someone truly loves their job, it may make sense not to retire early! I like aspects of my job, but I don’t think I will miss it much. But then again, as I said in the first point above, I have no idea if my 50-year-old self will look back and regret this decision.
Early Retirement Plan: Retirement Accounts
Social Security Calculations
One of the little-known facts about social security is that the benefits are calculated based on an average of 35 years of earnings. I have worked for about 20 years. If I retire early, I will have zero dollars for the rest of the 15 years (35 – 20 = 15). This will substantially reduce my 35-year average earnings and thus my social security benefits.
Future of Social Security / Pensions / etc.
This may seem obvious, but it is not. There is talk about social security benefits being reduced in the future. Given that an early retiree has a longer time horizon, the impact of this will be more significant for them. I am assuming no Social Security or Pension income in my retirement calculations.
Retirement Account Balances
Since early retirees work for fewer years, their 401K and IRA balances are likely to be lower – since there are annual caps on how much one can contribute to these accounts. Some strategies (like the Backdoor Roth IRA) can help in this case.
Early Withdrawal Penalties
There are early withdrawal penalties for most retirement accounts that early retirees should keep in mind. There are ways around some of these (for example, IRA conversion ladder).
Early Retirement Plan: Social Considerations
Social Perspective
Although the FIRE movement is gaining steam, it is still a fringe movement. I have found that typically people do not really understand what FI means or why anyone would like to retire early. Worse than that, some people think early retirees are freeloaders!
Friends and Relatives
Following up on the above point, don’t expect your friends and relatives to join you in early retirement anytime soon!
FOMO
This is important. You should not retire just because you reached FI. Or because others are retiring early. Early retirement is a big decision, and typically it is harder to reenter the job market after a long gap. So I have to make sure I am not doing it just out of FOMO (Fear Of Missing Out).
Early Retirement Plan: Making your Money Last
Inflation
This is a tricky one! We have not seen inflation in any real sense for many years. However, that does not mean inflation cannot come back in the future. Multi-year (or multi-decade) inflation can cause havoc in a retirement portfolio, impacting an early retiree more (since they have a longer time horizon after retirement).
Medicare
Early retirees are not eligible for Medicare. Evaluating healthcare insurance options before early retirement is essential. Healthcare is not only a significant expense but also has traditionally grown at a faster rate than inflation. I am reviewing my options on ACA.
Bear Market
A bear market at the start of your early retirement can be a bummer. There is not much one can do about bull or bear markets. The only thing I am doing is to have enough cash buffer and have a conservative portfolio.
Portfolio Volatility
Given the longer time horizon of early retirement (compared to traditional retirement), I have a higher allocation to stocks. This means I have to be comfortable with a higher level of portfolio volatility.
Safe Withdrawal Rate
This is different than the withdrawal plan point earlier. In addition to knowing which accounts to access when (withdrawal plan), I also had to make sure I had sufficient funds for early retirement. For that, I used a Safe Withdrawal Rate of 3%.
Early Retirement Plan: Other Items
Frugality
Frugality has been a great side-benefit of FI for me. However, it can be a problem if you want to retire early and are not comfortable with frugality. For the first few years after early retirement, I intend to be more frugal because the most significant risk to retirement is in the early years.
Optimism
People on the FIRE journey are mostly optimists (I think). While this is a great thing, one should be aware of some perils of optimism. That is why I am not relying on blind optimism; instead, I am working through this list!
Running Away / Running Towards
My biggest driver for starting on the FI journey was that I was working all the time. While it was important at that time, it is no longer an issue. I have used my FI superpowers to get a job that has a better work-life balance. I now need to figure out what I want to do after retirement. Running away from something is not great; I have to run towards something.
Planning for Early Retirement is Hard!?!
Yes, planning for early retirement can be a lot of work. But, it has been a lot of fun for me. Maybe it is because I am at the end of my FI Journey and am looking forward to the next chapter.
Planning for FI was also hard work, but it was worth it in the end. I am hoping the same happens with planning for early retirement.
The list above may seem long but is not meant to scare anyone from retiring early. On the contrary, I hope this helps you plan for early retirement.
Definitions
Everyone knows what a traditional or full retirement is. Typically it means working till one is in their 60s and retiring after that.
On the other hand, early retirement is retiring way earlier (for example, in one’s 30s or 40s). Unless someone wins the lottery, early retirement is mainly enabled by Financial Independence (FI).
Did I Miss Anything?
Do you see something that I did not think about? If so, please add it in the comments below, and I will update the early retirement checklist.
And, thanks in advance!