By Abbey L. Henderson, CFP®, RLP®, CPCC®
I’ve noticed a trend in my conversations with clients lately about whether the FIRE movement—Financial Independence, Retire Early—is a good idea or not.
I cannot simply answer yes or no to this question because it depends on a lot of factors – some obvious, some not so much. Retiring at 40 or 50 years old sounds like a dream to some. However, it’s not for everyone.
The FIRE strategy requires aggressive saving and the accumulation of enough assets so people can live off the passive income. Then, once financial independence is reached, they can retire from traditional work decades earlier than the standard retirement age.
I’m glad that FIRE is stimulating conversations about important topics like pursuing a meaningful life and saving for retirement. Just make sure you’re not jumping on the bandwagon solely because retiring at 40 sounds amazing.
You have to think through if it’s the best decision for you.
Nine Questions to Ask Yourself Before Pursuing Early Retirement
1. How much money will I realistically need?
We all live different lifestyles, so don’t use a cookie-cutter formula to determine this number. It won’t be entirely accurate.
Your financial plan needs to include a thorough and personalized estimation of your living costs in retirement. You need to consider your spending habits, cost-of-living increases in your area, how long you think you’ll live, and so much more.
2. How will I deal with unforeseen changes or even disasters?
Build flexibility into your early retirement plan for the unexpected.
Perhaps you thought you were done having children, but “surprise” here comes baby number three! There could be an economic downturn that could affect your assets in the stock market or your house could burn down in a fire.
Life is so unpredictable. Plan for those surprises.
3. How will I pay for health care insurance and expenses?
At least you have Medicare to help pay for your medical expenses when you retire at 65.
But, if you’re walking away from your employer’s health insurance plan before 65, you need to know how you will pay for health care on your own.
4. Can I live with less Social Security money and delayed access to my other retirement accounts?
If you’re working less, you can expect your Social Security to be greatly reduced since passive income doesn’t factor into those benefits.
Keep in mind that many individual retirement accounts and 401(k)s aren’t available without penalty under age 59 ½.
If you’re serious about retiring early, the above list should help you get started. Hopefully, you’re working closely with a financial planner to get all the information you need to make informed financial choices.
But, What About the Not-So-Obvious Lifestyle Factors?
5. How will the loss of my old identity impact me?
There’s an inherent sense of satisfaction that comes from earning money for a job well done. While not impossible, this can be difficult to replicate without a career.
Do you have the kind of personality that will derive meaning from hobbies or travel? Do you look forward to spending more time educating your kids or volunteering for a worthwhile cause?
Many need to find a way to contribute to the world. How will you?
6. Will I be lonely?
Think about your closest friends and colleagues. You most likely work with them or share work in common with them, which gives you a sense of camaraderie.
Yes, you might have a ton of free time but if the rest of your family and friends are busy at work or at school, you might be stuck with a lot of time on your own.
7. How much am I willing to sacrifice in order to retire early?
The FIRE movement requires most people to live on a tight budget, so you may have to forego things like eating out, going on vacation, shopping for new clothes each season, etc.
For some that sacrifice is totally worth it, but for others it sucks all the enjoyment out of life. You need to have a clear feel for your financial self-discipline if early retirement is a priority.
8. Can I return to the job market if I decide I want, or need, to work again?
Maybe a change of circumstances puts you back in the job market. This decision may not even be financial in nature, many retirees get bored in retirement and end up missing their work.
Will your skills be outdated? Will employers in your field look kindly at a large employment gap?
Another option could be staying in your field of expertise either part-time or as a consultant, rather than walking away completely. Only you can make that decision.
And finally, Question #9, why do you want to retire early?
What’s driving your decision?
Would you retire early if you love your job? Do you feel like you don’t spend enough time with your family? Or, is there a dream project – like writing a book or traveling the world – keeping you awake at night?
It’s important to be clear on what your motives and intentions are.
I always encourage my clients to focus on their life vision. When you’re clear on exactly what you want out of life and how your financial plan can make it a reality, it can re-energize you to reach your goals.
As a financial life planner, I specialize in helping people get a handle on their big-picture vision, as well as develop a personalized strategy to help make it a reality.
CTA: If you want to learn more, schedule a complimentary Financial Life Plan Discovery Session with me.