Reasons Why Early Retirement Should Not Be So Controversial

Early retirement is increasingly gaining popularity with more and more people wanting to retire in their 30s and 40s, as opposed to waiting until their 60s and 70s. However, the concept of early retirement is also criticized by a few. Many financial advisors who back up the notion of early retirement believe that in order to retire in your 30s or 40s, you need to save up at least $5 million for post-retirement life. If you were to save such a significant amount the latest by your 40s, you would have to save and invest at least 70% of your income. This would mean cutting your expenses remarkably and comprising with your current lifestyle. Early retirement sounds like a dream to most people but requires a lot of sacrifices and hard work. It is also widely rebutted, here’s why:

The reason why early retirement is disliked and dismissed by many experts is that, in practicality, it can only be a reality for a select few. There are very few people who are successful in saving up the required sum of money so early in their lives. And most are left behind, feeling bitter at having failed at the concept.

The most controversial rebuttals of an Early Retirement

1. It is for high-income earners

The most common problem with early retirement is that it is only considered possible if you have a high paying job from the beginning of your career. Naturally, not many people start their careers at a high paying job. As per a survey conducted by Payscale, American men get substantial pay hikes at the age of 41, and women at 39. Going by the reality of incomes that most people earn before their late 30s, the idea of early retirement seems quite difficult to achieve.

2. It is unethical

When people retire early, they are likely to get increased premium subsidies under the Affordable Care Act. These subsidies are from the money that is, in fact, the money from other tax payers taken out from the system. Experts believe this is a way of early retirees to cheat the system.

3. It promotes unrealistic frugality

Frugality is an integral part of all financial plans, but early retirement requires an extreme and unrealistic level and commitment of frugality for the most part of a person’s life. People not only spend their earning years living a frugal life, but are also required to keep up with it post retirement. Such extreme frugality is tough to maintain and takes away from the present.

4. It causes financial anxiety

With early retirement, you are likely to live a post retirement life that may last for 40 or 50 years. That is more than half your life being spent without a source of new income. Not having an avenue for such a long time and depending solely on your savings can cause financial anxiety in many people.

5. It is an illusion

Many experts argue that early retirement is a mere illusion. Most early retirement enthusiasts continue to earn money as writers or bloggers or are dependent on their spouse’s income. Even if you retire early from a desk job, the chances are that you will still need a part-time or freelance job from time to time to keep up with the rising costs. It is also extremely difficult for both spouses to opt for early retirement at once.

6. It requires you to compromise on personal goals

If you are aiming to retire in your 30s or 40s, having children can bring in many expenses. From doctor’s fees to college education, the expenses of children can become a huge hindrance in your early retirement saving goals.

7. It does not align with career goals

Not just your personal goals, but even your career goals are at stake. Early retirement is not for people who wish to pursue their passions even if it requires them to face an initial struggle in their careers. Early retirement simply does not give you enough time. You are required to start saving from the very first pay check.

Early retirement has many criticizers and there are enough reasons to make you change your mind, but if you truly believe in the concept, here are some things to follow:

1. Invest more

You are not likely to meet your early retirement goals by simply saving in the bank or investing in a 401(k) or IRA (individual retirement account). In order to substantially grow your money, you must invest it in high yielding stocks and bonds. It is advisable to consult a financial advisor and draft a diversified portfolio, so your money can grow substantially in a short duration of time.

2. Be smart

While cutting down on expenditure is an obvious way to reduce costs, it is not all that effective in practicality. Try and look at frugality as a wholesome concept. It is not just a debate on eating at home versus eating in a restaurant. It is also about finding ways to reduce your tax implications, loan debts, credit card debts, etc. The idea is to focus on earning interest on investments instead of paying interest on debts.

3. Be prepared

It is important to account for each and every probable aspect of your life post- retirement. While most people take care of their healthcare needs, they don’t really pay much attention to what these health costs can entail. Disability is one such neglected aspect. Make sure to sign up for disability insurance along with regular health insurance.
Another neglected but unavoidable deterrent is inflation. Right from housing, healthcare, to groceries and gas, prices are bound to go up sooner or later. When savings up for early retirement, you must keep some financial buffer for rising costs in the future.

4. Pick the right investment methods

A traditional 401(k) or IRA can incur penalties if withdrawn before the age of 59½. Even if you have another source of savings, and don’t plan to withdraw money from your retirement accounts earlier than the required age, it is still advisable to opt for a Roth IRA instead. A 10% penalty in case of an emergency can be detrimental to your retirement savings. Contributions from a Roth IRA can be withdrawn anytime without a penalty. Moreover, Roth IRA is a tax-advantaged plan that lets you grow your money without being subjected to any tax implications.

5. Start early

The earlier you start, the better it is. Early retirement requires a lot of planning and perseverance right from the first paycheck. If you wish to hop on to the bandwagon of early retirement, make sure you align your retirement goals from the very start.

To sum it up

Early retirement is a controversial topic, but it is not unachievable. You need to have an open mind and be ready to hear some judgments and criticism along the way. But as long as you are on the right path and aligned with your personal financial goals, you have little to worry about.

To retire early, it is important to access your current financial standing and then devise a realistic savings plan. Be prepared to put aside at least 70 to 80% of your earnings into savings and investments. Life, before you retire, is likely going to be hard, with working extra hours and not being able to spend money on leisure activities. But keep your eye on the final goal, so you can live your post-retirement years just the way you want.

Do you want to devise an effective early retirement plan? Contact financial advisors for their guidance.