Early retirement is a goal for many, particularly those who are motivated by the idea of financial independence, freedom from the 9-to-5 (or later) grind, and the opportunity to focus on personal passions.
In recent years, the Financial Independence, Retire Early (FIRE) Movement has gained significant traction, promoting aggressive saving and investing strategies to retire far earlier than traditional retirement age.
While early retirement can offer numerous benefits, it’s not without its risks and considerations. For those with a solid grasp of financial planning, it’s essential to weigh both the pros and cons before committing to a life of leisure.
Let’s explore the key factors to consider when thinking about early retirement, along with some hard data to help guide your decision-making process.
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What Is the FIRE Movement?
The FIRE Movement is centered around the idea of achieving financial independence as quickly as possible through extreme saving and investing. The movement typically emphasizes cutting down on living expenses, saving upwards of 50% to 70% of your income, and investing that savings in low-cost index funds, real estate, or other income-generating assets.
Since its inception in the early 1990s, FIRE has gained significant traction in the personal finance community. As of 2023, it’s estimated that roughly 2 million people in the United States are actively pursuing FIRE, with many bloggers and influencers sharing their journeys and strategies.
According to data from the U.S. Bureau of Labor Statistics, the average American retirement age is around 64, but FIRE advocates often aim for much earlier, typically between ages 40 and 50.
The Pros of Early Retirement
1. Freedom and Flexibility
One of the most immediate benefits of early retirement is the ability to design your life according to your own preferences. No more waking up to an alarm clock or dealing with office politics. Instead, you have the freedom to pursue hobbies, travel, volunteer, or simply spend more time with loved ones.
Research from the National Bureau of Economic Research (NBER) suggests that people who retire early report higher levels of life satisfaction, citing increased freedom as a key contributor. Studies also show that retirees have more time to focus on their health, relationships, and personal development – factors that can increase overall well-being.
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2. More Time to Focus on Health
One major benefit of early retirement that often gets overlooked is the ability to focus on your physical and mental health. With more time for exercise, sleep, and nutrition, early retirees often see an improvement in their overall health. According to a 2019 Gallup poll, retirees report significantly higher levels of physical activity compared to those still working.
Additionally, retirees often report lower stress levels. Chronic work-related stress is a major contributor to a range of health problems, from cardiovascular issues to mental health concerns. The freedom that comes with early retirement can significantly mitigate these risks.
3. Lower Living Expenses Post-Retirement
While the goal of early retirement is to build up sufficient assets to live on, many early retirees find that they can significantly reduce their living expenses once they’re no longer working. A study by the Employee Benefit Research Institute (EBRI) found that the average retiree spends about 15% less than they did before retirement.
By relocating to a lower-cost area, downsizing their home, or cutting discretionary spending, early retirees often find that their financial needs become more manageable. As a result, many FIRE adherents are able to live well on a lower income than they did while working.
4. The Potential to Pursue Passions
Retirement isn’t just about leisure – it’s also an opportunity to focus on personal passions that might have been neglected during years of work. Whether it’s writing, starting a small business, learning new skills, or traveling the world, early retirees often report high levels of fulfillment when they pursue activities that align with their interests and values. This can provide a greater sense of purpose and happiness.
The Cons of Early Retirement
1. The Risk of Running Out of Money
The most significant concern with early retirement is the risk of outliving your savings. With longer lifespans, an early retiree may need their money to last 40 or 50 years, not the 20 to 30 years that traditional retirees typically plan for.
A key rule of thumb is the 4% withdrawal rule, which suggests that a retiree can safely withdraw 4% of their retirement savings annually without running out of money. However, this rule is based on historical market returns, and in today’s volatile investment landscape, many financial professionals believe that a more conservative withdrawal rate – closer to 3.5% or 3% – is prudent for early retirees. A 2023 report from the Morningstar Investment Research Center cautioned that low interest rates and economic uncertainty could impact the sustainability of the 4% rule.
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Moreover, the FIRE Movement often relies heavily on stock market performance, which can fluctuate significantly. A market downturn in the early years of retirement – known as “sequence of returns risk” – can drastically reduce the longevity of your portfolio. This is a major risk for those who plan to retire early and rely on investment growth to sustain their lifestyle.
2. Healthcare Costs and Insurance
Healthcare is one of the biggest challenges for early retirees. In the U.S., Medicare eligibility doesn’t kick in until age 65, which means that early retirees must find a way to cover their health insurance until then. Premiums for private health insurance or marketplace plans can be steep, especially for those in their 50s, when insurance costs increase.
According to a 2022 HealthView Services report, a healthy couple retiring at age 65 can expect to spend an estimated $300,000 on healthcare over the course of their retirement. For someone retiring early, this number could be even higher, particularly if health conditions arise before they can access Medicare.
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3. Loss of Social Interaction
Work provides not only financial benefits but also social engagement. Colleagues and professional networks often form an important part of a person’s social life. Retiring early means missing out on these daily interactions, which can lead to feelings of loneliness or isolation.
According to a Harvard Study of Adult Development, social connectedness is a key factor in long-term happiness and health. Early retirees who miss this aspect of work may experience challenges adjusting to their new lifestyle, especially if they don’t actively seek out new social opportunities.
4. Lack of Purpose
While retirement can offer a sense of freedom, it can also lead to loss of purpose. Many people derive a sense of self-worth and purpose from their careers. Without work to structure their days, early retirees may struggle to find meaning in their lives.
In a Gallup study, 40% of retirees reported that they were struggling with finding new activities or meaning post-retirement. This sense of loss can sometimes lead to depression or anxiety, particularly if an individual hasn’t cultivated hobbies or a strong-post retirement plan.
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Is Early Retirement Right for You?
Deciding whether to pursue early retirement is a deeply personal decision, and one that requires careful consideration of both the benefits and risks. If you’re financially prepared and have a clear plan for healthcare, withdrawals, and life after retirement, early retirement can be a rewarding and fulfilling option.
That said, it’s important to remember that early retirement is not a “one-size-fits-all” solution. For some, the risks may outweigh the rewards. Others may find that working longer allows them to accumulate more wealth, take on less financial risk, and enjoy a more fulfilling career.
Before making the leap, take time to evaluate your financial situation, lifestyle goals, and personal priorities. Consulting with a financial advisor to model different retirement scenarios can help you make an informed decision. You’re welcome to schedule a complimentary consultation with our team of advisors using the link below.
In the end, the key to a successful early retirement is not just saving aggressively, but planning thoughtfully.
Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.