Posted by Tim Stobbs on March 10, 2007
Over at Common Sense Financial Wisdom From My Wife, there was an interesting post about early retirement being more about having a cash flow to cover your expenses rather than drawing down your nest egg. I believe the point of the article was to point out that if you have the cash flow to retire early it doesn’t matter how long you are retired since you won’t run out of money.
This is a bit of dangerous idea when it comes to early retirement planning. Yes you can retire that way, but I’ll explain what I mean about dangerous. If you assume that your spending will stay the same for your entire retirement your ignoring some studies which seem to indicate this isn’t true. Actually it seems your spending goes down in phases in your retirement years. During your initial retirement you will burn through more cash as you travel and do all those things you been waiting to try. Yet as you get older you can’t travel as easy and start to want to spend more time with the family, so your spending drops off. After all how many 80 year olds do you know whom still travel around the world every year?
So your asking, how is the cash flow model dangerous? Well it makes you saving up enough to fund your entire retirement like it’s your early retirement phase, you will be grossly over saving compared to your entire retirement spending. The net result, you actually spend more time working than you needed to. After all isn’t early retirement, about getting started early?
PS: You might notice that I’m posting on a Sat. when I normally don’t do this. Well the fact is I’m generating ideas faster than I can write about them at the moment. So I’m going to give Sat. posts a try for a while and see how it works out. Yet a word of caution about this, I can’t tell you when the post will be up on a Sat, since I don’t set an alarm on the weekend. -CD