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Saturday, March 25, 2017

Risky?

Posted by Dave on January 17, 2012

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

I think that one of the main things that people would question about a retirement plan where you retire at age 45 is how you could afford to do this?  Economically speaking, there is a significant opportunity cost to retiring in your 40’s, which in the past has been prime income-earning years.  In my case, I could be giving up hundreds of thousands of dollars in income that I very well might need at some point (for whatever reason).  Not only that, but in order to retire, I have to save a significant portion of my income – giving up on a lot of “stuff” and experiences that this income could buy.

The riskiest part of retiring early is outliving the savings that have been accumulated.  It would be very undesirable to be in my mid-eighties and find out that I have very little money left.  The potential for bankruptcy is something that needs to be examined prior to leaving the workforce and something I will have to monitor while I am no longer bringing employment income in, as I would not like to live off of cheap cat food in my retirement years. ;)

For me, I will accept this risk.  I would like to control my own day, rather than having to go to work in order to pay my monthly expenses. I would rather do what I want to do.  This freedom is worth a lot to me and I am willing to give up my prime earning years, as well as “stuff” now (a second car, a bigger/fancier house, an 80 inch television) to be able to do what I want to do from my 40’s on.

The risk of running out of money can be mitigated by (a) saving enough in the first place and (b) ensuring that money withdrawn from investments is done so safely, which depending on what you read is around 4% per year.  Additionally, as long as I monitor my budget compared to my investment earnings, I would hopefully be able to curtail some expenses in order to stay retired and not have to re-enter the workforce.

On a whole, the goal of early retirement is still fairly small-scale, when you look at the population as a whole.  Most people haven’t put much thought into it, and if they do happen to stumble across someone like me (in my experience) tend to dismiss the goal and are quite skeptical on whether I can do it or not.

If you’re on an early retirement path, how do you deal with the potential risks that come with exiting the workforce at a relatively young age?  Are you comfortable taking this risk?

Comments

3 Responses to “Risky?”
  1. deegee says:

    When I was developing my early retiremet plan back in 2007-2008, I first divided it into two parts. The first part, the important part, was to plan a budget to get me to age 65 while the second part was to get me beyond age 65.

    The first part is more important because I would need to generate income from almost exclusively from my taxable account investments and not other places such as Social Security, my frozen pension, and unfettered access to my IRA, the three items I call me “reinforcements.”

    Furthermore, once I turn 65 (under current law), I would become eligible for Medicare and lower my health insurance costs.

    I also made sure to include in my nearer-term budget a surplus or cushion to cover me against relatively small and unforeseen expenses. This would also cover me against some expenses which increase at a faster rate than my investment income.

    I also ran my proposal passed my Fidelity personal account executive and through its Retirement Income Planner software to see how it looked and it came out fine.

    My SWR is around 2.5% which is nice and low.

    I have been retired for 3 years since I ERed at age 45 in 2008, maintaining the same lifestyle I had before I ERed.

  2. We plan on saving a lot so that we can retire early. We both have defined benefit pensions from our work but we know that won’t cut it. We want to save enough to have steady income for a minimum of 30 years. We are also planning on reducing our expenses as much as we can.

  3. George says:

    The part that never seems to get explained is how to monitor and manage your pile of money post-retirement. If you’re young enough, how do you know when to take corrective action like re-entering the work force? What do you do if you find yourself with a runaway portfolio (positive runaway… 30% chance using the 4% withdrawl rate)?

    I’ve been coming to the conclusion that the simplest thing to do, at least until anything resembling a pension or annuity kicks in, is to keep track of your investments and ensure they stay 25x (or 30x or whatever number you like) above your expenditures. Then, when the pension kicks in, you’ve got quite a nice safety margin.

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