The concept of Retirement Early
If you are planning on retiring early and “Think” you can live on less than 60% of your current income?. Possibly yes, but we have to think about this situation in two different ways. At what age, you are thinking about retiring early, and where you are holding the majority of assets. As a couple in your fifties, if you make about $200,000 a year and you have about 1.5 million dollars in a retirement account, would that be enough to come up with a path to retire early within a year or missing something. Setting for retirement is not a one-size-fits-all recommendation and it doesn’t work this way.
Life is short
If you split your life into four quarters, then it does make sense to calculate your retirement number. First-quarter (0–25) — Transition period where you are getting out from under the yoke of my parents’ financial assistance to support myself financially as an adult. This transition period starts from your age of 18–21 and you are independent and responsible at the age of 25. Second Quarter (25–50)— Exploration period where you are fully financially stable and in the process of saving money for your future. The inception of the exploration period varies based on your career but the fundamental concept of saving is earlier you start and earlier you can retire. No matter where you are in life, begin saving today and you’ll be that much further ahead tomorrow. When you put money into a savings account or investment vehicle, the amount you originally save is called the principal. The principal amount earns interest, which then is added to the original principal. This amount then earns interest, and so on. This process is called compounding.
Third-quarter (50–75)— Payoff period where you are completely on your own and you don't have any dependencies and no family responsibilities. You are able to enjoy your life to the fullest. You should have amassed a lofty nest of eggs for your retirement. Fourth-quarter (75–100) — Prosperous period where you are lucky enough to live your life up to full lifespan. The longer the fourth quarter, the luckier you are.
Strategic Retirement Plan
The crucial period of your life is the exploration period where you plant a seed of retirement in your head. Saving for yourself is important but where you are saving is matter a lot for retirement early. If you would have saved all of your money as a couple in a retirement fund like 401k or Traditional IRA i.e. (2 * $19,500) + (2 *6000) for 25 years, then you must have had 1.2 million dollars. Rather than saving your money, if you would have invested half of the amount for 25 years with 10% interest, then you might have more money than actual. So, Early retirement is not about how much you make, it's about how much you invest. Either you can put all your money into 401K which will be locked until you are 59 1/2 or else, you can invest strategically into your retirement with the benefit of tax-deferred accounts like Roth IRA or you can explore the option of Roth conversions when you’re officially retired, because you’ll be in a lower tax bracket without your salaries.
20% of total net worth or 4 years living expense in cash!
Sustainability is another key feature of early retirement. If you have a $1 million portfolio, then the $36,000 anticipated spending rate looks reasonable using the basic 4% guideline after retirement. But sustainable withdrawal rates should be less in down markets, while potentially withdrawing a bit more in better times. So, you must park yourself with more cash i.e. 20% of total net worth should be saved in a less volatile account like a Saving account or Fixed Deposit.
Purpose of Retirement
There needs to be social engagement, physical activity, and a sense of purpose for your days, especially considering your retirement could potentially last three, even four decades.
“A lot of times when we’re in the middle of a career, we imagine a glorious retirement,” Graff said. “Then when it happens, you go ‘Oh my gosh, why should I wake up tomorrow?’”
Some people use retirement as an opportunity to pursue a career they would have liked to pursue decades ago when money was tighter and there were more obstacles to overcome. It’s critical for retirees to evaluate the expense of these activities before embarking on them, merely to make sure they can afford both this new path and the basics of retirement.
We’re living longer lives. Who’d have guessed I’d still be working at the age of 91? It seems impossible to me. However, we are living longer lives and having more time on our hands. Although not everyone will live to be 91, longevity is making a significant difference. If you are able to live your life in a prosperous period, then you should think about loneliness, lack of purpose after 75 years, and physical strength. It doesn't mean that you need to kill yourself, instead, you can choose your life to co-lead with other folks of your age or share the wealth in the exchange of care.
