Budgeting

The True Cost of Early Retirement

Many people dream about leaving their 9-to-5 jobs, pursuing their passion, and traveling the world before they get to the standard retirement age. If you don’t enjoy what you do for a living, for example, it’s easy to want out as soon as possible. Even if you do have a job you love, you could be yearning for a more flexible schedule and the freedom to plan your own time and give more time to the things that matter most to you, like family. Early retirement is a noble dream, and if you have thought about it, you are one of many. Defining what this vision really is and what it is going to cost is vital. What it means to you is a personal view, but in terms of the costs, there are some basic checks you need to consider.

Defining the Goal

What is early retirement for you? At what age do you want to leave your day job? What happens after you retire? While this might seem like a bombardment of questions, they are all important ones you have to answer if you are thinking about retiring early. If you are currently in your 20s and want to retire by the time you are 40, that gives you just under 20 years to prepare financially for that leap. If you are in your thirties and want to retire at 40 as well, then you only have less than a decade to put your ducks in a row. With this in mind, you can begin to assess how practical your dream is and whether you need to adjust it to make it more realistic.

There also have to be some good reasons behind your decision. While it’s a personal choice and there isn’t a right or wrong decision, it should make sense to you and for you. If you don’t like your current work schedule and it’s making you miserable, there could be changes you can make right now so that you are less strained and overworked. A new job, a different role, or a discussion with your employer are all worth exploring. You could find yourself feeling happier and more fulfilled sooner than you thought possible.

Another possible reason you might want to retire early is so that you can be your own boss. Running a business is exciting, particularly if you are a natural entrepreneur. What you have to bear in mind is that, when you start the business, you might put in more hours than you ever did with your employer. So if you are looking for a way to do less work, this might not be it.

You could also be looking to leave the workforce sooner rather than later to pursue volunteer and service opportunities either locally or internationally. This is a noble pursuit and could be very fulfilling. That said, you have to consider how you plan to fund your activities and whether or not you could incorporate some of those current passions into your life today.

Many people take off from their day jobs before they reach retirement age only to find themselves slowly pursuing part-time and eventually full-time jobs afterward. This happens for several reasons, including boredom, feeling unfulfilled in their new routines, not having enough money, or not having had a plan for the long post-retirement period to begin with. So take some time to consider what you really want and why.

Retirement and Costs

When you eventually retire, your whole financial position is going to change. Without a regular paycheck, you need to have a new way to maintain your current lifestyle and have enough to pursue your dreams. Your bills are not going to go away; in fact, they could even increase. You still have to pay your insurance, your taxes, and your debts. Unexpected expenses are still going to pop up here and there, and you may still want to upgrade your car at some point. If you have children, you have to take into consideration their ages at the time of your planned retirement. If they are still going to be financially dependent on you, then accounting for their educational and personal needs must be done thoroughly.

Most people rely on their 401(k) and other retirement savings accounts when they retire. These allow them to enjoy a monthly income. The more you have saved up, the better your returns are going to be. It also helps to have other investments built over time, such as property, dividend stocks, businesses, and other ways of earning passive income. Retirement isn’t cheap, especially if you have plans to do more with your time. If your monthly income is going to drop after retirement, you have to know how you are going to manage the lifestyle downgrade. While it can be done, and many do pursue a more frugal and minimalist lifestyle by choice, these are all considerations you have to think about beforehand.

Creating a Financial Roadmap to Early Retirement

We have talked about knowing the reasons for your early retirement, different ways of getting income when you are retired, and the cost of living. If you are still set on the goal, then now is the time to put pen to paper and create a financial roadmap to get you there.

Clarity about your financial goals is going to give you peace of mind. For one, you are going to know that your needs and the needs of your dependents are not going to be negatively affected by your decision. Secondly, with a 10, 20, or 30 year financial goal, you can begin to break that down and take the necessary immediate and short-term steps to make it a reality. When you make progress towards your goal each day, it gives you confidence and gets you that much closer towards living the dream.

Your financial roadmap should begin with assessing your current finances and defining your desired financial position at retirement. Next, you need to think about what you need to do between now and then to get there. The best time to invest is yesterday, so getting practical is important at this stage. In the next section, we are going to get even more specific about the actions you need to do to make retiring early a reality.

Dealing with Loans

We have spoken quite a bit about the money coming in and the expenses taking money out, both currently and post-retirement. One important category we haven’t yet touched on is that of personal loans. As you map out your current and desired financial position, don’t forget to consider the loans you have that are not fully repaid yet.

Taking out personal loans is common at one stage or another. If you meet the requirements of the loan provider, you can get a lump sum of money to use for different purposes. Perhaps you needed the money to buy property, start a business, pay tuition, buy a car, or just to get you to payday. There are many different personal loans, and these can be taken from banks, lending agencies, friends, or family members. Depending on who gave you the loan and how much it was for, you may have to adhere to certain conditions. Loans often come with a stipulated payback period and an associated interest amount. Paying off your personal loan in a timely fashion must be a priority because your credit score can be adversely affected when you default or are regularly late with payments.

When it comes to planning for retirement, it’s a good idea to try to pay off all your personal loans as soon as possible. Once you have this done, you can then focus on investing more. Many people are tempted just to pay the minimum monthly repayment amount and divert additional income towards shares and other investments. While this might seem attractive, it can be counterproductive. Loan interest percentages are often higher than what you might receive from your investments on a good day. In most cases, it might make more sense to pay your loan and eliminate all the interest you were going to pay first. After that, your money is your own, and you can focus on growing it.

If it is not going to be possible to pay off your personal loan in its entirety before your planned early retirement, you can always factor that element into your financial roadmap and retirement planning. We are now going to look at how to handle your money now as you work toward retirement.

Increase Your Earnings

You want a good lifestyle after retirement, and it’s more than likely that you have exciting plans that need to be funded. One practical step you can do right now is to look for ways to increase your earnings. There are various ways to do this. You could ask for a raise or look for a better paying job. You could pursue a side hustle or go into business full-time.  There are countless opportunities to make more money. Don’t be afraid to invest in yourself to get you there. Maybe you need to take a professional course or go back to school to increase your skill set and earning potential. If you have to borrow money to pursue any of these channels, you have to weigh out the costs and benefits.

Investing for the Long Haul

Another way for you to build your financial position is to look into long-term investment opportunities. This means putting your money somewhere it can grow over time and having the patience not to keep moving money around. Dividend stocks are a good example of a wise investment. As with all investing, having a diversified basket is the safest bet. Over time and with some consistent investing, these stocks could bring in real value and return.

Watch Your Spending

The final tip we have for you is to watch your spending. You might have to get more frugal with how much you order take out. Perhaps it’s time to start taking a packed lunch to work. Your goals determine the action steps you have to take right now. If you have to make more sacrifices than you want to and you feel like you might have to miss out on a lot of the fun at the moment, it doesn’t hurt to revisit your goals and reassess what your priorities are.

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