Tuesday, July 7, 2015

Early Retirement: Would I Do It Again?

After my first post on this topic, The Risk of Retiring (or Being Retired) Early, several readers wrote comments about the rewards of retiring early, despite the financial risk. You don't have to sell me. I retired quite early and I am having the time of my life. But, none of these posts were meant to suggest whether you should retire early or not. My intent is simply to make you aware of the financial risks you ought to consider before you make that decision.

And then there is the darker side of this issue. First, the majority of American workers will not be able to accumulate enough savings to retire comfortably at 70, let alone years earlier. And as surveys I mentioned in that first post show, more recent retirees are reporting that they weren't able to retire when they planned than those who report they were. Unfortunately, that number is growing. Retirement isn't always a choice. It usually isn't.

The major factors that can make early retirement financially riskier are:
  • a longer (and consequently more expensive) retirement, 
  • fewer years to save, 
  • lost returns on those forgone savings, 
  • lost returns on savings that we spend at an earlier age,
  • difficulty un-retiring the longer you are out of the workforce,
  • a lower sustainable withdrawal rate (or life annuity payout) due to the longer expected lifetime in retirement, and
  • the potential pressure to claim Social Security benefits sooner.
There are several others, of course. Health insurance cost should probably still be considered risky, though the Affordable Care Act has removed some of the risk of obtaining insurance until Medicare kicks in at 65. It is still costly. ACA was intended to make insurance more widely obtainable, not to make it cheaper. Consider this in your decision, particularly if you're used to company-provided health insurance.

There is also the loss of the safety net of returning to work. Wages typically peak around age 55 and decline afterward, anyway, but the longer you leave the workforce, the harder it is to return with anywhere near your previous income.

The converse of those risks provide a list of things you can do to make retirement financially less risky by delaying it:
  • a shorter (and consequently less expensive) retirement, 
  • more years to save when you're typically able to save more, 
  • investment returns on those additional savings, 
  • more years for our portfolio to grow without spending,
  • a higher sustainable withdrawal rate (or life annuity payout) due to the shorter expected lifetime in retirement, and
  • less pressure to claim Social Security benefits sooner.
In fact, this series of posts is not only about the financial risks of retiring earlier, but about the benefits of retiring later.
I suspect than many workers contemplating early retirement underestimate the risks I have pointed out in these past few posts. (I did.) Just a few years either side of a planned retirement age can make a difference; several years make a big difference.

You may be wondering how I feel about retiring early a decade after I made that decision. I'll share a bit of the experience.

I retired in 2005, just before the market crash (housing and stock) in early retirement that we financial analysts say you should fear more than just about anything except perhaps living to 110. Fortunately, my finances were positioned well enough to absorb it. My finances are in better shape now than the day I retired.

I struggled with health insurance before ACA because I had a pre-existing condition. I was able to find health insurance, but the cost was tremendous, much higher than I had planned, and in ten years my high-deductible insurance never paid a claim.

Would I do things differently? I retired early primarily for non-financial reasons. Given my same circumstances as 2005, I would make the same decision. But as much as I had studied retirement before deciding to retire early, I didn't fully understand the financial risk I was taking. After a decade, and knowing what I do now, I might have considered working a while longer to reduce some of that risk – but probably not.

I'm pretty sure that retiring early is far, far riskier than most people assume. Then again, I'm the happiest person I know. My day is packed and virtually everything on my calendar is something I really, really want to do.

On the other hand, the second happiest person I know loves his job so much that he barely slows down for weekends. He may never retire.

The decision isn't purely financial, but I would advise you not to ignore that part of it.


  1. Replace 2005 with 2010 and put the crash one or two years in the past (the 2009 Q1 flush hurt me the most) and I could copy-paste this article, put my name on it, and it would more or less be exactly true for me -- especially the lag time between retirement and the full realization of the risk that had been taken.