Plenty of us dream of being able to retire early — to escape the “rat race” and spend many decades of our lives doing just what we want to do. For most of us, it’s just that: a dream. But even if you’re not seriously considering early retirement as a real possibility, it can make a lot of financial sense to prepare for it anyway. Let’s explore the reasons why.
Fast-forwarding Your Retirement Saving
Even if you don’t plan to retire early, you might decide that you want to stop saving for retirement early. Or you might find out that by the time you reach middle age you’re not able to save as much. Sometimes life just gets in the way. These are solid financial reasons to front-load your retirement savings as if you were planning for early retirement.
Let’s do a case comparison to demonstrate the point.
Investor A has no intention of retiring early. As a result, he invests 10% of his $100,000 annual salary in his retirement plan. His savings averages an annual 7% rate of return. If he begins saving at age 25, he’ll have $2,071,270 by age 65.
Investor B has no intention of retiring early either. But just in case she changes her mind later, she decides to prepare for the possibility. She salts away 20% of her $100,000 annual salary in her retirement plan. Her savings also averages a 7% annual rate of return.
By age 50 Investor B has amassed $1,181,209 in her retirement plan. She decides to stop funding her retirement at that point. But her account continues to grow at an average annual rate of 7%. By age 65 Investor B has $3,258,993 in her retirement plan.
Investor B stops making retirement contributions at age 50. Still, she has about 60% more in her plan by age 65 than Investor A. And he’ll spend 40 years building up that smaller portfolio. Investor B will spend just 25 years, then kick back for the remaining 15 years before normal retirement age.
The moral of the story: Front-loading your retirement savings creates an insurmountable advantage. Especially when time is on your side and the power of compound interest comes into play.
Preparing for a Future Career Change
Life has a funny way of changing both our circumstances and our attitudes as we move forward. It’s entirely possible that the career you’re so fond of today will turn into a nightmare later. Here’s an interesting statistic to support that assertion: 54% of people in their 40s want to change careers. You could be one of them.
Someone who is not financially prepared to make a career change could find themselves with a life sentence. They’re forced to stay in their crappy career because they can’t afford to pursue other options.
Instead, make the assumption that you will retire early. Then you will be in a better position to make any career changes that you want to.
This kind of preparation can be especially important if a career change will mean that you will either move into a lower-paying job or start a new business. Either way, you can take a drastic reduction in pay that would leave little available to fund your retirement. But if you’ve already built up a very large retirement nest egg, you’ll be able to forgo making contributions. And if your situation doesn’t improve, you may still be in a good position to retire when the time comes.
Preparing for Involuntary Early Retirement
Some people want to retire early. But for others it isn’t a choice. It’s forced on them. It can happen due to illness or injury. It can even happen as a result of a crisis with a family member. Perhaps a loved one is no longer able to take care of himself. You could leave your job to take care of him, because you are not completely dependent on your job.
Once again, you will be in a better position to deal with the involuntary situation. Dealing with the loss of your career may be hard enough. But if you have been already been saving, at least the income side of the job loss will be covered.
At that point, you’ll seriously appreciate the foresight that you had earlier in your life. That planning will be the very strategy that will free you up.
Having a Plan B in Case the Long Predicted Social Security Crash-and-Burn Actually Happens
I’m not in the camp of people who believe that the collapse of Social Security is likely. It’s not that it isn’t on shaky ground from an actuarial standpoint. Rather, the government has too many options to keep it going.
But a lot of people think that some sort of collapse is not only likely but will come soon. If it does, then preparing for early retirement will be the best strategy for dealing with it.
Saving early will make it easier to develop an even larger portfolio as you move toward traditional retirement age. That is, you can skip past early retirement and devote the larger portfolio to providing all of your retirement income. Your savings could even cover the part that Social Security will no longer provide.
You Might Decide That You Want to Retire Early After All!
Maybe you don’t plan to retire early at this point in your life. You might change your mind in just a few years. If so, it will be far better if you had already planned to retire early. The “Fast-forwarding Your Retirement Saving” example above makes clear the advantages of loading up on savings early in life.
It’s even possible that the fact that you prepare for early retirement will become a self-fulfilling prophecy. You may decide to retire early just because you can. Looking at the example of Investor B, you can see when their early retirement bug might bite. She will have saved well over $1 million for retirement at age 50, so she could retire then.
This isn’t a minor advantage, either. Most careers have become incredibly stressful. Workers are continually being asked to give more on the job. This is due to globalization, technology and runaway competition in nearly every industry. You might be able to tolerate that stress level in your 20s and 30s. Later in life, though, it may become too much.
You may also find that your career motivations change as the years pass. For example, in your youth you may set out to conquer the world — however that looks from your perspective. But as you get older, you may decide that the world isn’t worth conquering. You may decide that finding peace and contentment is more important. Those factors begin to weigh more heavily the longer you’re in your career and the more apparent job burnout becomes.
Considering all of the above, you just might decide to retire early anyway. If you’ve been saving all along, you will have the financial resources to do so. It won’t matter that that was never your plan. The change in your outlook, in combination with the ability to retire, could make early retirement happen. Just the way you never planned!
Creating More Options Overall
We can probably sum up early retirement preparation as creating more options in your life. It’s a fact that money creates options. The more of it you have, the more options you have.
Saving for retirement is probably the single best way for people of average financial means to grow the kind of financial wealth that provides realistic options. For one thing, your contributions to a retirement plan are tax deductible. For another, employer plans often provide matching contributions. Both combine to substantially increase the amount that you are saving each year.
But the real magic bullet is tax deferral of investment earnings. When combined with the tax deduction and employer match on your contributions, you have an unbeatable wealth accumulation strategy.
That combination is what can enable a person who earns an ordinary income to attain a seven-figure investment portfolio. And that means you’ll be a millionaire.
Sure, being a millionaire isn’t as glamorous as it would have been a generation or two ago. But it still buys a lot of options. Perhaps the biggest of all is freedom. And when you prepare for early retirement — even if you never intend to do it — you’re creating for yourself the kind of freedom that will enable you to do just about anything that you want with your life.
Get Started Now
So how are you going to start saving? Thanks to the internet, there’s now a plethora of apps that can make saving a cinch. Microsavings services are particularly geared toward younger people who might want to save in smallish increments. In fact, with these apps, it might be possible to retire on your “spare change” alone!
Readers: Have you considered saving for early retirement, even if you’re not planning to take advantage of it?