Retiring Early Probably Sucks

By Scott Gardner, IAR, Realtor For many of us, retirement is a distant goal that seems nearly impossible to attain—this is mostly because everyone has an opinion of how to get there, and there is a ton of discipline needed to save for something that won’t happen for 40 years! For some, retirement is so scary that they would rather try their chances at winning the lottery than learning the financial discipline needed to get there.No matter if you are beginning your journey to retirement or if you’re well on your way, I am going to break down some common misunderstandings and point out why so many people are confused on this subject. STEP 1: DREAM BIGAttaining retirement requires discipline and deliberate action to achieve. The VERY FIRST THING you need to do before saving for retirement is to define it—you cannot attain an invisible target! This is such an important step that you should spend some quality time thinking it through—make sure to be specific.Ask yourself—when will you retire? Are you traveling? Are you traveling first-class or coach? Are you watching tv all day? Do you have hobbies? What is your home like? How much does it cost? Will you be involved in charitable causes? What is your cost of living? How much do you need to retire well? What will I do all day when I’m retired? STEP 2: RETIREMENT SCHOOLOnce you’ve defined your retirement and can envision your retired life, you need to pick one of a couple of schools of thought on getting there.The Pot of Gold Method. The most popular retirement idea is that you save a massive pot of money over 30-40 years of working that you can live on until the day you die. For this method to work best, early investing is critical due to the benefits of compounding interest. Most people following this retirement planning method invest in low-yield, stable investments during their retirement years. A significant downside to this method is that the reduced returns during retirement increase the likelihood of you outliving your money! Another downside is that you have to save a substantial amount of money to pull it off.Financial Independence Method. This method has been gaining some traction in recent years. The idea is that you invest in cash-flow producing assets, such as rental properties, that can supplement and eventually replace your income. The nice thing about this method is that the cost of getting to retirement is lower than the Pot of Gold Method. The downside is that you’re a little more susceptible to market movements and could potentially be without income during major economic crises. STEP 3: SAVINGS TARGETSDepending on which method you choose, you need to know how much you need to get there:Pot of Gold Method. There are two general rules used to determine how much money you’ll need for the Pot of Gold Method—the 20x Rule and the 4% Rule. For $100,000 in annual retirement income, the 20x Rule says you need $2,000,000 saved up ($100,000 x 20), and the 4% Rule says you need $2,500,000 saved up ($100,000 / 4%). So, if you choose this method, you will probably need between $2,000,000 and $2,500,000.Financial Independence Method. Rental properties and other cash-producing assets vary in their returns and long-term expenses, so it is important to diversify. The optimal return target for this method is a 6-8% return on your investment. If successful, this means that you will need $1,250,000-$1,670,000 in cash-producing investments ($100,000 / 8%) for $100,000 in retirement income. STEP 4: GET OFF THE COUCHOnce you know what you’re working towards, you need to take action! The magnitude and intensity of your action will determine how soon you’ll retire. Here are some things to watch as you’re saving for retirement:Find Ways to Keep Your Expenses Low. Everyone focused on retirement should watch where their money is going—that means getting on a budget and sticking to it. Most people don’t notice that their lifestyle increases in tandem with their income—they buy cars, buy large houses, and travel in class. Don’t let this happen to you!Look for Ways to Boost Your Income. You can only get so far by reducing expenses. If you’re on a budget, you need to look for ways to expand your income—get creative, but don’t take unnecessary risks with get-rich-quick schemes or speculative investments!Make Saving and Investing a Priority. The more you save, the faster you get to retirement—it’s that simple. People who subscribe to the F.I.R.E. movement (Financial Independence, Retire Early) save 50-75% of their income—now that’s impressive! If you need help working towards either retirement method, my office (Sterling Wealth Management) is here to assist you with your retirement planning needs. If you want to schedule a free, no-obligation meeting to speak with me, please call me at 702-228-0500.