The ‘Financial Independence, Retire Early’ (FIRE) movement is hot right now. People working toward FIRE are hoping to retire in their 40s and, in some cases, even their 30s.
And while the focus of FIRE is to produce financial freedom and not ascribe to a strict definition of the term ‘retired’, it is a tantalising goal many find worth chasing.
However, if not properly planned, early retirement can be more of a burden than freedom. The earlier you retire, the longer your money has to last.
Your life mitigation plan also has to be more thorough than those who retire at the standard age. Below are some things that could derail your finances if you retire early.
1. Not planning for a health crisis
Failing to properly plan for a health crisis leaves the door gaping open for financial hardship during early retirement.
Some global estimates show that the average couple retiring at traditional retirement age (65) can expect to spend over Dh200,000 on health care during their retirement years.
If you retire at 45, you have an additional 20 years’ worth of potential expenses for which to plan. You have to factor this additional cost into your overall retirement number.
Financial experts strongly advise that you keep health insurance coverage during retirement to help offset the cost of a serious illness or injury.
There are health insurance coverage options available through private companies worldwide — which can be pricey.
In addition to keeping health insurance, you must also ensure that you’ve adequately accounted for out of pocket health costs when determining how much you need during retirement.
2. Failing to live on a budget
One of the biggest myths many retirees fall prey to is the notion that you’ll spend less money during retirement.
The truth is it is rare that your cost of living will decrease as dramatically as you think it might. This is why living by a strict budget is financial life or death for the early retiree.
Getting older comes with hidden expenses. You spend more time engaging in leisurely activities — which comes with a cost. You outsource chores as you age. And, health care expenses increase with age.
An increasing number of surveys indicate that budgeting and tracking expenses isn’t just for workers. Living frugally, budgeting, and strategic spending are habits that should follow you to retirement.
If you find that you are burning through your retirement funds quicker than expected, make sure you re-adjust immediately.
This means you may have to scale back or even cancel some of the leisure activities and find ways to cut day-to-day spending.
If an unexpected expense arises which consumes a large chunk of your funds, you may have to consider working part-time, or re-joining the work force for a few years to replace the loss.
3. Not factoring in inflation
Next is failure to properly plan for and adjust for inflation. As you age, your currency loses its elasticity.
Your fixed cost of living expenses are slowly going to creep up over time. Retiring early means you have to deal with that creep a lot longer.
Your retirement budget and planning should include a yearly or biyearly cost-of-living increase. Think about the things you do regularly and plan to spend more on those things as time goes on.
Your medication, transportation, food, and clothing are going to cost more and failing to adjust your budget to accommodate the increase can prove to be a costly mistake long-term.
4. Becoming a caregiver
Children who move back in with their parents after living independently and providing for aging parents are some of the unexpected ways to burn through your retirement funds.
Although studies show that one of the reasons people chase financial freedom is to eventually be in a position to assist others, helping becomes a problem when a person’s need exceeds your capacity.
This is even true for those retiring early. You really have to be careful to ensure that your money lasts past your life span.
Whatever you think you may want to do, set money aside for that purpose and don’t touch it. It is also strongly advisable that you establish a ‘friends and family fund’.
This is money that you set aside specifically to help a loved one out of a financial jam. It can pay for healthcare, funeral expenses, the added cost of caring for your kids, grandkids, parents, or all of them.
Most importantly, it can help offset the heightened cost of living that occurs when loved ones come to live with you for an extended period of time.
It’s better to live on less in order to set money aside for ‘just in case’, instead of trying to adjust when an emergency occurs.
5. Incurring debt after retiring
One of the biggest mistakes money managers say you can make is to carry debt into retirement.
Retiring with no debt can be a bit tougher when you retire early, but it should be your goal. You don’t want to waste your precious monetary resources making years of interest payments.
So experts recommend that you should aggressively work to eliminate all debt before retiring. You could even opt for a partial retirement and work part-time or get a job on the side just to pay off your debt.
It’s ill-advised to incur new debt while retired. If you need to make home improvements, buy another car, or make another major purchase, try to do it with cash — and even then, proceed with caution.
If you must use credit for any reason, make a deal with yourself to find some other means to finance the purchase. That may mean going back to work temporarily until the debt is paid.
