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Retiring early can seem like a dream come true. You would have all the time you wanted to pursue your passions, enjoy your hobbies, spend time with friends and family and never have to work again. But, before we get too excited let’s explore what it really takes to retire early, and some of the tradeoffs and risks associated with early retirement.
The formula for retiring early isn’t complicated. It’s far from easy, but it’s not complicated.
Let’s look at a simplistic example. We must make a few assumptions:
Given these assumptions:
This extremely simplistic example ignores a lot of important variables such as taxes, life events, (marriage, children, buying a house, changing jobs, ect.) investment volatility and many others. But it can be a simple way to look at the math.
The 10% investment per year simulates a normal retirement age. Assuming you start investing early in your career, you would build up enough of a nest egg, along with social security and pensions to retire in your mid 60’s.
However, if you are retiring early, you may not have access to social security, pensions, or most other forms of guaranteed income for most of our retirement. This means you will have to cover most your retirement expense from our investments.
In our simplistic example, if you were to make $80,000 per year, after taxes, and invest half per year in investments averaging 5% return, you would reach $1,000,000 in around 17 years. If you started investing at 20, you could be retired by 37!
Let’s think about some of the tradeoffs and risks that come with early retirement:
All of that said, while there are many potential drawbacks to early retirement, the only major tradeoff that occurs before you actually retire early, is spending less. If you aren’t excessively crimping your lifestyle and enjoyment now, planning for early retirement can give you a strong head start. If your goal is to save 50% of your income, but you only save 35%, is that really a failure?
If retiring early is something you want to learn more about, give us a call at 336-547-9999. We are a team of CERTIFIED FINANCIAL PLANNERTM that specialize in retirement and retirement income planning. In my opinion, financial independence is a good goal to have, regardless of your planned retirement date. Work is better when you don’t need the money.