You may have heard whispers that early retirement isn’t all it’s cracked up to be - a friend of a friend may have lost their sense of purpose, a cousin’s uncle went back to work, or an ex-colleague's partner ran out of money. Not all of us will win the lottery or be paid for Instagram, TikTok, or Roblox content (power to the youths who hold on to these algorithm secrets like a holy grail) - but who doesn’t dream of the complete freedom to choose how you spend your time and money?
What would that freedom look like to you? At what age would you like to be able to accomplish this? How much would it cost?
There isn’t a one-size-fits-all approach - early retirement looks different for everyone. The bottom line is the same, however: anyone considering this route must be hyper-disciplined and wise about money.
Consider the following phases when mapping out an early retirement plan:
Phase 1: Planning
Start with a clear vision of your life during retirement
A good way to see early retirement is not having to work for a living. This doesn’t mean you won’t work; you get to choose whether you want to. And it doesn’t mean you cannot evolve or change your mind later. Early retirement is whatever you decide you want it to be. Envisioning your retirement life helps you plan it better.
Calculate your net worth and annual expenditure
Your net worth is the sum of your financial standing calculated by subtracting your liabilities from your assets. Your annual expenses are best determined by your banking and financial habits and credit card statements. This establishes your current cost of living and determines the amount of money you will need to save or how much income you will have to continue earning.
Estimate how much money you will need
The typical benchmark is 25 to 30 times your annual spending. However, this does not consider that the earlier you retire, the longer your retirement fund will last. Nor does it consider inflation, recession, future medical expenses, or any other scenarios that might throw a wrench into your plans. The fact of the matter is, expenses do not necessarily decline post-retirement.
Consider your retirement housing
Attention should also be given to where and how you will live post-retirement. Whether you move abroad, stay in place, or downsize to something smaller, your mortgage and any significant repairs or renovations should not be funded through your retirement savings.
Phase 2: Managing Finances
Set guidelines for your spending habits
The lower your expenses are when compared to your income, the faster you can save enough to gain financial freedom. This might require lifestyle changes that limit expensive habits. A good rule of thumb is to identify a lean, middle, and fat budget that gives a certain amount of leeway that would allow you to spend or pull back where necessary.
Get out of debt
Debt weakens your income by cutting down the money you would otherwise be able to invest or spend in retirement. Make a list of your debts, including mortgages, loans, and credit cards, from highest interest to lowest and pay them off systematically before you retire.
Create separate savings funds
In addition to your retirement fund, you will also need to consider future costs such as your children’s education, the needs of your parents, and medical expenses. You should also have an emergency fund that can last between six months to a year.
Plan for healthcare costs
A health insurance premium is a must-have regardless of retirement age. However, insurance alone is not enough. The best way to minimise future healthcare costs is to prioritise your health and well-being today. Prevention of chronic diseases will always be more cost-efficient than treatment and management.
Continue earning income
A retirement income can help stretch your savings and mitigate the stress of watching your savings dwindle. This could include investments, unit trusts, private retirement schemes (private-company-managed schemes similar to EPF), investment-like insurance plans, side hustles, and even part-time opportunities that provide additional income.
Work with an investment pro
Retiring early requires juggling many moving parts that can be pretty stressful. Working with a financial advisor can help you get to where you want to be and maintain where you need to be while you enjoy your retirement. They will be able to help you manage your financial issues, answer money-related questions, and help you work more efficiently towards your financial goals.
The value of retiring early
Besides a better quality of life where you have the privilege of time, planning for early retirement gives you a better understanding of your finances. It pushes you towards your life goals with intensity and purpose.
Whether this freedom means travelling around the world (when borders reopen), starting a new business venture, going back to school, relaxing, or just having the time to pursue your interests at age 35, 45, or 55, the choice is entirely yours. All it takes is a lot of discipline and even more planning to gain the financial independence needed to retire early.
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