It seems that there are more and more people with an interest in “retiring early” or at least not being stuck in traditional corporate jobs that are done from 9-5 till the age of 65. There are a few challenges with leaving the workforce early, many of which are complex, but there is one in particular that stands out in my mind.
Who doesn’t aspire to have the option of leaving the workforce early? Whether its retiring by 30 or retiring by 40, it seems this is more and more a topic that keeps coming up across the internet. I don’t know what the reason is for the change in mindset, but whatever it is it doesn’t seem like its a trend that is going away.
Perhaps it’s a recognition that there is no loyalty and no such thing as a job for life anymore. Maybe folks are suddenly waking up and realizing that there is more to life than sitting at a desk and watching 40 years of your life pass you by (hmm… depressing thought)? There are challenges to any retirement, let alone one that is early.
Building a large enough nest egg
The task of saving a large enough nest egg to provide the security of leaving the workforce early is a pretty big challenge. Whether you are planning to sell off some stock or generate a stream of passive income from what you own, its non trivial to raise the amount of capital to leave early.
Starting early makes a big difference. The chart below shows a pretty simple illustration of how much you need to save per month to get to $1M assuming a give rate of return, with the vertical axis showing the number of years to retirement. It’s pretty clear from the chart below that taking actions in your 20′s to plan for retirement can make your task much simpler than someone who has to start in their late 50′s.
The fact is though, that not all of us need a $1M nest egg to leave the workforce. Many people can make do with much less. Even if you are looking for the magic million, it’s not impossible that someone could earn long term rates of return of 8%p.a over an extending period of time and easily save $1,500 per month and be done by 40. (Hey, the long term rates of return from investing in the Dow Jones Industrial Average is 9% p.a since 1900!)
In fact, that sounds very readily achievable if you happen to be making a reasonable income, particularly if you happen to be double income, and live in a place where cost of living is low.
A married couple in their 20′s who each happen to makes $60k per year would take home approximately 70% after state and federal taxes (maybe slightly more), or roughly $84,000 per year. If they were diligent enough and could somehow save 25% of their income to save and invest, they’d be able to hit the 1M mark in 20 years.
A savings rates of 25% of income probably seems a lot, particularly when compared to the national US average of under 5%, but if your prioritize and cut out excess waste, its probably easily achievable.
So building a large enough nest egg to exit early, isn’t a problem to achieve early retirement in my view.
The other big barrier that comes up with early retirement is how to attain independent health insurance in the US. Health costs are expensive here, No bones about it. Having any kind of major health issue without health insurance cover would probably send you broke.
Still almost 50M Americans are without health insurance. Wow!.
So the Affordable Health Care Act will change a few things next year, and make health insurance cheaper for many but your employer typically pays a big chunk of your health insurance costs today. Its hard to imagine how much.
According to Forbes, the average cost of healthcare for a typical American family of four in an employer-sponsored health plan in 2012 was $20,728. On average, employers paid $12,144 of that total cost while employees paid the rest.
Fortunately for our family of 4, my employer kicks in a bit more than the national average, but consider that $20k insurance tab as an added expense of stepping away from the workforce early.
In any case there are solutions to solve the insurance problem. High deductible private health insurance plans can be had for a couple for as little as $400-$500 per month. Admittedly, as the name suggests, it only kicks when you have more than $10,000 in health expenses, so it could be pretty expensive before you happen to get the benefits of these policies.
So if you happen to be chronically ill or frequently get sick, it’s a very good idea to take this into account before you exist the workforce, because this could probably set you back big time. You basically have to self insure yourself the first $10k, and then someone has your back for anything above that.
In any event, if you’ve saved up enough, you can cover this one as well, so this isn’t an issue in my book either.
It’s tough to change old habits!
The biggest issue to walking away from the workforce early is something I think of as cultural conditioning. When you’ve been used to being productive and fully occupied for the last 15 or 20 years, how do you suddenly step back and go to a life where you just sit around and are not fully engaged? Surely there are only so many hours that you can sit in front of the TV or at the bar?
While this may sound like the smallest of problems, if it isn’t thought through properly you could end up sitting around during the day with not a whole lot to do while everyone else you know is engaged with something else. Though all retirees have this problem to deal with, I think it hits early retirees the hardest, because at least older retirees either have a set of friends who have all retired at the same time. They’ve got “retirement villages” where they can meet and hang out with others who happen to be in the same time of life.
Somehow I don’t see a youngish 30 something person shooting a round of golf regularly with his 60 + buddies ………
Of course most early retirees are pretty driven themselves and probably d have broader aspirations than just sitting around the whole day. Living out your passions and doing all those things that you couldn’t do because you were stuck in a desk job is probably one of the first things thats on someone’s list. The risk I see with this is that suddenly deciding to start something out of the blue once you have exited the workforce may not be the easiest thing to do.
New Ventures also have boring things to attend to
You may decide to do your own thing, and while there is every chance of being successful, will you really feel the passion that you thought you would? Even in your own venture, there are mind numbing administration tasks to attend to, and periods of down time that you have to manage through without someone to vent with.
You have to pay the bills, deal with company structure, banks accounts, tax filings, all that red tape that gets in the way of executing your passion. The worst part? If you are just scaling up, there’s nobody else to attend to it, it’s all you.
Attaining success may sound easier than it is
Time for a sobering reality check. You’ve launched your new venture and find that revenues are taking a little longer than what you thought possible, let alone getting to a profit. The niche that you researched on the side is starting to take on more competitors a little earlier than you thought, and its not possible to build your own McDonalds with a sustainable competitive advantage and a wide moat!
You also learn that 1/3 of new businesses fail after 2 years and 56% fail after 4 years. Suddenly the thought of going back to the desk job doesn’t sound so bad after all…..
While all of this may sound just a tad depressing, I think there are a bunch of ways to determine for a fact if early retirement is for you or not before you check out of the workforce, and if you do have an eye on a scaling up something of your own, ways to test the waters to at least see how viable it will be. I’ll be addressing how you can take some precautions in a follow up post.
The good news with early retirement ? If you’ve properly estimated how much retirement income you need, building up the nest egg to achieve this shouldn’t be a problem. The costs of covering health insurance, while expensive also shouldn’t be a problem. This biggest “question” you have to ask yourself is what do want to do with the rest of your life?
For many of us, that’s a nice question to have