Avoid these mistakes if you are planning for early retirement

Published: July 20, 2022 at 6:00 am

In this article, we discuss some common mistakes that should be avoided while planning for early retirement.

What is early retirement? This typically means quitting a salaried job to do what a person loves (for free or otherwise). Today 55 is the normal retirement age. So early retirement is approximately 45 years or earlier. See; How to prepare for the new normal; in retirement planning.

  1. Have a clear plan of what you would do with your time at least 1-2 years before you resign. As they say, the idle mind is the devil’s workshop. When the pressure of the job gets to you, all you want to do is relax and do nothing. When you actually have nothing to do, life can be quite dreary. Freelancing or other forms of gainful employment involving productive use of time is crucial for health and wealth (in this context, ensuring the person does not run out of money).
  2. It would be better to have a dry run by taking a few months’ break (without pay) from your employer (if possible) to see how you cope mentally.
  3. Ensure your spouse/partner and children fully appreciate your decision.
  4. For most early retirees an irregular source of income from freelancing would be essential. However, in many cases, estimating this income before retirement will be hard. Therefore we recommend not to depend on this retirement while planning for early retirement. If you depend on this income then it is not really early retirement.
  5. Do not assume you will be frugal in future! You have no control over your expenses!
  6. You must assume your expenses after retirement will increase each year by at least 6% – 8% would be much better!
  7. Expect lower returns from equity and fixed income than what we get today. Your retired life could span 2-4 decades. Over this time, returns are expected to fall. See: Ten-year Nifty SIP returns have reduced by almost 50%
  8. Review your retirement plan (inputs and assumptions) each year before and after retirement.
  9. Never assume your portfolio will be able to beat inflation in retirement. That is, do not set a real return higher than 0%! A poor sequence of returns (such as the one in play) can deplete your corpus fast. See: Want to be financially free? Do not count on frugality! Worry about sequence of returns risk!
  10. The above implies that you should not have significant equity allocation regardless of when you retire! For a person retiring at 40, the freefincal robo advisory tool recommends an overall 37% equity allocation to be distributed among three buckets – see example below.
  11. Do not think of early retirement unless you have enough resources to live off a safe fixed-income instrument with withdrawals increasing 6% a year for the first 15 years in retirement. Additional resources are necessary to beat 6% inflation for the remaining years of retirement and these can be invested in different buckets. See: Retirement plan review: Am I on track to retire by 50? This is a reasonably robust way to handle bear markets in the initial phase of retirement.
  12. If you are not going to work for money after early retirement then do not be in a hurry to quit your job. Ensure you have enough corpus to implement an annuity ladder or at least a single annuity (aka income flooring). That is you guarantee a certain amount of your expenses via a pension plan. See how to compute this here: How to use income laddering with annuities to plan for retirement.
  13. Do not take multiples of annual expenses seriously! Members of the FIRE community talk about 30X or 40X as a good enough corpus to retire with. Here X refers to current annual expenses. While these multiples are good enough to relish a sense of accomplishment, they cannot be relied on to actually quit your job! You need to create a detailed plan capable of withstanding at least one decade of recession or bear markets (pt. 11 refers to 15 such years).

To reiterate, by quitting your job, you are giving up a stable (albeit stressful) job and a reliable income stream capable of supporting you for years. Such a decision is not to be taken lightly. No matter how big a corpus you have, the most productive alternative is some form of gainful employment that may not pay as much or as often. Do not think about early retirement without this alternative firmly in place.

Do share this article with your friends using the buttons below.

🔥Enjoy massive year-end discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)
 
Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
  Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)