CFO of Life #59: How to Decide If Early Retirement Is Right for You and 10 Questions to Ask Yourself Before Retiring Early

Early retirement is the dream of not having to wake up early and go to work, but still have enough money to enjoy life. Or the dream of being on the beach enjoying the summer breeze and drinking cocktails all night.

But is retiring early worth it?

Well, it could be, but it depends on how you make it and how it feels! You can always make it work, but interestingly, a lot of people who retire early go back to some sort of work. Therefore it begs the question, is it worth it to retire early and if so at what cost?

By the end of this article, you will be able to understand :

-What early retirement means?

-Why do people retire early?

-What are the costs of early retirement?

-What are the different ways you can retire early and which one suits you?

-How to make the qualitative judgement if early retirement is for you!

Let's lay the foundations of what early retirement is and what it entails

Early retirement is when you stop working before the age when you start receiving your state pension. In most countries, early retirement is anything under the age of 65.

It could be achieved either by having enough money coming in from your investments to support yourself and your family. Or it could be from having a job that qualifies for early retirement ie. being a military personnel, a pilot or something similar.

For me, the ideal early retirement would be to get to the point of scaling down my work hours and enjoying more time with my family.

For you, it might be getting to the point of being so financially safe and secure that you can always quit your job and still live comfortably for years to come. But you need to take your time and form your game plan as this will make up all of your calculations.

Why do people retire early?

Well, some do it because they don't want to work for someone else, some because they want to live life free and some just because they manage to do so because they win the lottery. Or some have extremely hard and stressful professions like pilots, miners and military who retire early because of the stress of the job.

But is it worth it?

If you ask me, it could be, but it all depends on which scenario you work with.

In the most common scenario of early retirement, people have to become a lot more frugal than normal and invest between 30-60% of their salary for 5-15 years. And that would guarantee that you will probably* have enough money invested so with compounding they will be able to sustain their current lifestyle.

Some people simply win the lottery and retire that way. But statistics show that most of them don't manage to last more than 7 years and they go back to work. Therefore, that is not a sound plan for early retirement!

What are the costs of early retirement?

Looking into the "traditional route", people would need to live frugally for a few years. For most people, the numbers only start to add up after 10-15 years of compounding and even in the best case, it would take 5-10 years. But that would require you to save between 50-60% of your earnings. Therefore, that would leave you with quite a small amount of money to spend each month, which would not be a fun time!

If you go the route of a dangerous or high-stress job, it would be a bit easier as you would be guaranteed to retire early. You would work extremely long hours, with a lot of stress and health risks, but at the end, you will get a state pension, which in theory should be enough to cover your living expenses. However, in practice, many of those people continue to work even after retirement.

You probably see the pattern that there are different ways you can retire early, but finding out which one suits you is the most important decision to make. That would define if you can keep up the motivation to meet all the requirements or if you would fall face-first on the pavement in a few years.

For me, I’d take the route of saving and investing. Hopefully, that would help me to the point of being able to balance work and life a bit more in the future. Maybe move to part-time work or simply stop chasing the next position/promotion so hard and enjoy more family time. This would not require crazy amounts of savings to do, but a healthy amount of diligence and preparations. You can somehow call this “part-time” retirement.

At the same time, if I wanted to get to the point of being able to have a complete early retirement, I would need between $1.5 and $4 million in my investments (this is how to calculate your number). That amount would guarantee that all my bills would be covered, my mortgage paid and a significant amount available for any emergency needs. With my salary, that would be an extremely big challenge, but not something impossible!?

Last but not least, there is the “super early retirement”. It is the idea of retiring with so much money invested that you can live a significantly better lifestyle than you currently have. For most people (me included), this starts at the $5 million point and that would be roughly $200,000 a year. And I bet you can have a great life with that much money, even in the most expensive of cities like New York, London, Tokyo, Beijing or Singapore. But this lifestyle comes with the cost of sacrificing plenty of years to save and invest + push to get a great paying job. Therefore, if you don’t make $150k or the equivalent in your country, it would be hard to get to this point!

If you look at those 3 types of early retirement, you can easily conclude that early retirement is all dependent on how much money you want to have. So it is more important to focus on the qualitative side and what you need to sacrifice to get to each one of those positions. Therefore, you need to properly assess the qualitative side of early retirement and make a judgement if early retirement is entirely for you!

To do so, you would need to answer those questions for yourself: Is it worth living extremely frugally for 7-15 years, so I can maybe retire early?

Would I be happy living on a ‘ramen budget’ for a long time, or would that make me go crazy??

Do I want to slave away working super hard for 15 years and put my body and mind at risk for a hypothetical early retirement? Even if I get to the $5 million, is giving away my best years worth it?

When I am 60, would I need a sports car or would I be happy with a good reliable car? What does my spouse or partner think about me retiring early?

How will my retirement affect my relationships with my children and grandchildren?

Am I ready to retire emotionally?

How will I cope with the transition from working to retirement?

What are my hopes and dreams for retirement?

How would I find meaning and purpose in retirement, or would I simply go with the flow?

How would I make new friends and connections in retirement?

How would I deal with boredom and all the free time that I will have?

What would keep me motivated after I achieve early retirement?

What are the things that will make me enjoy every moment of my retirement?

Those are just a few questions that you should ask yourself before starting the journey of early retirement. They will not only tell you if it is something that you would be good at, but if it is something that you would manage to tolerate in the long run. At the end of the day, if you start the journey and halfway through it you find it is not for you, at least you gave it a chance and you will have a lot fewer regrets.

Next week, we will look into financial solvency and how your relationship with debt influences your life.

Thank you for reading! All comments and topic suggestions are highly appreciated. Post #59 in the series CFO of Life #si #personalfinance #CFOofLife