Retiring early may be the ultimate dream for many, but achieving it means years of diligent savings and disciplined investing. For a surprising number of early retirees, their plan slowly crumbles until they have to find a job again. However, what they don’t know is that they made mistakes along the way, which made retiring feel like a mistake. With that, here are the 9 errors you can’t afford to make when it comes to your early retirement.
9. Leaving Money on the Table by Mis-timing Your Exit
Some corporate jobs with benefits that are vested for a specific number of years, and a premature exit can be a costly error. An analysis by the American Society of Pension Professionals & Actuaries actually found that leaving your job five years before being fully vested through a traditional pension plan can forfeit as much as 25% of the total benefit. The same applies to 401(k) of matching funds, stock options, and retiree health benefits that also have graded vesting schedules. So before you hand in that notice, do a full audit of your benefits.
8. Ignoring the Sequence of Returns Risk
One of the risks of retirement planning is that most financial models use average market returns to project portfolio longevity. With that, the order you receive those returns matters, especially in your early years of retirement. If you retire before a major market downturn, then you’ll be forced to sell assets for a low price to fund your expenses. Because of this, financial planners advocate for a “bond tent” or cash cushion, which holds several years of living expenses in stable assets to avoid selling them in stocks when a downturn happens.
7. Falling for the Geographic Arbitrage Fantasy
Moving to a country because of its lower cost of living is a geographic arbitrage, and it’s one of the most common early retirement plans. Some mistakes you fail to acknowledge, according to VegOut magazine, are healthcare costs, strict visa, and residency laws. But most of all, it’s the exchange rates where currencies fluctuate, and a country that seems cheap for you today can be expensive tomorrow. Also, you’ll be surprised to learn that as U.S. citizens, you’re still required to file your taxes for worldwide income.
6. Forgetting That Retirement is a Team Sport
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Retirement planning is never an individual pursuit if you have a partner. One critical mistake is your failure to communicate and align a shared vision for retirement. Just imagine one partner grinding through work while the other is traveling around the world. This would just cause financial and relationship strain. Early on, have an open and honest conversation with your partner about budget, spending habits, and lifestyle expectations.
5. Retiring From a Job, Not To a Life
There’s that burning desire to escape a toxic job or stressful career to make you think of an early retirement. But when your goal is to escape, you’ll likely find yourself in an existential vacuum later on. You see, work provides a structure for your identity and your sense of accomplishment, and without it, it can lead to aimlessness. Leaving a bad job is only the first step, as early retirement requires a plan not only financially, but also for your lifestyle.
4. Overestimating Future Investment Returns
You may feel like a genius investor in a bull market, but that’s actually where an early retirement mistake moves. Many of our plans are built on the assumption that high returns will continue in the later years. However, there’s no guarantee for future results as the stock market is cyclical. Use a prudent approach by conservative and long-term historical averages and testing the plan against prolonged periods of poor market performance.
3. Claiming Social Security at the First Opportunity
For early retirees, there’s a temptation to claim Social Security benefits as soon as they turn at an eligible age of 62. However, it may be a mistake as it results in a permanent reduction of your monthly check by 30%. Note that for every year you delay claiming up to age 70, your benefit increases by a guaranteed 8%.
2. Overlooking the Healthcare Coverage Gap
Most people thought that Medicare eligibility starts at age 65, while underestimating the cost of the healthcare gap between their last day of work and that milestone. Private health insurance for individuals can be expensive, especially for those with pre-existing conditions. That’s medical debt that can easily bankrupt you! Your mistake is about failing to budget for all the deductibles and maximums, so a multi-year budget plan is needed in terms of healthcare.
1. Miscalculating Your Future Self
Aspiring retirees calculate their current expenses and deem them final. But it’s what they call the projection bias, which is a belief that your future selves will want the same things you want today. Your plans will definitely change as you might get married, have children, have health issues, or pick up some expensive hobbies along the way. That comfortable budget you’re thinking of won’t align 15 years from now.