What Does it Mean to Retire Early?

Remember the 40s and 50s?  I’m guessing not, though I have no doubt that you’ve been subjected to nostalgic (and false) musings about simpler times when the country was prosperous and family mattered and cable reception was poor.  Men wore suits, women wore dresses, and the kids had hats with little propellers on them.  

Of course it turns out that the rose-tinted lenses that give us that view are horribly skewed.  Did you take a driver’s ed class where they made you put on those glasses that supposedly make the world appear as it would if you were drunk? Well, our nostalgic view of the post-war era in the US is something akin to that.  But somehow this antiquated view of a very short period of time seems to have crafted the mold for the retirement landscape even now, years later, when little about the economy and the way we work are the same.  

Back then, working for the same company for 30 years and then retiring in your late 50s or early 60s with a pension – that was the dream.  But at some point along the way, say the 80s and 90s, after pensions were looted and people wouldn’t seem to die soon enough and continued drawing payments, that concept departed from private sector employment, and is rarely found today.  And in more recent years, as taxpayers no longer prop up underfunded pension plans, the public sector has dramatically scaled back its own offerings of lifetime security during retirement.

The consequence of the demise of the pension system entails a fundamental shift in who bears long-term market risks, shifting the risk from employers to workers.  Rather than being the recipient of a guaranteed annuity (the pension) where the employer takes the long-term risk of market fluctuations, employees were asked to save for their own retirements, and assume the risk themselves.  The US government aided in this by creating incentives to saving for retirement in the form of 401(k) accounts and IRAs, in which certain amounts can grow without being subject to income taxes until withdrawn.  But what it comes down to is that we still tend to focus on this model established in the old days of pensions.  Work until you’re 60 or 70 or whenever you’ve saved enough so that you don’t run out of money and become a ward of the state (or your children) before you die.

The sunset of the work-for-guaranteed-annuity model has, however, opened some possibilities for early retirement by untangling long-term commitment to a single employer from the ability to retire comfortably.  Now, of course, there are still some employers – mostly government – that offer pensions, and others that tie vesting in certain benefits like profit sharing to duration of service.  All of these can play a part in early retirement, even if it means foregoing certain benefits that would only be available with further years of service.

So what’s the point of saving and investing during our working years to retire early when it requires foregoing certain fruits of our hard-fought labor?  Is it purely freedom from wage earning?  Does it mean you live the rest of your life in a beer commercial sipping a cold one from an icy bucket while you stare at the waves, without a care or worry?

Probably not.  Sitting on the beach is great, but for most people, even those with time on their hands, it’s a once in a while reality.  Sure, you could retire at 45, get a house on the beach in Belize and dig your toes in the white sand while worrying only about when to replenish your sunscreen.  The thrill is likely to last a year, maybe two, tops.  The human brain is built to run, and when it gets cold, our bodies grow stale, it becomes difficult to move or perform anything other than the basic functions to survive.  What I’m saying is, for most people, not keeping yourself busy will lead to boredom and all that it entails.

So are you telling me that I should save and retire, and then get a new job?  Maybe.

“Early” retirement is not necessarily about giving up wage-earning.  It’s about not being fully dependent on wage earning to survive.  And the freedom this brings is better than doing nothing because it’s about having at your disposal the most precious resource on the planet: time.  Don’t get me wrong; relaxing on the beach or in the mountains is phenomenal, and more power to you if that’s what you want and it can keep you interested.  

But perhaps even better is the freedom to pursue what you want in a day to day life.  Have you always wanted to volunteer?  Now you can.  Have you always wanted to take a job with a non-profit or in public service but didn’t think you could live off the (relatively) lower salary?  Early retirement could be the chance to pursue something that aligns with your passion, a job you see less as something you have to do and more as something that you want to do.  

Ever thought of starting your own business but couldn’t stomach the downside risk or simply didn’t have the time to sit down and plan it out?  Here’s the chance – though I’ll discuss some of these riskier activities in later posts.  What about writing a novel?  There’s an activity that takes more time than you might think, but reaps the reward of freeing your imagination, whether it ends up published or buried in a password-protected file on your hard drive.  Better yet, you can spend more time with your kids.

The possibilities are essentially endless. It might even be that you like whatever job is paying you the wages that you’re saving, and retiring early entails nothing more than switching to part-time and having more hours to yourself each week.  And, as I always say, everything is about balance and trade-offs.  The best course might be a combination of everything.  Maybe instead of working 8 to 6, 5 days a week, you work 8 to noon, and spend the rest of each day writing the novel, picking the kids up from school, and crafting a bespoke dinner for the family each night.  Doesn’t that last one sound like a great example of an ad for a cooking class at a resort?  Those ads are always filled with people who do nothing but smile, even as they spill oil onto the burner and the flame flares up and torches their eyebrows.

The choice is yours.  But you have to be prepared to manage the risks.  Unlike a more traditional retirement where you work until your 60s or so, if you do retire “early,” you’ll have to be prepared to manage your money and spending due to the number of remaining years in which you have to support yourself.  It might involve creating a budget and sticking to it, and it might involve adjustments depending on how your investments move.  You’ll also want to manage the risk profile of your investments.  Unlike when you’re still working, if you’re actually living off passive investment income, a precipitous or sustained drag on your returns could impact your cash on hand.

So I suppose you could say that early retirement is different for everyone, depending on what you make of it.  A tidy conclusion would be to say that it involves abandoning your dependence on your wage-earning profession and shifting to managing your risk and finances to sustain a standard of living that suits you.  

In future posts, I’ll talk more about specific goals for early retirement, from traveling and living abroad, to pursuing a new career, to learning how to relax.  The last of those, you may be surprised, is often the most difficult part for the sort of person who pursues FIRE.  You may quickly find that the sort of drive that compels a person to reach a very specific goal does not quickly fade.  I’ll also discuss the numerous financial considerations that must be accounted for when planning for an early retirement, ranging from managing investment risk to purchasing health insurance.

Always keep this in mind: the point of early retirement is to create freedom that allows you to pursue a more fulfilling life, which again, sounds like an ad at a nice resort.  But there’s a ring of truth to it, even without the idyllic images of palm trees and spa treatments.  Of course, it takes proper planning and execution, and hopefully this site offers a helpful guide toward getting there.