I always get a kick out of the financial and personal advice given in mainstream financial and business magazines such as Money, Kiplinger, and Forbes. The advice can usually be paraphrased as “Here is how to do things 3% better than the average thoughtless drone sitting in the cubicle next to you.” ** And the early retirement articles are the worst, because their definition of “early retirement” usually means retiring before turning 60. So I thought it would be fun to take a completely random article about early retirement from one of these websites and see how it compares to an genuine early retirement (before turning 40).
(**) I suppose this makes sense, though, since most of the authors are experts in journalism rather than in the topic they are writing about. Unlike blogs, where often the author is not so good at the journalism piece, but they are more likely to be experts and passionate about the topic they write about.
So I googled “Forbes early retirement” and found this article which is written as a contrarian piece against early retirement. Fair enough, I’m up for a debate, so let’s break down their top 10 list one at a time.
1. Easier access to retirement accounts
Technically, this is true. After 59.5 years, it certainly is easier to gain access to your 401k and IRA accounts. But the details of this in the Forbes article is absolutely wrong. They state that you can’t access money in your 401k until you are at least 55 without a penalty. This is untrue, you can move that money into a Roth IRA, sit on it for 5 years, then pull the original money out (not the gains) penalty free (you do have to pay taxes, of course). You can also use the 72(t) rule to withdrawal money. With the 72(t) rule, with $500K in retirement accounts, you could pull out about $10K-$15K per year up until age 60, at which point you gain full access. There are, of course, negatives to using the 72(t) rule, but that’s beyond the scope of this debate.
The author also seems to rely on an assumption that the vast majority of savings are in tax-sheltered accounts. However, for many people with high incomes, they could easily be maxing out their 401K and still have enough left over to be saving in taxable accounts. For me, over 60% of my savings are in taxable accounts, which most likely makes early withdrawal from my IRA irrelevant.
2. More Savings
Of course, this is true. If you work longer, you’ll save more. But the author hasn’t considered the marginal utility of money. Once you have enough money saved, there’s no need for more. In other words, it’s not about having more, it’s about having enough. And enough is usually far less than people think if they are creative, and adventurous. Besides, this is just another way of saying “you need to have enough money to retire” much like #1 above.
3. Buy stocks low
Here, the author makes a pair of bad assumptions. First, she assumes stocks are at a low point on a cycle. But making a retirement decision based on what you think you know about the future market is a very bad idea. Market timing is bad enough with stock purchases, let’s not try to time your retirement with the market.
4. More investment earnings
This is true, of course. The longer you work, the more time you give your investments to grow. But this is really just a duplicate of #2, and my response is the same. Once you have enough to retire and live your desired lifestyle, the additional earnings are irrelevant. So far we are 4 arguments into the article, and they are all different ways of saying “make sure you have enough money before you retire.”
5. Higher Social Security benefits
We’re talking about early retirement, which means you are 20 at least 20 years away from collecting any social security. I would advise against having any dependence on social security, even if you are more optimistic about it’s future than I am.
6. Possibly higher pension benefits
My first rebuttal of this argument is that so few people still have pension benefits. And even if you do work a job that gets a pension, then this is still no different than the previous 5 points about having enough money.
7. Lower health care expenses.
OK Forbes, this is getting ridiculous. All you are talking about is money. Yes, I will concede your point that there are various reasons why working longer has financial benefits. Let’s merge points #1-#7 together as one argument.
8. More home equity
Sort of, but there’s no reason you can’t pay off your mortgage before an “early” retirement as opposed to a “late” or “normal” retirement. It doesn’t require you to be working, it requires money. Which leads me to my next point, this is no different than the previous 7 arguments. Whether you you look at paying off your mortgage as a reduced expense (no mortgage payment) or as an income (reverse mortgage) it’s still just about money.
9. Fewer years to draw down savings
Hmmm, very unique – another point about money. Nothing to see here.
10. Will you be emotionally ready to retire?
Finally, after 9 different arguments all centered around money – author Liz has brought new material. She has brought up a very important point that needs to be considered.
The author sites Warren Buffet and Bill Gates as people who continue to work even though they don’t need to. This is a good point. And if you asked them if they’d continue to work if it were unpaid, I’ll bet you they would say yes. In fact, both of them have given away much of their money and have pledged to give nearly all of it away in the future. To them, work stopped being about money long ago.
But Bill and Warren are anomalies and hard to relate to, since they have more money than most of us can comprehend. Let’s bring it back down to earth and review a conversation I had recently with my 62 year old mother-in-law, who was questioning the wisdom of my retiring early. After some debate, I asked her if she would work for free (like Bill and Warren I’m presuming). While she is not yet financially independent, I asked her whether she would work if she was FI. After a little thought, she didn’t know her answer and it was getting late, so we all went to bed.
The next morning at breakfast, she said “You know, I couldn’t sleep last night thinking about your question.” Having mostly forgotten our conversation since it wasn’t quite as important to me than it apparently was to her (or maybe it was the Kentucky Bourbon Barrel Ale I was drinking during our game of Trivial Pursuit that night), I had to ask her to remind me of the question. She said that see was up for hours laying in bed, wondering if she would keep working if the job didn’t pay. (By the way, I have a ton of respect for a 62 year old woman who is mostly set in her ways, yet is willing to listen to her 33 year old son-in-law with such a socially unaccepted philosophy). She said that she would work for free, that she really truly likes her job.
And this is really the whole point of an extremely early retirement. I am currently 34 years old, and in the peak of my physical and mental health. My social life is primarily my wife and my two young kids. My personal fulfillment comes in raising the kids, and providing for my family. While my job can offer me some fulfillment and some social benefits, these are needs I don’t need my job to fulfill. My mother-in-law, on the other hand, is on the downward slope of her physical health, and has already raised her three daughters who have now begun their own families. Her job, it seems, fulfills her personal needs.
Let’s Wrap This Up
I think the Forbes article boils down to two things to consider before retiring early. First, you need to have enough money to fund your desired lifestyle. This is the first, and most obvious consideration – and can usually be answered with simple math (you need 300-400 times your monthly expenses accessible savings).
Second, you need to consider whether you are mentally and emotionally prepared for retirement, or if some critical personal needs such as social belonging, self-esteem, and sense of fulfillment are dependent on your job. Of course, this is a dynamic consideration, which is what makes the term “early retirement” sort of ambiguous and definitely dynamic. I suspect that in my situation there will come a time where I don’t meet all of my personal needs from my hobbies and my family. That time may come when my kids are teenagers and don’t think daddy is so cool anymore, or when they leave home and start there new lives. Maybe sooner. If that day comes, and nothing else fills my personal needs, then return to work is always possible. The same applies to everyone – life situations change, and the value received from having a job rises and falls. When considering early retirement, I suggest you consider the present and the near future situation, and not consider it a permanent and irreversible decision.
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