Early Retirement: You WILL Need More Money Than You Planned

As many of you know, the FIRE movement stands for “Financial Independence, Retire Early.” And, for many people, the “Retire Early” portion of FIRE is the most intriguing.

After all, wouldn’t it be great to spend your time learning new things, pursuing hobbies, and hanging out with friends and family without having to worry about that 9-5 job? Even if you absolutely love your job, you are probably slightly intrigued by the concept of retiring early.

Even for me, a teacher who enjoys his job, I am still very excited about early retirement. Although I did not retire in my 20s or 30s, I still fully intend to retire when I turn 50 (a mere 9 years away). However, I know that I probably will not be able to calculate exactly how much money I need before I can retire.

I also know that I won’t be able to control my expenses during retirement.

Skepticism

If you are a proponent of FIRE and a reader of Mr. Money Mustache, the godfather of the FIRE movement, then the statement that I just made almost sounds blasphemous. “Of course we will be able to control our expenses in early retirement,” you may be thinking to yourself.

You may be basing your skepticism on the popular article titled The Shockingly Simple Math Behind Early Retirement. This article shows how we can use our savings rate to tell exactly when it will be possible to retire. For example, if you save 50% of your salary, then you will be able to retire in 17 years.

Now that’s pretty cool! I think that we would all love to be able to retire within 17 years from when we started working.

As MMM, or Pete Adeney, explains, early retirement proponents just need to invest in index funds to generate the cashflow they will need to never work again. The math behind this has been established by the Trinity Study and the 4% rule, which basically shows that retirees can withdraw up to 4% of their retirement portfolio and never run out of money.

Agreement and controversy

If you have been reading this website for more than a few minutes, you will not be surprised to know that I completely agree with Pete. I believe that the U.S. economy will continue to grow.  Investing in simple index funds that model the U.S. and world economies will allow us to grow our retirement portfolios.

Like many people, I feel that the stock market may be a bit over-valued as I am writing this in late 2019. However, I also am humble enough to realize that I really do not know what is going to happen to the stock market in the future. Therefore, I am continuing to invest my retirement portfolio in stocks because I cannot hope to accurately time the market.

Other people are more conservative than me, thinking that early retirement is merely a dream. Some even state that millennials will need to save 40% of their salaries just to retire at age 65, or that an investment portfolio of $5.2 million dollars is necessary if you want to live on $100,000 per year in retirement. I won’t link to those articles, because I think that they are just clickbait and are far too conservative. However, as these and other articles suggest, many people are significantly more conservative than me.

Expenses in early retirement

Whether you are conservative or not when it comes to retirement, I would still suggest that your expenses in early retirement will probably be different than you originally thought.

For instance, let’s say that you are projecting expenses of $40,000 (plus inflation) per year in retirement. Maybe you used your average expenses during your last few years of working to help derive this projection. During the first few years of early retirement, you may find that your expenses are pretty close to $40,000, so you begin to feel pretty good about your projection.

However, as time goes on, you will probably find that your expenses are not matching up with what you projected. As you continue to get older, you may find that your expenses will change even more from where they were when you were younger.

Perhaps your kids start getting involved with more expensive activities. Maybe you realize that you don’t want to camp or stay in hostels when you travel. Or you decide that you want to get a pet, get married, or have another child. It’s difficult to recognize which expenses will increase, but as time goes on in, you will find that some expenses in early retirement will definitely increase.

This means that you will need more money than you originally projected.

What can you do

Although you may need more money, that does not mean that you have to work longer than originally planned. It also does not mean that you have to give up your dream of early retirement, just because your expenses will probably change. Instead, if we are going to need more money in early retirement, then we just need to be flexible with our spending and maybe even earn a bit of money during early retirement.

If your plan was to spend 4% of your portfolio in early retirement, then maybe you want to spend a bit less when the stock market is decreasing. Spending 3% instead of 4% for a couple of years, will allow your portfolio to remain strong, even when the market is struggling.

When you find that you are spending more in a certain area such as travel or medical, you should be prepared to cut back in another area. For instance, if you spend more on travel, then you may want to own a less expensive car. After all, since you are traveling so much, you won’t even need a car for a portion of the year. Not only will you save direct car expenses, but you could also cut your insurance and gas costs as well.

Making some extra money during retirement is also a possibility if you find that your spending is creeping up. When you just need to make a few thousand dollars instead of $50-100 thousand each year, you may find that you can do work that is more enjoyable than your current career. For instance, my neighbor makes wood furniture. So far, he has only made this furniture for his family, but he could easily make a couple bucks if he decided to sell the furniture to others. Even spending time doing exactly the type of work you do now will probably be a lot more enjoyable if you only have to do it 2 or 3 days per week.

We should NOT be scared

Even though we will spend more money then we planned when we retire, this doesn’t mean that we should be scared and skip out on early retirement altogether. We also shouldn’t postpone early retirement for a few years just so we make sure to have enough money for every contingency.

Instead, we just have to be flexible when it comes to early retirement.

Are you planning on retiring early? What are you planning to do if you expenses are higher than projected? Let us know in the comments.

And thanks for reading!

~Nathan

Let’s keep living a great life … with the help of money. So what’s next?

• You can travel for free by using rewards credit cards.
• You can get motivated and get out of debt.
• You can check out the next post or the previous post and continue to learn.

But no matter what you decide to do, let’s leave the ordinary behind and take action today!