While you certainly need a substantial nest egg to retire early, those who are happy in early retirement usually share a few common traits. You will need to be able to cope with financial shocks and to fill your days will new activities so you don't become bored. For aspiring early retirees, here's a list of goals worth shooting for:
You are willing to tune out market gyrations. Most early retirees need the help of growing equities to sustain their lifestyle for decades. But markets are volatile, and it's hard to hang on during a bear market. And the more you look at your investments, the harder it is to hold on. That's why successful early retirees often develop a strategy they feel comfortable with and then don't monitor the market constantly. That way, they won't feel as much anxiety with the daily gyrations, which ultimately helps them keep more money by staying the course.
You know your expenses. Some people project their retirement expenses as a percentage of their current income, but how much a retiree needs to save has nothing to do with his final salary. What you really need is to start estimating your expenses once you no longer have to work. From there, you can determine how much you will need to draw from your assets each year and can calculate a savings goal you need your nest egg to hit. Knowing exactly how much you spend on a monthly basis and that your nest egg can cover those expenses indefinitely can certainly ease many of your financial worries. Tracking your expenses also makes cutting spending without much sacrifice a lot easier.
You are comfortable earning income again if the need arises. You may never need to go back to work, but it's comforting to know that the option is always there. And just a tiny bit of additional income in retirement can make a huge difference because you can put a bit less stress on your portfolio whenever valuations head south. A retirement job can be a last resort that actually isn't that bad, and it could even be fun if you find an ideal position. At the very least, you won't have to significantly reduce your withdrawal rates and cut spending every time the market turns south.
You feel at peace about family dynamics. It's not always a good idea for young people, even if they have managed to save a boatload of money, to retire early. Your financial situation can change quickly once you get married or have kids. A changing family situation affects spending so much that none of the previous calculations make any sense anymore. Day care alone in certain parts of the country can cost $20,000 each year. Add that into the mix and you are looking at a completely different financial situation. If you expect your family situation to change, you probably aren't ready to retire just yet.
You are self-motivated to find new activities to fill the day. While it is fun to dream of retiring early during a stressful time at work, not everyone will actually be happy without work to fill their day. It takes initiative to get off the couch as an early retiree. Instead of running into people at work-related events, you must pick up the phone to call your friends to go out. You need to get over the nervousness of trying something new, and drive to the places you want to visit. Those who sit around all day quickly find that the days get boring, and a lack of social interaction and exercise can also start to impact your health. And let's face it, without a healthy body, nothing is enjoyable anyway.
Aiming to become an early retiree requires the discipline to save and stick to a budget. But happy retirees also need to be able to find meaningful ways to spend their time.
David Ning is the founder of MoneyNing.com.
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