The ability to retire at an early age is a desirable goal for many working individuals. The motivation for early retirement can vary. Some people grow tired of working and are ready for days of less structure. Some people enjoy working but want to reach a status of not needing earned income. In any case, the financial capacity for early retirement can be difficult to achieve. Early retirement does not come without some financial sacrifice. Let’s examine the financial aspects of early retirement to determine what makes this such a challenging goal.
Most working individuals who wish to retire someday should be regularly saving a portion of their income to be used to fund their living expenses during retirement. Because those individuals also need a portion of their income to fund their current living expenses during their working years, the amount they can save each year is limited. The variable they can control is the number of years they work and save. An individual who chooses to retire five years early has five fewer years to save for retirement, which means the individual will have less retirement savings and may not have enough to fully fund his or her retirement. On the other hand, an individual who chooses to work and save five additional years will have more retirement savings and possibly have more to spend in retirement.
Once an individual retires, that person will start withdrawing an amount from his or her savings portfolio to fund his or her living expenses each year until death. Since most retired people have a minimum amount they need for living expenses each year, they usually cannot afford to reduce the amount they withdraw from their savings portfolios. The variable people can control is the number of years they must withdraw from their savings portfolios. An individual who chooses to retire early will require more years of withdraws from his or her savings portfolio, so he or she may have to withdraw a smaller amount each year. On the other hand, an individual who chooses to work longer and delay retirement will require fewer years of withdrawals from his or her savings portfolio, so he or she may be able to withdraw a larger amount each year.
As you can see, early retirement is difficult to achieve because of two main reasons: fewer years to save and more years of spending. We call this the double-edged sword because you cannot reduce the total amount you save without increasing the total amount you need for retirement. To achieve early retirement, you must sacrifice your lifestyle expenditures in both your working years and retirement years. You sacrifice during working years by spending less so you can save more money for retirement. You sacrifice during retirement years by continuing to spend less so your savings portfolio is not depleted before death. Early retirement is difficult to achieve, but if you are willing to sacrifice some lifestyle expenditures, you may be ready for the challenge.
