Two types of early retirements have become more and more prominent through the pandemic recovery.
Despite the number of job openings reaching the highest level since the Bureau of Labor Statistics began tracking the measure in 2006, labor force participation among those 55 or older continues to decline. This indicates that more people over the 55-age cohort have begun to stop looking for a job, even if they’re of age (and health) to continue working.
While most of the decline in participation rates are among those 65 and older, the numbers also indicate that those 55 to 65 without a college degree may be one of the hardest hit groups – and may be forced into early retirement. In total, the pandemic resulted in 1.7 million more people into retirement than would have at a regular slice of time, according to the Schwartz Center for Economic Policy Analysis.
But there’s another cohort of individuals that have saved aggressively in the years leading to the pandemic—and during—which has given them savings boosts due to the rebound in the market that now leaves them in a position to retire, whether they’re in their 30s, 40s or 50s. This group, who often follow FIRE (financial independence, retire early) principles, include many members that have the means to leave the workforce forever. But even when you hit your mark, hesitation can follow.
What does it mean to actually leave the workforce for good, whether it’s thrust upon you or not? What will you do with your time? And do you have the financial ability to pull it off? Answering these questions can give someone that may be reticent to step away for good the confidence to do so. Or it can help those forced into early retirement with a strategy to overcome the surprise.
Do You Have The Means?
Easing the anxiety over an early retirement, whether forced or not, will first depend on the financial implications. How much do you have, and can you retire at a younger age than you might have originally expected?
To understand this, you need to determine how much you have and how much you spend. Those in the FIRE community typically gauge their ability to step away from the job based on whether they have enough in their portfolio to cover their expenses. To weigh this, they use the 4% rule. This rule of thumb, based on retirement research, finds that if you take 4% of your portfolio out each year, then you have a very strong chance of having that money last for 30 years or more. Since many in the FIRE community expect to retire for 40 years or more, then they may use a smaller percentage – 3% or 3.5%. This virtually guarantees their ability to afford their retirement, if they stick to the number and never have to pull out more than 3.5% per year.
To calculate this, you need to first determine how much you spend each year. Also, in this account, make sure to know how much debt you have on hand, which requires repayment, since this will drastically increase the amount you’ll spend year-in, year out. Once you know how much you’ll spend, you simply multiply by 25 if you’re basing it on the 4% rule. So if you spend $50,000 a year, then multiply that by 25 and you need $1.25 million. But 3.5% may be a better mark if you expect a longer retirement. In that case, multiply by 30 (technically 28, but to make the estimate more conservative, many round to 30) and you get $1.5 million as your target.
The less you spend, the less you need. So, based on the 3.5% rule, if you spend $40,000 a year, then you would theoretically need $1.2 million for a 40-year retirement. If you spend $30,000 a year, then the target number drops to $900,000.
When you look at your portfolio, which includes your retirement accounts, brokerage account and cash on hand, is it large enough to afford your retirement? For those forced into early retirement, by running this calculation, you at least know how feasible it’s for you to consider quitting altogether.
Do You Have a Back-Up Plan?
The anxiety over the retirement may also have to do with concern over what happens if something goes wrong.
If you’re not quite in a position for that early retirement, then consider a part time job. This could particularly help those that had to stop looking for full-time work during the pandemic. By affording half (or more) of your annual expenses through a part-time role, you can ensure you have enough to cover your needs while avoiding tapping retirement accounts. This gives the portfolio more time to grow.
And for those with the means, by taking a part-time role, it allows you coverage in case the unexpected occurs.
In a study of the 3.5% rule, researcher Michael Kitces found that by having an average of $10,000 in annual side-income throughout retirement, someone that spends $40,000 a year would cut the amount they need by $250,000. It’s effective because you’re covering a portion of your retirement through the job, while you can physically work.
The extra income allows you the ability to cover any shortfalls early in your retirement, in the case a down market hits or another concern rises.
Have You Practiced?
For many, though, the anxiety around retirement extends far beyond money. People spend their entire adult lives working, and they get used to having that responsibility when getting up in the morning. For some, the lack of responsibility and routine scares them more than the dislike of work. It plagues many, whether you have plenty of money in the bank or not.
Instead of fretting over this, it’s best to practice what retirement would be like for you, before you officially quit (or quit looking, in some cases).
What do you think you would want to do if you retired? Hobbies are good to have, but also think of how you will spend your time beyond the hobbies. Would you want to travel? Volunteer? Start a side-hustle? Test it out before your entire day relies on your willingness to enjoy the activity.
By doing so you might just find that retiring was exactly what you wanted all along.