This question was posted anonymously in the HTM Facebook group…
“For someone retiring significantly early (think 40s), what are some of the hidden costs or catches that can be a surprise and lead back to needing employment or significant cuts to lifestyle?”
Matt & Joel’s response: First off, congrats to this poster for handling their money so well that they’ll be able to retire at least two decades before most folks!
We don’t know the details of income or employment, but it goes to show that it can be done. Retiring early is definitely possible if you make the right money moves when you’re young.
That said, there are some things to watch out for. Rarely can you make a plan and then follow it precisely with no adjustments for 50-60 years.
And our fellow Facebook commenters had a lot to say on this front…
Lifestyle creep
In general, when people make more money and feel “richer”, they end up spending more. It’s a phenomenon known as lifestyle creep.
And for early retirees, it’s not so much about having a big income… It’s more about having too much time up your sleeve. Financial freedom is about being flush with money, and time.
If all your friends are working, what are you gonna do? In your early 40’s you might think that your lifestyle will never change, but there’s so much world out there to explore and things that you can buy – and if you have no job or money problems holding you back it’s natural to spend a bit more treating yourself.
Of course, there are awesome no-cost ways to spend your time. But the temptation will likely be there.
So that’s the first big gotcha to watch out for. Lifestyle creep.
Healthcare costs
One of the biggest unknowns in everyone’s future is healthcare costs.
Hopefully early retirees can spend much of their time and effort staying as fit and healthy as possible. But, medical surprises catch us all at some point!
If you are too young to receive Medicare benefits, and you’ve said goodbye to your employee healthcare plan, you’re probably gonna need to buy insurance from the healthcare exchange.
The cool thing is the subsidies you qualify for and the ultimate price you pay revolve around your family size & income, not your net worth.
So for folks in the FIRE crowd who are retiring early, even if you have millions in investments, your income will often look minimal. That could mean a much lower bill for health coverage.
How long those massively generous subsidies will be around is another conversation.
But it would be a smart idea for early retirees to build in substantial flexibility for your costs to rise dramatically, far above the rate of inflation.
Listener Heidi also mentioned the reality of needing dental work. That’s not covered by health insurance. Much of that will be out of pocket! There are ways to save, like dental tourism, but saving and investing more to have a healthcare cost buffer would be wise.
Inflation concerns
Continuing on the inflation topic, many retirement models factor in a 3% rate of inflation. That’s not a bad assumption.
Imagine retiring in late 2019. Running standard numbers seemed reasonable. Rates had been relatively steady and we hadn’t seen out-of-control inflation in decades.
But alas, inflation reared its ugly head in a massive way the last few years.
If you had just reduced your liquidity, paid off your 2.5% mortgage, and switched into more conservative investments, largely missing out on a massive stock market run-up, you will have found yourself in a tough spot.
Inflation was not slowly, but rapidly reducing your buying power. So for many retirees, young or old, they found they had to go back to work.
Tax rates
Another future unknown is how taxes will affect your wealth and income.
It’s a scenario worth considering. Taxes are scheduled to go up in a couple years when the Tax Cuts and Jobs Act expires.
Will it get extended? Who knows! But we have a debt problem in our country and a 3-5% bump in taxes could impact your early retirement plans.
How to stay prepared
There are really only two solutions to help get you past these potential early retirement problems… Planning is crucial, but it can only get you so far.
Flexibility and conservatism are a necessity.
Early retirees must remain flexible and be open to cutting expenses, or going back to work (at least part time) to cover any rough patches or downturns.
Get stuck with an unforeseen medical bill? No worries, just pick up a part time job to make money and pay that sucker off! Or, reduce some of your discretionary spending.
For conservatism, we would recommend oversaving a little. And use reasonable but conservative growth numbers in all your estimates.
It’ll be better to accidently have too much money than to not have saved enough.
That’s why lean FIRE in particular has always worried me. It’s all about saving up just enough to squeak by. Which is fine if you’re highly flexible, if you don’t mind going back to work should things hit the fan. But if not you’ll want to aim higher.
The Bottom Line:
If you can reach financial independence early in life, that is admirable and awesome. It takes a lot of discipline to pull it off.
But, that doesn’t mean you can completely ignore what’s going on around you and never worry about money again. There will always be issues popping up and money challenges might get thrown your way.
Ultimately, being flexible and ready to enact contingency plans when things go wrong is necessary. And definitely be conservative when it comes to forecasting portfolio growth numbers, inflation, and how much you envision spending in retirement.
Thanks to the fellow HTM Facebook members for pitching in with answers to this question. Y’all are awesome!
For the full version of this discussion, check out Podcast Episode #841 (it’s the last question in the episode)
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