Even retiring in our mid-sixties today poses unaccustomed challenges revolving around our unprecedented longevity–the increasing odds that we might live deep into our mid-90s or even beyond–and our psychological tendency to electively compromise our lifestyles once we stop earning income out of fear of spending too much too soon and running out of money. So if a thirty-year retirement is bedeviled by these factors, think about a 50-year period extending from age 45!
It’s crucial for anyone seriously contemplating early-retirement to make a study of the complex psychological and financial dynamics involved, or work with an advisor who has. Most of us don’t know what we’re up against in modern retirement, and that goes for untrained financial professionals as well as clients. True, it’s an opportunity for extraordinary self-realization but it’s also rife with the risk of financial ruin no matter how much money we may start with.
The “early retirement” planning process really needs to start at the “back end” with a vision of the lifestyle desired. A new profession of retirement coaching has emerged to assist people in finding meaning in retirement no matter when it might start. I call this aspect of retirement planning its “soft” side to distinguish it from the financial dynamics; I refer to them as retirement’s “hard” side. The two are intertwined.
The process of planning a meaningful retirement isn’t “one size fits all ” In financial terms retirement can come in small, medium and large. How much you’ll need to accumulate, and in what vehicles, will be determined by the cash flow you’ll need to sustain your envisioned lifestyle. Is your goal to escape the grid and live the single life of adventure or is it to be a high-profile head of household educating your children and practicing communal philanthropy to make the world a better place? It’s essential to start with your vision of a meaningful life freed from the need to work and earn. Keep In mind, though, that “meaning” can be expensive to sustain.
Obviously, living on $50,000, adjusted each year for inflation, requires a much smaller nest egg than living on $500,000 or $5 million. Once you settle on the cash flows you’ll need, you can size the income-producing nest egg required and focus on its core portfolio construction. The more income you can generate from your nest egg–the higher its yield and the more reliable its duration–the more efficient its construction can be and the less capital you will need to get the job done. This frees up other capital to satisfy your risk appetite or philanthropic intent.
To retire early you will want to start saving and accumulating whatever capital you will need as soon as you have a clear vision and a declared objective. If it’s to last a lifetime, the nest egg needs to be de-risked to avoid untimely market losses that could prove hard to recover. Better to position your income-dedicated retirement portfolio to compound safely over time. Smoothing returns and avoiding losses is key to portfolio design; we believe you should look for financial instruments that can guarantee the outcome. Next-gen longevity insurance can play a stabilizing role in the nest egg. Linked to the underlying markets, Its new varieties offer downside protection together with a reasonable share of upside potential both before and during retirement. We use them extensively in constructing our “stable-core” retirement portfolios.
That’s because losses incurred in retirement planning can undermine even the most consistent effort. Market risk should be hedged and minimized if not totally avoided. Taking on uncompensated risk is anathema.
In fact, retirement at every stage is an exercise in risk management. Risk sensitivity is accentuated the earlier you start and the closer you get to the goal line.
Avoiding depletion is like walking a tightrope. Success is not dependent on how much wealth you start with; it’s more a factor of the ratio of your spending in retirement to your dedicated retirement capital. Study the concept of the “safe” withdrawal rate and figure out a way to exceed it without prejudicing your ultimate success. Getting good advice on how to do that may even be worth paying for.
Unless your income goals in retirement are modest, it’s hard to save enough out of one’s wages to build an adequate nest egg no matter how early you start, especially if you have a spouse and family to feed, house, clothe and educate. Starting a successful business or owning shares or stock options in a start-up that ultimately gets acquired or goes public are more often the sources of wealth creation among age-45 retirees. A carried interest in a real estate or financial firm—a share of the profits—can be another path to early riches.
Ironically, while risk taking is often the source of early-retirement wealth, the nest egg itself should be hedged and protected. In our practice we go further and recommend insuring it for higher initial yield and longevity guarantees that can survive an individual issuer that may go under.
Retiring early only accentuates this ever-present dialectic that characterizes a retirement that, if starting at 45, can last far longer than your work life.