Financial Independence and Early Retirement are not necessarily linked at the hip. They exist independently too.
To retire, you must be financially independent. Unless, you are living with family and they are supporting you. Yet, you can be financially independent and choose not to retire.
For most of us, retirement is solidly on our own shoulders. Most safety nets have been pulled out. Don’t make any decision lightly. The earlier you retire, the more the time your money will have to suffice to out-save inflation and non-working years. Being old and broke is a terrible reality.
Here’s something to get you started.
What is retirement?
There is a fundamental change on how retirement is perceived today. Earlier, it was the case of being shoved off the demographic cliff and being forced to leave the company, saying goodbye to the 9-to-5 lifestyle.
Today, the concept of retirement is being reconfigured.
It could mean just slowing down and working 3 days a week, or, working 5 days a week but just for a few hours each day. It could be opting for project-based work or going off the salaried payroll to that of a consultant. It could also be the conventional “giving up work” altogether to pursue your hobbies or volunteering. You get the gist.
Neither does it have to be at a particular age. You could be retiring way before the conventionally set mark, out of choice. Or maybe, a golden handshake was offered, and you were asked to move on.
There is no right or wrong. There is no one-size-fits-all. It all depends on what you want from life, and what option is best suited to you, taking into account your financial position and the number of dependents. But how you choose to interpret retirement is what will form the basis of your retirement plan. Have clarity on your plan so you can build on it.
How different people define retirement
What retirement is not.
Don’t make the error in assuming that it is a destination, an end-of-the-road milestone, or a one-time event. Nothing could be further from the truth. It is a transition into a new way of life that could be long and winding and unpredictable.
Professor Robert Atchley developed six descriptive phases of retirement that show it to be a transitional process over different phases. It is a new stage in one’s life, but a multi-phase journey, not a homogeneous phase.
Retirement in your 60s will be quite different from retirement in your 80s. Not only will your level of activity and dependence differ, but also the financial outgo. In the initial year, travel may take predominance. Later on, the focus might be on healthcare. Each phase will have its own opportunities and challenges and moments – death of a spouse, deteriorating medical conditions, travel, marriage of children, birth of grandchildren, and so on.
Hence, while you plan for retirement, don’t forget to also plan through retirement. What sort of lifestyle do you plan to maintain? How do you plan to spend your time? What do you really plan to do once you quit the 9-to-5 routine?
You need to approach it from different perspectives: existential, financial, emotional. There is the psychological and behavioural distancing of oneself from the workforce. But there is also the reality of new social roles, expectations, challenges and responsibilities. You must have clarity on what you are retiring from, and what you are entering into.
4 retirement planning blindspots
Don’t assume that you won't live for long.
Don’t be conservative when estimating your retirement period. We can’t know how long we’ll live. So as a foundation, use life expectancies.
David Blanchett, head of retirement research for Morningstar Investment Management, recommends that the expected length of your retirement should definitely be longer than your life expectancy, since you want a cushion should you live longer than average. So he would advise a 65-year-old American today in average health, to keep a period of 25 years in mind. For a couple, both age 65 and in average health, I think the minimum period should be 30 years. If you are much younger, say age 25, you need to really pad up on life expectancy number because by the time you eventually retire, life expectancies will be even higher (something actuaries call expected improvement in mortality rates).
According to the latest Sample Registration Survey (SRS) of India, overall life expectancy at birth for women is 70.4 years and 67.8 years for men.
But do remember, life expectancies are just an average. If you have not suffered from malnutrition (as the lower economic classes might) and are in excellent health, chances are you will live longer. Look at your family history. How long did your parents live? Be practical.
Do NOT make these 4 money mistakes
You can’t mess around with retirement planning.
Don’t be naïve in assuming that your spouse will always manage your finances. If you are married, be prepared for the eventuality that you might not be so for your entire life. Unless you and your spouse pass away at the same time (which you don’t need to be told is very highly unlikely), one of you will experience being single at some point. So don’t leave all the money management to one spouse; both must be active or at least very aware of the financial situation.
Your retirement could easily last for a few decades, your money must last too. Also, you will have to figure out the withdrawal rate during the initial phase so that you have ample funds to keep you going. For instance, you cannot overdo the travel at the start and deplete your kitty. Also, since your money needs to suffice for decades, you cannot have a retirement kitty that has zero exposure to equity. You can look at annuities though.
Most importantly, ensure that Wills are drawn up and nominees are in place.
Don’t be afraid to seek the services of a financial planner. The objectivity and professional expertise will go a long way in setting you off on a solid footing.
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