Who doesn’t want to retire early?

Unfortunately, many people won’t be able to.

Even worse, many people don’t have a clue that they won’t be able to retire early.

Such was the case with this couple in their mid-30’s that planned on retiring in their 50’s even though they only had $17,000 in savings.

Yes, that’s it and the reason I filmed this financial rant video.

I wish I could say that this couple was the exception and many on our pace to retire early, but if I was I Pinocchio then my nose would be grow to be a mile long.

Are you in this camp?  If you’re guilty of the following 15 items then welcome to the retire at 70+ club.

Here are 15 reasons why you won’t be able to retire early.

15 Reasons Why You Won't Be Able to Retire Early

Some of them have to do with how you handle money, but others focus on your mindset, your expectations, or even factors beyond your control.

My hope is that this list will enable you to avoid the traps that prevent people from retiring early.

You Have Some Bad Personal Money Management Habits

For a lot of people, good money management means being able to pay their bills on time and having a little bit extra left over at the end of the month. But if early retirement is on your radar screen, you’ll have to do a lot better than that.

You’ll have to master the art of creating budget surpluses – great big ones — every year. In order to do that, you may have to overcome some bad habits, like:

1. You’re not very good at saving money

Saving money – and doing it consistently – is the foundation of early retirement planning. If you don’t have a credible, workable savings plan, you simply won’t be able to retire early.

Additionally, the amount of money that you think you need to save may not be realistic. For example, if you’re 25 years old and you hope to retire in 20 years, saving 10% of your pay each year is extremely unlikely to get you there. More likely, you’ll have to plan on saving 25% or 30% of your pay, and even as much as 40% or 50%, depending on how you want to live out your retirement.

Don’t think you can do it?  This guy was able to save more than half of his income which allowed him to retire in his 30’s.

If it will be difficult to save for a retirement that begins at age 65, you can rest assured that it will be even more so if you hope to retire at 45 or 50. Understand also that early retirement reduces the positive effect of the time value of money.

Retiring early means you’re going to lose out on several years of compound interest on your nest egg, so there is definitely a huge benefit from that time value if your time horizon is 40 years, rather than 20. If you do decide you want to retire early, that’s great, but it will require even greater reliance on savings than normal retirement will.

2. Your cost of living is too high

Often one of the reasons why you’re not better at saving is because of your budget; your cost of living is simply too high to provide much room to save the kind of money that will be necessary for you to retire early.

If you’re serious about early retirement, more than a few things will have to go. For example, you may have to abandon having a single family house in the suburbs, driving a late-model car, taking exotic vacations, and eating in restaurants a few times a week. You’ll also need to go without a premium cell phone plan, premium cable TV, and some extras like a home security system and even pets.

The city you retire in could make all the difference in the world.  Here’s the top 10 cities that financial advisors beg you to not retire in and here’s the current list of the cities you should retire in.

3. Your structural living expenses are too high

Sometimes the reason people are unable save isn’t because of their overall cost of living, but rather certain basic expenses that are consuming entirely too much income.

A house is a major offender here. In America, people are accustomed to being over-house, and owning the most expensive house they can possibly afford. But this will be a real obstacle to early retirement plans.

The money you are pouring into the house – whether it’s for the basic house payment, utilities, repairs and maintenance and insurance, is money that you will not be able to save and invest for your early retirement.

Your Mindset Going In Isn’t Where It Needs To Be

Preparing your life for early retirement requires an entirely different mindset than what the average person has. It will take a large dose of mental discipline as well as some attitudes and habits that you may need to change.

4. You never really bought into that “delayed gratification” thing

This gets back to Reason #2. If you are too settled into living the good life, there may not be any room in your budget to prepare for early retirement. As the Bible says, “Where lies your treasure, there too lies your heart” – if a disproportionate amount of your income is going into creating a nice and comfortable lifestyle, your heart just may not be into early retirement – at least not as much is you think.

In point of fact, some people can’t let go of the good life. Sure, they may want to retire early – along with a bunch of other high-minded goals – but their desire for the good life is simply too great for them to make the necessary sacrifices.

Preparation for early retirement really is a zero-sum game. The only way to make it happen is to rearrange your finances in a way that prioritizes saving and investing money so you will have the capital necessary to retire in a lot less time than most other people do.

5. You’re too easily distracted

Early retirement planning takes concentration – lots of it!

It means that you will have to create a plan, primarily based on your budget, and commit to saving a disproportionate amount of your income for as long as it takes.

If you’re the kind of person who is easily distracted by side ventures, your intentions may be good, but you may not ever retire early.

Early retirement slowing-distractions could include making a career change every few years, going on an occasional spending spree to relieve stress, or getting involved in personal projects that either drain your finances, or reduce your ability to earn income.

Any kind of retirement, especially early retirement, requires a slow and steady approach. You cannot afford to get distracted if you want to retire early.

6. You have a vice or two that soaks up too much time, energy and money

Most of us have hobbies that give us necessary distraction and may help to relieve stress. But if a hobby consumes too much time, energy and money, you could be flirting with a vice – at least as far as preparing for early retirement is concerned.

Once again let’s emphasize – if you are serious about early retirement, more than a few things in your life are going to have to go.

For example, going skiing every weekend during the wintertime could be a serious money drain. So could a year-round commitment to your golf game. Not only would each hobby cost you serious money over the course of a year, but it will also take time away from earning extra money – which may be what you need to do.

7. You’re not as committed as you need to be

If you would like to retire in 20 years or so, you’re going to have to develop laser beam focus in order to make it happen. It’s not something that you do just for six months or a year, then declare victory. You will have to maintain the needed intensity between now and the time that you retire.

If that’s 20 years from now, then that means that you will have to commit to your plan for 20 years!

If you’re not willing to commit for that length of time, or you don’t think you’ll be able to, you probably won’t be able to retire early, and you might be better off making other plans.

Your Retirement Crystal Ball is a Bit Cloudy

Not to over-simplify the process, but early retirement is really about creating a math equation, and then being prepared to do what you need to do to make it work. Here are some lines of thinking that can get in the way of that.

8. You underestimate how much you’ll need to save to retire early

One of the complications of early retirement is that you probably won’t have other sources of predictable income the way you will if you wait until you’re 65. Social Security and Medicare are two examples that make preparing for normal retirement much easier.

In order to early retire – if you’re going to truly retire without having to work – you have to be completely realistic about how much money you’re going to need to do it.

Let’s say that you decide that you need $40,000 per year in order to completely retire. Using the safe withdrawal rate of 4% – which is the convention that says you will never exhaust your portfolio if you limit your withdrawals to this percentage – you’ll need to have $1 million in your portfolio by the target date of your retirement in order to generate that income consistently.

To do that, you’ll have to work out some serious projections. Start with a
retirement calculator, and fill in the information being as realistic as you can.

For example, let’s say you’re 30 and you want to retire by 50. You earn $60,000 per year, and you assume a long-term rate of return of 10% on a portfolio 100% invested in stocks. By investing 30% of your income each year for 20 years, you can reach $1,055,812 by age 50.

The key takeaways are that you will need to invest 30% of your pay for the next 20 years, and stay 100% invested in stocks for the duration.

9. You’re aiming too high with your early retirement plans

If you’re plan is to early retire to a life of luxury – complete with world travel and living at the beach – you’re probably aiming too high. Early retirement will require compromises. For example, you may find that you will need to live at a standard of living that is beneath where you are right now.

Trying to early retire to a life of luxury is something other than early retirement. That’s more about acquiring wealth than it is about retiring early. If you plan for early retirement when what you’re actually looking for is to be wealthy, you’ll probably give up the effort once you realize that it isn’t doable with the plan you have.

Your Investment Strategy Needs a Little Work

Along with saving money, your plan for early retirement will succeed or fail based on the performance of your investments. There are some investment obstacles you may need to overcome.

10. You invest too conservatively

In Reason #8 we looked at a portfolio that is 100% invested in stocks. That’s about what you’ll have to do in order to reach your investment goal. If you invest a sizable portion of your money in fixed income investments paying less than 1%, you’ll never have enough money to retire.

You are going to have to take on a considerable amount of risk in order to reach your goal of early retirement. That risk will be part of the price you’ll have to pay in order to get there, and there’s no getting around it.

This was the case with a couple I met that wanted to retire early but after the 2008 financial crash they were too scared to get back into the market.  To their benefit, they cashed out before they lost too much, but they never got their money back in.  Their entire $800,000 portfolio is sitting in cash making nothing.   Even if they would have invested into CD’s they would be making more, but the average yield on their portfolio was around 0.35%.   Yowzers!!

11. You invest too aggressively

The flipside is that you don’t want to invest too aggressively either. You’ll already be taking on plenty of risk by investing entirely in stocks. You’ll need to be careful about the kind of stocks that you invest in.

Long-term, your best bets are likely to be growth and income stocks/funds. They can earn you close to double digit returns over the long run without exposing you to a ridiculous level of risk. High risk investments expose you to big time losses, and are best avoided.

Another client of mine worked in the energy sector and had accumulated quite a bit of company stock.  Since he was familiar with that sector he also owned several energy stocks.  He thought he was diversified.  I thought otherwise.  Almost 60% of his portfolio was in energy stocks with 95% being in individual stocks.  Because of his DIY stock picking strategy he lost over 50% in 2008.  Luckily, many of his stocks rebounded and learning his listen has sold many of these stocks to diversify his portfolio preparing for his upcoming portfolio.

12. You speculate too much and invest too little

When there is a pressing investment goal, you might be tempted to fast-forward your progress by getting into investment situations that are more speculations than true investments. This could include taking a flyer on upstart companies, investing in market segments you know nothing about, operating on tips, or even day trading.

While it may be possible that you can earn some above average returns with some of those ventures, collectively there’s a better chance that you’ll end up losing money. That’s something can’t afford to do if you want to retire early. Stick with mainstream stock investments, and let the speculations go.

The Big Picture – Factors That Are Beyond Your Control

After you’ve done all that you can do to make your dream a reality, life can get in the way of your best laid plans. There are some big picture factors that are completely beyond your control, and they can have a material effect on your ability to retire early.

13. Inflation

Inflation is one of the X factors in all long-term investment plans. In our example in Reason #8, we showed what you would need to do in order to get to a $1 million retirement portfolio. Inflation will have an effect on that, and likely mean that you’ll need even more.

We can’t know what inflation will do in the future, but we do know what it’s done in the past. We can use the inflation experience of the last 20 years to make a reasonable estimate of the effect it will have 20 years into the future.

You can use the Bureau of Labor Statistics’ Inflation Calculator for this purpose. If $1 million in 2014 dollars is what you will need in order to be able retire early, you can simply go back 20 years on the inflation calculator.

For example, in 2014, enter $1 million, then select 1994 for the drop-down. Press the calculate button and you’ll find that you will need about $1.6 million in 20 years in order to keep up with inflation, based on what inflation is done over the past 20 years.

As a result of inflation, you may need to delay your age or retirement, increase your savings contributions, or a combination of both in order to make up the difference.

14. The stock market may not cooperate with your plans

So much of your ability to retire early will depend on the average rate of return on stocks between now and the time of your retire. We’ve been using 10% because that has been roughly the historic average over at least the past 80 years. But if that return turns out to be just 8%, your portfolio will fall far short of the mark you need. It will produce a portfolio that will yield just a little over $835,000 after 20 years.

If that turns out to be the case, you can make up the difference simply by delaying your retirement by two years. Better late than never, right?

15. Bad timing

The timing of your retirement is yet another X factor that’s completely beyond your control. The equity markets do fall, and from time to time they even collapse – think 2000 and 2007. If such a collapse occurs shortly before you plan to retire, it could put your whole plan on hold. A 50% drop in your portfolio would certainly be a game changer.

Fortunately the market tends to correct, and it seems to do it relatively quickly. Should the market collapse just before you retire, you’ll simply have to delay your retirement and give the market a chance to recover. That will also be an opportunity to make more savings contributions to your portfolio, which could leave you in an even better position.

Not everybody who wants to retire early will accomplish the goal. As you can see from above, there are an incredible number of details that go into creating a successful early retirement. You’re going to have to master at least most of them in order to get there. If not, you can make up the difference by saving even more money or by extending your time horizon.


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Comments | 11 Responses

  1. says

    Nice article…although a bit depressing for anyone who fit into one or more of these categories, I think you’ve covered the topic well. :) For us, #3 is a borderline problem. And #12 sometimes get in the way. For the last year, I may have invested too little thinking the market was overdue for a correction. I need to stick to a disciplined investment plan that is constant both during good and bad times. :)

    I do plan to work on these items and not let them get in the way of my retirement plans….Cheers to early retirement! AFFJ

  2. says

    Depressing indeed, but very true. Most of us don’t have a clear goal/image with retirement and we just expect something to happen. Saving money, smart investing and lifestyle adjustments are mandatory, if we ever dream of a nice retirement and not having to work till we’re 90.

  3. says

    Very eye opening piece. Early retirement sounds nice but takes a lot of work. The article did emphasize the need for a high savings percentage, but there also needs to be a high income. Someone making $40,000 a year will not have a comfortable early retirement even if they save half of their income. We should always try to increase our savings rate while increasing our income at the same time.

  4. says

    The bottom line is that most people don’t understand what it takes from a financial standpoint not to mention a “life organizing” standpoint to retire.

    That leads them to not have a financial plan. That means their spending, saving and investment habits are not aligned with their life goals. And also, they don’t really understand that they don’t

    I can’t say that financial planning addresses all the issues you have listed but a a good financial planner can help knock a good 2/3 of them!

  5. Dave LaLonde says

    Great post, this would be very encouraging to those who WANT to retire early. For the younger generations who are still coming out of college or starting new families, would you recommend them seeing a financial planner to get started?

  6. says

    I wouldn’t retire early too, honestly I’m not really good on saving that’s why retiring early is not yet on my list. By having a solid goals and keeping track of your expenses and income will be a good help.

  7. says

    These are all serious challenges to the traditional retirement model. Maybe its ok not to retire though. You can shift gears to an alternative way to make money, rather than retire exactly. Although that may leave a bad taste in some people’s mouth, it might just be the best choice.

  8. says

    I think redefining retirement as a time when you work less or work for less is completely reasonable. It is not healthy for people to just stop working.
    However, eventually everyone has to. As we age, we are not as sharp, as energetic, or as healthy.
    From a Planner’s perspective it is easier to assume that someone is going to stop working. It is much harder to plan for contingencies. That’s OK though. Hard is what I get paid for.

  9. says

    Nice post, Jeff. Every point you made is true, and I think most people can relate to at least a few of them.

    Retirement is a tricky thing in my opinion – I think in an ideal world, we would NOT want to retire. Instead of spending your younger years sacrificing just to be able to retire at 55 instead of 65, consider enjoying your youth AND finding a way to never fully retire. Easier said than done, of course.

    Personally, I hope I never retire (or maybe retire when I’m 70-75), and in my later years, I’ll enjoy whatever it is I’m working on (part time, of course). It’s more important that I live my life to the fullest while I’m young (obviously still saving sufficiently, but not aggressively) so that I have a safety net when I’m older, but am not completely reliant on it.

    What’s the value in being “wealthy” when you’re in your 70s? (Ignore your beneficiaries for a moment.) People love to point to the time value of money to show how an invested dollar today will be worth more in retirement (assuming you can beat inflation), but consider what the practical value of a dollar is when you’re 30 vs. 70. It’s worth more to you as a 30 year old – don’t lose sight of that either.

  10. SimpleRyan says

    Great points Jeff!

    I think people look at retirement as something that is so far away, that they don’t need to worry about it now. So they just keep putting it off, putting it off – until they realize that they’ve put it off for too long and it’s too late to do something about it. Now their retirement dreams are just that..dreams.

    I relate it to having a six pack of abs and a body like Superman. Most people want the six pack – but don’t want to do the work(healthy eating & exercise) it takes to get them.
    Same thing here: People want to retire – but they really aren’t willing to put in the work of diligently saving, create a plan for their money each month, review their finances every month & make the necessary sacrifices in order to turn their retirement dreams into a reality.

    Planning for your retirement doesn’t mean that you can’t live in the “now”…but it requires you have to plan to live in the now AND in the future also.

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