Early Retirement Pitfalls – And How to Avoid Them

The idea of early retirement – throwing off the shackles of the nine-to-five and basking in the freedom of self-directed days – holds immense appeal. It's no wonder countless individuals or couples envision this as their ultimate life goal. The mantra "quit your job, retire early, live happily ever after" captures that sentiment perfectly.

However, the path to early retirement and the reality that awaits can be far more nuanced. Before taking the plunge, it's crucial to acknowledge the potential pitfalls that might lie ahead. This article will explore the challenges you might encounter when retiring early and equip you with the knowledge and strategies to navigate them effectively, ensuring your dream retirement becomes a smooth and fulfilling reality.

Spending Too Much During the Early Years of Retirement

The primary challenge when choosing to retire early is making sure there’s enough assets to provide an acceptable level of income for the full duration of retirement. With increasing life expectancy, someone who retires at age 55 may need their savings to last a 35 to 45-year retirement. If someone else works fulltime until age 70, their savings will need to provide for a much shorter time frame.

Someone retiring early may quickly find themselves spending more than they should. This is like taking an advance on their regular paycheque, it will catch up with them later. This worst-case scenario is faced by many early retirees who spent too much too soon and must later head back to work to make up the difference or rely on the generosity of others (such as their children) if they’re unable to work.

How to Avoid Spending Too Much Early in Retirement

There are two key aspects:

1. Develop a detailed budget before retiring early. This includes adding in all the “one time” expenses that seem to occur more years than not, such as: home maintenance, car repairs, medical expenses, financial assistance to family, and travel.
2. Conduct thorough planning to ensure the draw-down of investments can meet identified expenses – and ensure the plan has enough flexibility for adjustments and meeting unexpected costs. Retirement calculators can help, though the drawbacks of retirement calculators are well-documented.

Any retirement plan should specify exactly how much the retirees can withdraw from savings and investments each year, and then those limits must be adhered too.

Spending Too Little During the Early Years of Retirement

In total contrast to the point above, for many, the prospect of outliving their hard-earned nest egg is such a serious worry that they don’t spend anywhere near as freely as they should. This is at precisely the time when they are in the best position to enjoy the fruits of their labour – during the early years of retirement.

Whether someone retires in their 70s or 40s, they’ll typically want to spend more during the earliest phase of their retirement. There are many reasons for this, not least of all that the earliest period of retirement is the healthiest and most energetic a person will be during their retirement years. This means it’s the best time to work through a bucket list.

Most often, when people are nearing 80 or earlier, life slows down. By then, most people are content living a simple life, not venturing far from home, and aren’t as likely to enjoy pricey gadgets or experiences. This is because they’ve already ticked-off things from their bucket list; travelling or experiences become more difficult and tiresome, and costs such as travel insurance increase significantly.

Some people spend only the interest on their retirement savings, which is an overly cautious way to approach retirement and nearly guarantees they’ll one day be the “richest person in the graveyard” – in other words, this means finishing their life with far more funds than needed. We’ve all heard stories of people who lived a long and frugal life then died and left a fortune that could probably have been better enjoyed, at least in part, by themselves. Unfortunately, the funds left behind are often depleted significantly by lawyers or the executors of a will and can be the subject of legal challenges and family squabbles.

How to Avoid Underspending Early in Retirement

Thorough retirement planning is the answer.

Planning needs to include several things that are often overlooked, including:

• There’s no need to save for retirement anymore!
• Retirees of any age usually enter a lower tax bracket. Therefore, any earnings received (such as interest, or investment gains) will leave the retirees with more disposable income for each dollar earned.
• A reasonable assumption is made regarding the rate of inflation.

What Got You Here Won’t Get You There

Part of the solution includes optimising a retiring person’s or couples’ investments to meet their retirement income needs. One of the most common issues our financial advisers see when meeting those who are about to retire is that their overall mix of investments need realigning to provide for the retirement lifestyle they would like. For instance, after all expenses are met, the income yield on a residential Auckland investment property might be 1.5% - which is a very low figure to live off. In this case, better investments can be considered which offer greater income, better diversification, and the ability to make the most of the retirees’ overall wealth.  

Struggle to Maintain Human Contact

Anyone who retires early may find that their contact with others reduces significantly. This is because of the reduction in human contact that comes with ceasing work, and the associated constant small-scale workplace interactions which occur daily. Many retirees don’t realise this until after they’ve ceased full-time work.

Struggling to maintain human contact is especially important for those whose friends are still working nine-to-five while the early retiree has plenty of free time during the day.  

How to Avoid Retirement Isolation

Anyone considering early retirement needs to know how they’ll maintain social contact when they retire, including during weekdays when most of their friends may still be working.

Maintaining social contact includes replacing the contact which has been experienced in the workplace. This could be by volunteering for a charitable cause, joining new clubs, travelling, or taking up new activities and hobbies.  

Early Retirement Might Not Be All It’s Held up to Be

Having a lot of free time sounds like a dream come true, which is precisely why many people aim for early retirement in the first place. For some, early retirement may lack the fulfilment that working can bring.

This is because it’s undeniably good for a person to; work on something we’re good at, feel the satisfaction of overcoming difficulties, learn new things, and operate as part of a team. For most people, these things occur in the workplace, so leaving the workplace for the ‘holy grail’ of an early retirement isn’t without drawbacks in areas such as these.

Story after story highlights how many people who’ve retired early then soon end up back at work. Some highlight the challenges of being a stay-at-home parent, missing workplace camaraderie, wanting to feel ‘normal’, already having ticked off many bucket list items, and any other number of issues.

How to Avoid This Issue:

Anyone retiring early needs to know what they’ll do with their time before they retire.

• Is there a bucket list that needs working through?
• A new skill to master?
• A charitable cause which is deserving of volunteer time and energy?
• Children to rear?

A strategy for tackling the emotional aspects of retirement, such as finding meaningful activities to take the place of work, will help circumvent the feelings of loneliness, boredom and disillusionment that sometimes set in after the initial excitement of being job-free wears off. Early retirement doesn’t have to be an all-or-nothing decision, and for many, steadily scaling back can be better than a complete retirement.

The Bottom Line: Avoid Early Retirement Pitfalls

Early retirement can be a beautiful thing, but let's be honest – chasing sunsets all day might not be as fulfilling as you imagine. Financial stress, a lack of purpose, and the potential for social isolation can creep in and steal the sunshine.

Don't let your dream retirement turn into a reality check. Here at Become Wealth, we help you plan for a future that's not just early, but truly enriching. Let's craft a retirement roadmap that ensures your golden years glitter, not sputter. Schedule a free consultation today and turn your early retirement dream into a reality.