Five Early Retirement Mistakes to Avoid

VaselineAugust 17, 2024

0 6 minutes read

Editor’s Note: This is the seventh part of an ongoing series throughout this year focusing on how to retire early and the FIRE (Financial Independence, Retire Early) movement. The first part is How to retire early in six steps. The second part is How to retire at 40. The third part is How to retire early by age 50. The fourth part is Retire early for adventure: travel and volunteer. The fifth part is Will retiring early make you happier? It’s complicated. Our latest article is Early Retirement Withdrawal Strategies for the Long Term.

The attraction of early retirement lies in the prospect of gaining greater freedom over time. However, as you work to get there, time is not on your side. Those who join the FIRE movement aim to save and invest aggressively—more than 50 to 75 percent of their income—to achieve financial independence and retire early in their 30s, 40s, or 50s. With such an ambitious target date, there is less time to recover from mistakes along the way.

Fortunately, you don’t have to watch FOC in the dark. Legendary investor Warren Buffett once said, “It is better to learn as much as possible from the mistakes of others.”

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Since the concept of FOC was introduced in the 1992 book Your money or your lifemany people have done it successfully by creating a roadmap of what to do and, most importantly, what not to do. Here are five significant mistakes to avoid if you want to follow in their footsteps.

1. Miscalculation of future expenses

People tend to overestimate how similar their future selves will be to their current selves, a mental shortcut known as projection bias. This bias can lead to short-sighted decisions that derail your retirement goals.

In an interview, Sam Dogen, founder of the popular website FIRE Financial Samurai, said, “The biggest mistake is to miscalculate your future expenses, your future, and how you will live…whatever you imagine your future will be will be more probably not what your future will be like. Your expenses will change. Your desires will change.”

Over time, you might get married, have kids, buy a house, change jobs, or move—all of which can change your spending habits and needs.

In addition, markets and the economy are likely to change, as illustrated by recent inflation, which erodes the purchasing power of your savings. Ultimately, your future expenses may be much higher than you originally thought.

How to avoid this mistake: Never stop planning. Regularly review and adjust your plan to account for changes in your personal circumstances, the market and the wider economy. Maintain a disciplined approach to spending and resist the temptation to upgrade your lifestyle in tandem with your earnings.

2. Transition with a view to health care coverage

“One oversight I see frequently is inadequate planning for healthcare expenses,” says Patrick Cummins, certified financial planner and financial advisor at Advance Capital Management. He notes that “it becomes a challenge when costs are not automatically deducted from service wages and have to be paid out of pocket.”

While traditional age retirees can rely on Medicare, younger retirees are on their own when it comes to healthcare. They often pay more for health insurance but get less coverage.

Charlie Pastor, certified financial planner and contributing expert at The Motley Fool Ascent, warns, “Private insurance coverage can be prohibitively expensive, especially for those with pre-existing conditions.”

But failing to secure adequate health coverage is like gambling with your retirement savings, which can lead to financial ruin in the event of a serious illness or injury. In the US, 41 percent of adults have some form of medical debt, and many are being driven to bankruptcy as a result, according to a 2022 study by the Kaiser Family Foundation and NPR. Medical debt hits those with acute and chronic illnesses the hardest, and most people owe at least $10,000. The administration has enacted several rules to help those with medical debt, but it remains a stubborn problem, according to the Urban Institute.

How to avoid this mistake: Early retirees can secure their health care by purchasing coverage in the health care marketplace, joining a working spouse’s plan, working enough to qualify for employer coverage, or opting for self-insurance, which can be cheaper if you retire abroad. If your employer offers a health savings account (HSA), try to keep as much as possible in there for later use in retirement.

3. Overestimation of return on investment

Early retirement can look particularly attractive during periods of high market returns. However, it would be a mistake to count on future investment returns too optimistically, as past performance is no guarantee of future results.

“Even with proper allocation, relying too heavily on high investment returns can be risky,” says Cummins.

The stock market has historically gone up more than down, but not in a straight line. On average, a bear market occurs every four years, sometimes with extended down periods. For example, the average annual return from late 1999 to 2009 was -1%.

How to avoid this mistake: Cummins emphasizes the need for diversification. “Maintaining a diversified portfolio and having realistic expectations of market performance is essential if you’re serious about achieving your goals,” he says. A balanced portfolio that includes a mix of stocks, bonds, real estate and other assets can provide more stability and growth potential.

4. You feel bored and lonely

A major non-financial mistake is failing to plan for the psychological and social aspects of early retirement. Many people find that without the routine and social interaction that work provides, they feel isolated and aimless.

A ResumeBuilder.com survey found that 34 percent of retired Americans who plan to return to work in 2024 say it’s to combat boredom. This phenomenon, known as “retirement boredom,” can make the transition from the daily routine of a full-time job to the unstructured life of retirement difficult.

Research consistently shows that purpose is a key ingredient to a happy retirement. This explains why many FIRE proponents strive for FI (financial independence) more than RE (early retirement).

And don’t underestimate the cost of loneliness in retirement. Failure to establish a strong social network can affect your mental and physical health. Early retirees have to make an extra effort to keep and make new friends, which can be especially hard if many of your friends still work during the day.

How to avoid this mistake: Instead of a bucket list, have a plan for how you’ll spend your time, including hobbies, volunteering, part-time work, and other fulfilling activities. You might even consider going back to college to launch a career or business in a new field. Staying connected to a community and maintaining a sense of purpose can greatly improve the quality of your retirement.

5. Don’t communicate with your spouse or partner

Before you set your early retirement plans in motion, Pastor advises, “Make sure you communicate your plans and expectations with your spouse or significant other.”

If you’re married and plan to stay married in retirement, it’s essential to be on the same page. Imagine one partner fighting traffic to work while the other fights for a start time. “Managing a household’s finances is a team sport, and clear communication is vital to the long-term success of a couple’s finances,” adds Pastor.

Clear communication ensures agreement on goals and expectations, helping to avoid future conflicts. Couples need to organize their finances, including savings, investments and budgets, and discuss lifestyle choices to create a coherent and realistic retirement plan. Being married in retirement affects important decisions, such as when you or your spouse should receive Social Security benefits.

How to avoid this mistake: In addition to talking to each other, Pastor says, “It’s not uncommon for financial planners to work with a couple who have completely different expectations for retirement.” Couples may benefit from consulting a financial advisor who provides an objective point of view.

Even when you know the potential pitfalls, the path to FOC doesn’t necessarily get any easier. It takes a lot of work, discipline and careful planning. However, by planning for these common mistakes, you improve your chances of moving forward rather than backwards – saving you a lot of stress and, most importantly, time.

Vaseline

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