Increasing stress from work appears to be changing the behaviour of most middle-aged working professionals; they want to retire early. Are you one of them? If so, you need to consider two factors — the cost of achieving early financial freedom and the post-retirement emotional cost of retiring early. In this article, we discuss why both these factors are important for you.

Financial issues A major concern when we retire is this: Will our retirement money last for as long as we live? In retirement economics, this risk is referred to as the longevity risk — the risk that you will outlive your investments. You can reduce this risk by accumulating enough wealth during your working life to generate cash flows till you live. But that is easier said than done, especially if you want to retire early.

Suppose you start working at 23, plan to retire at 50 and expect to live till 90. You will, therefore, have a working life of 27 years and a retired life of 40 years. So, approximately every 8 months of your working life should fund a full-year of your retired life! Of course, the amount you need to fund your post-retirement living will come from two sources — your savings in your working years and the return earned on those savings.

So, if you want to retire early, you need to substantially increase your savings and/or invest your savings in risky assets to earn higher returns. Here is the issue: You can typically increase your savings if you restrict your consumption during your working years. Are you willing to do so? Additionally, investing in risky assets (primarily equity) could expose your portfolio to large losses if the market declines. You may then fail to achieve your objective of retiring early.

Emotional issues A successful early retirement also depends on how emotionally prepared you are for the transition. You will have more leisure time if you retire early. And unless well-planned, your early retirement could lead to physical health deterioration! Here is why: You are more organised when have a day job because you have less time at hand! Early retirement would upset this organised schedule.

Leisure is initially good. But if you do not have a well-crafted plan on how to spend your retired life, too much leisure could harm you emotionally, and therefore, physically. Now, you may argue that you would like to travel and pursue certain hobbies during your retirement. Your enthusiasm for travelling and pursuing hobbies could well fade after the initial years of your retired life. So, what will you do thereafter?

Then, there is your marriage to manage. For one, your spouse may continue to work even as you decide to take an early retirement. That could change the responsibilities in managing the household. Are you prepared to manage such conflicts? For another, you and your spouse will see a lot of each other because of your early retirement, if your spouse has been a stay-at-home parent. And that would mean you will have to harmoniously work with each other’s differences more often than you did when you were working! Your fulfilment from early retirement depends largely on how you effectively manage these issues.

Many of us like to retire early. We discussed above some of the costs associated with early retirement. How can you moderate such costs? For one, you can reduce your longevity risk by buying stable income products such as life-time annuity, anytime within five years on either side of your retirement. For another, you can plan a phased retirement instead of full retirement – working part-time 3-4 days a week. This will keep you gainfully engaged and reduce the emotional issues associated with early retirement.

(The author is the founder of Navera Consulting, a firm that offers wealth mapping and investor-learning solutions. Feedback may be sent to knowledge@thehindu.co.in)

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