Ready For Retirement
Ready For Retirement
5 Things People Regret About Early Retirement
Many dream of retiring early, but you would be surprised to learn that many people who retire early regret doing so. James reveals five things that lead people to regret early retirement and provides practical tips to avoid these pitfalls.
He explains why many individuals who retire before 65 struggle due to a lack of planning, overly conservative investment strategies, and failure to envision life beyond work. He highlights the importance of aligning financial plans with personal goals, maintaining a balanced portfolio to outpace inflation, and considering part-time work as a transitional phase. He also encourages listeners to “practice” retirement before fully committing and cautions against adhering to common retirement “rules” without understanding their context. By addressing these critical aspects, listeners can make more informed decisions and transition into retirement, at any age, with confidence.
Questions answered:
Why is it important to have a life plan in addition to a financial plan when retiring early?
What lifestyle adjustments should early retirees be prepared to make to sustain their retirement long-term?
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Timestamps:
0:00 - Defining early retirement
1:15 - Not knowing what you’re retiring to
4:14 - Being too conservative
7:51 - Not considering part-time work
12:25 - Not practicing retirement
14:05 - Relying on retirement “rules”
17:26 - Being too dependent on 401(k)
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In my role as a financial advisor, I see far too many people retire early and then ultimately end up regretting their decision to do so. And out of all the times I've seen people regret their retirement, there tends to be a few commonalities as to why they end up regretting that decision. So in today's podcast, I'm going to walk you through the five most common reasons I see people regret their early retirement, as well as what you can do to avoid these regrets. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode.
Speaker 1:So, to start, let's unpack what I mean by retiring early. What is early? It can be very much a relative thing. Well, what I'm going to say is anything before the age of 65. Why is 65 typically thought of as common retirement age? Well, for a number of reasons. Number one that's when Medicare starts, so you're eligible for health insurance coverage. Number two, that used to be the age at which you could collect Social Security as your full retirement age. That age has since been pushed out. Number three a lot of pensions. Now, pensions are less common today than they used to be. But a lot of pensions would start at the age of 65. And it's just a nice round number. So a lot of people think of age 65 as the traditional retirement age. Of course, many people retire later, but a lot of people retire earlier, and that's what I want to focus on today.
Speaker 1:If you're retiring before the age of 65, what are the common mistakes we see people make? So when you retire, you don't need to worry about these things and can instead focus on everything that you're excited about with your retirement. So let's jump right in. The first thing I see. The first mistake I see is people not knowing what they're retiring to. Now here's the reality If you're retiring early it's not definite, it's not guaranteed, but chances are good you're not retiring early because you absolutely love what you're doing for work. If you absolutely love what you're doing for work, you'd probably continue doing so you wouldn't be retiring early. So you at least, maybe aren't fully in love with what you do for work at best, and maybe you downright hate it at worst, if that's the sense there is this trap you might fall into, and that trap is thinking that retirement is just magically going to make all of your problems go away. Now, to be fair, when you first retire, it might seem that way. There's no longer an alarm clock, there's no longer a boss, there's no longer reports, there's no longer deadlines. It's going to feel almost like the honeymoon phase of your retirement and it will feel like that. It will feel really good, until that honeymoon phase starts to drift away, it starts to dissipate.
Speaker 1:What comes next might not be all rainbows and butterflies. What comes next might not be all rainbows and butterflies. What comes next unless you were intentionally designing what you're going to retire to, might make you end up feeling lost. It might make you feel unsatisfied, it might make you feel like you're drifting and you really just don't know what you want to do with your life. It's the reason that I say if you only have a financial plan but it's not connected to some type of even a basic life plan, it's incomplete. You could have all the money in the world, but if you retire and are completely bored and unfulfilled and don't know what to do, what good is that money? It's not really serving any purpose in your life. That is why it is important that you understand what you're retiring to Now. This does not need to be something big and dramatic and this gigantic life plan that has every single chapter of your life prepared out in advance. It can simply be an understanding of what's most important to you.
Speaker 1:What do you value Health, family relationships, adventure. Start by understanding what matters most to you and then what's one thing you can do in each of those categories. What's one thing you can do in retirement to take care of your health? Step two how can your money align in such a way to support that? What's one thing you can do in retirement to support relationships with the people you care about most? And then, step two how can you use your money to support that? What's one thing you can do in retirement to pursue that sense of adventure that maybe has been missing in your life because you've been so committed to work and responsibilities there. Well, what's one thing you can do then with your money to support that? So a lifeline doesn't need to be a gigantic binder about everything about you and what you're going to do. It just needs to be direction. It just needs to be this sense of here's what I am, what I want to do, and then you can start to use your resources your resources being your income, your assets, the financial resources that you have to pursue that so that when you retire, it's not simply escaping the job that you didn't like, but it's retiring to something that's going to bring you far more enjoyment, contentment and satisfaction. But if you just retire thinking as long as I can get away from this thing I hate, then I'll magically become happy. You're probably going to be disappointed. Start by having a life plan. Start by having an understanding of what's most important to you, what are you retiring to, and your retirement transition is going to go a whole lot better.
Speaker 1:The second mistake that I see people make when they retire early is they start to get too conservative because they don't believe that they're young anymore. There's this traditional sense of okay, you retire, you need to get very conservative with your portfolio. In many ways, this is an incredibly risky proposition if you're not doing it correctly. And if it's risky for people who are retiring at traditional ages, say of 65 and beyond, it's even more risky for people who are retiring before the age of 65. The reason for that is simple the earlier you retire, all else being equal, of course, in terms of life expectancy, the longer your money needs to last, to support you throughout the entirety of your retirement. So do not fall into the trap of thinking okay, I'm retired, I'm at the finish line. Now it's time to take my investments that were growth oriented and now get super conservative just to protect what I have. To be clear, you absolutely need to make sure that you have a portfolio allocation that is designed to have some piece of it very conservative, very stable, to support downturns when they happen or to create income for you when market downturns happen.
Speaker 1:But the biggest risk to your retirement and your ability to enjoy it is in those temporary downturns. Yes, it's painful when the market goes down 20%, 30%, 40% In newsflash. That is going to happen multiple times over the course of your retirement. But that pain tends to be relatively short-lived. Short-lived could be months, it could be years, but that pain, historically speaking, 100% of the time, has passed.
Speaker 1:What's a much greater risk to people isn't those temporary downturns. It's the permanent loss of purchasing power. The permanent loss of purchasing power comes when your portfolio is too conservative, when your money is not working for you and the cost of everything goes up and up and up. So this is inflation the cost of everything is going to continue to get more expensive. Whether it's the eggs you purchase at the grocery store, whether it's housing, whether it's clothes, whether it's fuel, whatever it is, the cost of everything you purchase to maintain your standard of living.
Speaker 1:Retirement is going to continue to go up If your portfolio isn't positioned in a way to outpace that, to grow faster than inflation. You're going to be in a position where it might feel really conservative to have all of your money in cash or all of your money really stable, or at least a majority of your money. Like that. It's going to feel really good at first. You're not going to have too many ups and downs, but one day you're going to wake up feeling like the money you have, the income you have, the income you have isn't going as far. All of a sudden it hurts a little bit more to go to the grocery store. All of a sudden, the vacations you used to be able to take, you can't quite take those same vacations. All of a sudden, the things that you used to be able to do pretty easily you can no longer do pretty easily because your portfolio has been positioned too conservatively and where you are too focused on one risk, which is the ups and downs of the market, you are not nearly focused enough on the bigger risk, which is the erosion of your purchasing power over time.
Speaker 1:That is why, for people retiring, and especially for people retiring early, look at retirement not as a finish line but as another beginning point, as another beginning point of you now need your money to potentially last for 30, 40 plus years, depending, of course, on when you retire and how long you might live. But you cannot afford in most cases to be too conservative with your assets. To be too conservative, it gives a false sense of security and it's a risk that you end up paying for down the road. And, by the way, down the road, when you're 70, 80, beyond, you can't just go back to work. You can't just go get another job to make up for your lost income. You're at a point where you can't go back to work then, which is why it's crucial on the front end of retirement to make sure your assets are positioned appropriately to create income today and to protect the portion of your portfolio that needs to be protected today, but also to make sure that your portfolio is growing for you so that income can continue to keep up with inflation and beyond over the course of your retirement.
Speaker 1:The third mistake that I see people make when they retire early is they don't even consider part-time work. Now, typically, like I said, if you're retiring early, it's probably because you're pretty burned out, it's probably because you're pretty sick of work and the last thing that you want to think about is doing something, even a part-time basis. So we don't put the thought into it and we just jump into retirement. And there's a few issues with that. Number one is sometimes it's very difficult to go from going 100 miles per hour all in on something to just completely stopping. Depending on your personality and the nature of who you are, that might not even be healthy. So in some ways, simply working part time even apart from the financial benefits, working part time can be a nice transition period for you. It can allow you to adjust to this new way of living instead of going from all in at work to completely nothing. But the second benefit is actually a financial benefit. So obviously working part-time is a financial benefit, but maybe not in the way that you're thinking. It may actually be a much more significant financial benefit than you're thinking.
Speaker 1:Let's assume that you're 55 and you're making $150,000 per year, but you don't like work. Work's become a drag. Work is something that you're getting pretty burnt out on, but you're working full-time and you're earning $150,000, and the longest you can see yourself doing that for is five more years. So from age 55 to age 60, you make $150,000 per year, which is a total of $750,000 over that five-year time period. Now let's compare that to the person who, at age 55, says you know what, maybe I'm not going to continue working part-time, maybe I'm going to scale this back and I'm going to earn $80,000 per year, so a little over half of what you were previously making. But here's the thing If you're working less, if it's not as stressful as a position, maybe you're going back to doing something that you enjoy doing. You're probably going to be able to do that for much longer. So, instead of just working from 55 to 60, maybe you could be totally happy working from 55 to 65. It may be because this is a job that's not as demanding. You have time to take the trips, to do the things that you want to do, to prioritize health, to prioritize relationships, to almost feel like you're in some ways partially retired even as you continue to work.
Speaker 1:Now that combined income for this made up salary of $80,000 per year for 10 years, is $800,000. So of course it's a little bit more, but it's actually a whole lot more, because when you're working and earning $150,000 per year, taxes are going to take a much bigger chunk out of the entirety of that. Versus if you're working and earning $80,000 per year, taxes aren't nearly going to be as high as they would be at $150,000 per year. Now, 80 is not exactly half of 150,000, but it's not like a proportionate reduction Because we have a progressive tax system. The dollars you earn from 80,000 to 150,000 are going to be taxed at a higher rate than the first $80,000 that you earn. So it's just a way of saying, even if your total income earned over this time is pretty similar, simply because you earned less but worked longer, the after-tax income will probably be much higher because you're not having income taxed at a higher rate in this example.
Speaker 1:So back to big picture part of this. Yes, financially this tends to make a lot of sense. But the big picture here is when we think about retirement it tends to be a very binary decision. We're either working or we're not working. We're either retired or we're not retired. A better approach is to say how can I make work as desirable as possible, as appealing as possible, as meaningful and purposeful as possible? Because work really truly does have the potential to be incredible. Work can be something that, ideally, you actually never want to retire from because it's so enjoyable and so fun and so meaningful. Unfortunately, that's not something that everyone has. Because of that, how can we make it like that to the greatest extent possible and get the most out of our work, not just financially, but also from a satisfaction standpoint, from a meaning, from a connection, all these other things that work has to offer? Because when we simply go all in on work for the first 40 years of our life 45 years of our life and then stop abruptly, that's a very challenging transition.
Speaker 1:If, instead, you can think about starting to dial things back, starting to take your foot off the gas a little bit, that gives you some time to think, that gives you time to go back to step number one, which is what do I actually want to do when I'm retired? Oftentimes people don't think about that because they don't feel like they have the time to think about that. They're spending 40 to 50 hours a week working. They're spending time commuting. They're spending time doing all the things you need to do just to survive. They're not thinking proactively, intentionally, about what do I actually want to do when I retire. Well, if you start considering a part-time option, you start to have more time, you start to have the ability to think, you start to have the ability to say what do I actually want to do with my days, and it can be a very healthy transition that a lot of people who retire early wish they hadn't just cut out cold turkey. They instead wish maybe they had thought to do something more part-time and gradually transitioned into retirement.
Speaker 1:The fourth mistake that people make when they retire early is they don't practice retirement. So what does it mean to practice retirement? Well, there's a couple that I've talked to, or talked about here, where they moved to Hawaii when they retired early, because they just envisioned that would be the best thing in the world. Why wouldn't they want to retire and go live on the beach? Well, they did so. They didn't like it. They didn't actually practice ahead of time, they just made this giant move and then ended up not enjoying it. What would practicing that had looked like? Well, can you take extended time off, can you use all of your PTO? Can you save up some sick leave and go spend a month in Hawaii? Go spend two months in Hawaii, not in a traditional vacation, but live in an Airbnb. Go grocery shopping at the local grocery markets, do the things that you would do as if you lived there and weren't just on vacation there and see how you actually like it.
Speaker 1:Or another couple who was so excited to retire and finally be away from their work, but the day they retired, all of a sudden they felt really constricted in their ability to spend. It was difficult for them to flip that switch and actually start spending down their portfolio, to the point that they never wanted to go out to dinner because that was too expensive, even though their portfolio could easily support that. They never practiced. They never did some of these things. They never pulled money out of their portfolio to start living on and they went into retirement totally unprepared. In the same way, you would never go do a big performance without preparing. Think of retirement as a big performance. Now. That performance is your life and that's a big chunk of your life. But practice the things you want to do. You're going to start to understand what you actually enjoy what you don't enjoy unforeseen challenges and when you do that ahead of time, you can work things out. You can start making changes before you actually retire. So by the time that you actually do, you retire with confidence and you retire into something that you've already tested and know that you already enjoy.
Speaker 1:And then the fifth and final mistake I see people make when they retire early is they use conventional retirement rules that don't actually apply to them. So there's three big ones here. The first one is portfolio withdrawal rates. So a big question of course when you retire is how much can I spend for my portfolio? And not just how much can I spend today, but be assured, or as assured as possible, that that money is going to last the rest of my life. Well, the traditional rule is the 4% rule. People hear that and they say, okay, I can just take 4% per year for my portfolio and I'm going to be okay for the rest of my life. Well, that might be the case, but it depends upon what you mean by the rest of your life.
Speaker 1:That research was based upon a 30-year time period. And ask the question if you were to retire and not just retire into a good market. But what if you retired into a horrible market or a media market or really anything in between? What's the most amount you could pull from your portfolio and be assured that your money is going to last for, in this white paper or in this research, 30 years Now, 4% is about what that number came up with. So if you take out 4% per year from your portfolio, it doesn't matter if the market's up or down, if markets are within the confines, what they've been historically, you can withdraw 4% per year and that money's going to last for 30 years. But what about the 30 years might not be enough. 82 is going to be the end of that time period. What if, at 82, you run out of money? Well, on paper, the research was correct your money lasted for 30 years. But your life might be a complete disaster at that point if you run out of money at age 82. So that's a conventional, traditional withdrawal rule that maybe doesn't apply to you if you're going to retire early, especially if you have a long life expectancy. Apply to you if you're going to retire early, especially if you have a long life expectancy.
Speaker 1:Now, under that umbrella of using conventional rules that might not apply, there is health care. So if you work until 65, you're eligible for Medicare. Now, with Medicare your health insurance you still have to, of course, choose a plan, but your health insurance is covered for you Now. There's still a premium, there's still other things, but there's not a whole lot that you need to go do to find your own coverage. Now if you retire before 65, you do.
Speaker 1:Now there's a couple of ways in which I see this go wrong for people. They retire before the age of 65 and they don't think about what to do for health care and then maybe they end up with bad coverage or they end up with really expensive coverage, or they just are completely flustered and overwhelmed when they retire and don't have a great plan in place for that. That's one area in which I see that go wrong. The second area in which I see this go wrong is people who actually could retire well before 65. Maybe they're 60, maybe they're 61 or 62. They have plenty of money, they can retire and they can go do what they want to do. But the thing that holds them back from retirement is they're saying, oh, I'm not Medicare age yet, so I don't have a healthcare option, so they continue working simply for the health insurance coverage.
Speaker 1:Now, sometimes that's necessary, but there are other options. You have, cobra, you can go get a policy off the marketplace. There's all kinds of things you can do. It just takes some preparation and some planning to do so. So this is a mistake where people actually don't retire early, even though they want to, even though they have the financial means of doing so, because they're too overwhelmed at what they would do for health insurance. So, even though they want to, even though they have the financial means of doing so, because they're too overwhelmed at what they would do for health insurance. So, even though options exist, they delay retirement until Medicare age because they don't know about those options. They don't know how to plan accordingly. So understand the options exist. The health care planners, the financial planners existing can help you with that, but don't let health insurance be the driving factor of when you're going to retire and certainly don't go into retirement without a plan for health insurance coverage.
Speaker 1:And then the final thing, under the umbrella of following conventional retirement rules, is people become too dependent upon their 401k. Now, your 401k plan is maybe one of the best tools for creating wealth over the course of your lifetime. The fact that you often get an employer match on it, the fact that there's tax benefits. But probably the biggest benefit is it is just automated. If you set your 401k deferral rate whether it's 5% or 10% or 20%, whatever it is it just happens, meaning you don't have to make the decision every single month to go invest money into an account. It happens for you. If you get a raise, then by default, because you have a percentage of your salary going into your 401k, those dollar contributions increase. So it's one of the best tools that most people have for creating wealth for themselves over time. But a 401k has more restrictions. There are some rules around this, but generally speaking, you cannot access that money until the age of 59 and a half.
Speaker 1:If you want to retire early and all you have is your 401k account, you might be in a challenging situation. So if you have the desire to retire early, don't just put your money in a 401k. Think bigger picture. Think what type of an account should I put money into? Not just for the immediate tax savings, but what's going to set me up for maximum flexibility when I retire? What's going to give me that optionality, that ability to do what I want to do because of the resources to afford it, as opposed to just doing the traditional thing or the conventional thing, which is the 401k. Again, nothing wrong with the 401k the 401k is probably responsible for making more millionaires in this country than anything else but if that's the only thing that you have, you're going to be limiting yourself in terms of options of when you can retire and how much you might be able to spend. So that's a recap of five things that I see people struggling with when they retire early mistakes they made that they wish they could go back in time and unmake. So if you're listening to this and you're not yet retired, make sure you have a plan in place with these things Everything from your life plan to understanding conventional retirement rules that might not apply to you and everything in between. So that is it for today's episode.
Speaker 1:If you're enjoying this, if you're watching on YouTube, really appreciate if you would subscribe to the channel and hit the like button on this. If you're listening on Apple Podcasts or Spotify, please be sure to leave a review, and if you have someone that you think could benefit from this, please share the podcast, share the YouTube video with them. We wanna make sure we're able to impact as many people as possible. Really appreciate you, as always, taking the time to tune in and we'll see you next time. Root Financial has not provided any compensation for and has not influenced the content of, any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements.
Speaker 1:Hey everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.
