I first blogged about early retirement about a month ago. Perhaps because it is a topic that is seldom explored, the insights on the topic has been tremendous. It is worthwhile to summarise in one post all the insights on the topic.
Is Your Financial Freedom Conditional?
If you are thinking of early retirement, it is probably because you have or about to achieve financial freedom from your job. You probably have a regular stream of passive income from your dividends and/or rental income to cover all your expenses. However, as explored in Can You Count on REITs for Retirement? and How Much Does One's Financial Independence Depend on One's Health?, is this financial freedom conditional upon things remaining the same as they are today? What happens if the economy goes into a recession, possibly bring asset prices, dividends, interest rates and currencies down along with it? There might even be massive rights issues on your stocks or REITs as happened during the Global Financial Crisis in 2008/09. Would your passive income still be sufficient to cover all your expenses and allow you to continue your early retirement? If you have to emerge temporarily from retirement to tide through such difficult periods, it should be noted that it might not be so easy to find a job during recessions, especially if you are out of the job market for a prolonged period of time.
On the expenses side of the equation, will there be unexpected large expenses later down the road that could not be covered by your passive income, such as overseas education for your children and/or medical costs for your close ones? All these unexpected expenses may cause disruptions to your retirement and it is best to have sufficient buffer in your passive income before you embark on early retirement.
Retirement is only the Beginning of the End
The common perception is that retirement is a destination that you reach after working, saving and investing diligently for 20 to 30 years. After retirement, you just need to enjoy life using savings from your retirement nest-egg. However, retirement is only the beginning of the end of the financial journey. As discussed in The Great Retirement Challenge, there are still 20 to 30 years of retirement spending to be managed. It is like you spend all your life since you started working climbing up a mountain and finally reaching the peak, only to realise that you still have to climb down that mountain! And the down-hill path is even more treacherous than the up-hill path. Any mistakes on the down-hill path could be difficult to recover because you no longer have time and labour capital on your side.
The most ironic part is the tools that you have for accumulating the retirement nest-egg on the up-hill path (i.e. dollar cost averaging and portfolio re-balancing) have become the obstacles on the down-hill path! When I first understood the beauty of dollar cost averaging and portfolio re-balancing, I thought that there is finally a free lunch for investors. It turns out that there is really no such thing as a free lunch. If you look high and low for the bill and still could not find it, it is because the bill has not yet arrived! So, while the lunch is still free, you might want to enjoy the free lunch and defer the bill for as long as possible!
Retirement is a Mindset
If all the above discussion sounds demoralising, you may wish to note that retirement is a mindset. If the work you do everyday is something that you are passionate about, there is no need to talk about retirement. Everyday would be a day of fulfilment of your passion, and there would always be something still unfinished at the end of the day that motivates you to continue and finish it the following day.
Finally, you may have heard the story about a rich CEO who works very hard for many years so that he could one day relax and engage in his favourite past-times versus the poor fisherman who has no assets to his name but could also do the same after fishing for a few hours in the morning. Who says that you need to have $1 million or more to retire comfortably? If you have to work for a few hours each day, but gets to enjoy the rest of the day, is it not retirement too?
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