Retiring early is pretty much everyone’s dream. As the years roll by, the demands of work can come between us and the things we love to do. But if we can make enough money to wrap up our working days soon enough, we can enjoy that much-desired “freedom” for a long time.
Yet, not every attempt at early retirement has been successful. Some have sentenced the retiree to a lifetime of regrets rather than of comfort and pleasure. Read on to find out how to avoid this, including some valuable advice from an economics expert.
“For most Americans, early retirement isn’t just a decision to take the longest vacation of their lives,” Laurence J. Kotlikoff, an author and professor of economics at Boston University wrote in a column for CNBC. “It’s one of the biggest money mistakes that they will regret,” he wrote.
While everyone won’t have the control to retire early, those who do mustn’t rush into such a risky decision. There are Is to dot and Ts to cross, especially on the economics front. But many early retirees are in too much of a haste to see the red lights.
“We are, as a group, lousy savers, making early retirement unaffordable,” Kotlikoff explains further. “Financially speaking, it’s generally far safer and far smarter to retire later,” he goes on to advise.
But you can enjoy an early retirement if you are careful enough and avoid some financial pitfalls. Let’s see 4 expenses prospective early retirees should watch out for and the experience of retirees who glossed over them.
First, prospective retirees should keep an eye on the increase in the cost of living. Early retiree, Jean Voronkova said, “Your retirement funds are never as foolproof as you plan for.” This statement holds especially true for retirees who want to comfortably spread their savings and benefits over a period between 30 to 50 years.
Voronkova, who retired to Bali at 38, said that the rising cost of living has disrupted her and her husband’s retirement plans. She wished they had considered the chance of inflation.
Secondly, early retirees must watch their charitable donations. Joe Kuhn, another early retiree who together with his wife, made lots of donations before retirement wasn’t able to convince his spouse to cut down on donations from her end. They both suffered for it.
Thirdly, early retirees should deal with their optional spending habits. Kuhn also narrated how he spent $10,000 revamping his kitchen not because there was anything wrong, but simply because the kitchen wasn’t as stylish as his wife desired.
“We’ve had some special one-time costs we knew were gonna happen — the market’s down, inflation’s up — now’s not the time to do those optional things,” Kuhn said. “I’m not trying to paint my wife as evil here. It’s just that… there wasn’t that alignment on what spending would be like in a bear market and then in a bull market, so that’s a conversation I wish we would have done,” he said.
Lastly, early retirees might regret ignoring taxes and Roth conversions. Mr. Kuhn made the same mistake. “I should have started Roth conversions one year earlier,” he lamented.
For many people, tax rates are higher during retirement and Roth conversions could be a life-saving decision to make before retiring early. According to Kuhn, “Taxes are most people’s No. 1 expense in retirement, so have a plan for that.”