Early Retirement: Luxury or Folly?



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Retiring early is a dream for many but can often appear impossible unless you’ve accumulated significant wealth early on in your career.

“Twenty years ago, rates of early retirement were fairly similar across different wealth levels,” said Heidi Karjalainen, a research economist at the Institute for Fiscal Studies (IFS) in the UK. But this has now changed, retirement before 60 is increasingly concentrated amongst the wealthy. Meanwhile, those who hold average levels of wealth in their late 50s and early 60s are most likely to be employed, and work until well after pensionable age.

The key factor in whether early retirement is possible is, of course, a person’s NAV (Net Asset Value).

Whether you can afford to retire early, then depends on whether you can afford “the life you want.” While various factors play a role in getting to the ‘yes’ answer the main ones relate to your levels of savings over your lifetime and your investment strategy. An added curveball is the fact that people are generally living longer. It is no longer prudent to plan and calculate for a lifespan of +/-75, but one should plan for well into the 90’s. Other factors such as increased educational costs for children and children leaving the “nest” later, also play a significant role in the retirement date calculation. These additional factors, after taking inflation into account, means that that the NAV required for an early retirement becomes a far bigger number.

An early start to saving is crucial for anyone considering early retirement, even if it means implementing lifestyle sacrifices such as skipping holidays abroad, not buying expensive items like new cars frequently and living within your means.

Choosing and monitoring your investment strategy is crucial to positioning your retirement portfolio for optimal growth. Using cash and similar guarantee like instruments will not generate the long term returns that one needs to build sufficient NAV for an early retirement. Taking a higher level of market risk early often leads to much better returns in the long term. Taking good professional advice becomes a necessity in determining the correct asset allocation and investment strategy for your portfolio.

Regardless of whether you are planning to retire early or not, many are not paying enough attention to their retirement planning. There is a sense of complacency when it comes to retirement savings, especially among the younger generation. Retirement seems so long in the future that it is not worth considering in the present, and together with so many other demands on cash flow, they never get around to it and just put it off!

The moral of the story, no matter where you are on your journey to retirement or your current age, is to take good professional advice and implement a strategy that is suitable to your circumstance and will help you achieve the retirement “life you want”. The worst mistake you can make is to retire early and then find out that you live longer than your NAV.

Acknowledgements to CNBC retirement article published 19th Dec 2023 – author Sophia Kiderlin

Make an appointment with an Activ8 Advisor to review your retirement plans and strategy.

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