37-year-old retiree and self-made millionaire: Beware of these 2 ‘potential downsides’ to early retirement – CNBC | Jewelry Dukan

Grant Sabatier, creator of financial website Millennial Money and author of Financial Freedom, isn’t technically retired. But it could be him. He has enough money in his portfolio to live on without ever having to work again. And that’s sort of the point.

Sabatier is one of the leading voices in the so-called FIRE movement – short for financial independence, early retirement. Adherents of this philosophy aim to save and invest large chunks of their income in their early working years in order to have enough money to retire decades before they reach their mid-60s.

By 2015, at the age of 30, Sabatier had saved $1.25 million, enough to ensure he never had to work again. But instead of kicking back on the beach, he’s started a new career teaching others how to achieve financial independence.

Over the past seven years, Sabatier has seen its share of FIRE success stories, as well as common pitfalls faced by early retirees. If you’re considering embarking on a FIRE journey, understand two potential problem areas now so you don’t encounter them later, says Sabatier.

1. Retire before building a post-career identity

Planning for early retirement requires an idea of ​​what life after work will be like, which can be difficult in a society where people are often defined by their work.

“So much of our identity is related to our work and the things we do in our professional lives,” says Sabatier. “A lot of people spend all their time working and saving and investing in order to retire early and then have no idea what they want to do afterward.”

That can make it difficult to know how much money to save if you’re retiring to a beach in Thailand, writing a novel at a coffee shop, or traveling across the country in a van to meet other financial needs.

One way to narrow things down is to focus on your core values. Asking which parts of your life bring you the most happiness can help you have a clearer idea of ​​what you want, Jim Crider, a board-certified financial planner who specializes in serving clients seeking financial independence, recently told CNBC Make It

“If you can articulate what’s important to you, you have a clear vision,” he said. “You can spend money in the most efficient way. You can make the things that matter most to you happen in a bigger, grander way.”

No matter how clear your vision for retirement is, Sabatier says some field testing may be needed. Once you’ve accumulated enough savings to cover a year’s expenses or more, try a “mini-retirement” to get a feel for what life outside the office is actually like, he suggests.

Or start pursuing your passions on the side while you’re still working. “It’s one of the top reasons I recommend trying a side job so you can make money doing something you enjoy. And then actually use that as a bridge if you want to retire early.”

2. Underestimating how much it will take you to retire

None of your early retirement dreams are likely to materialize unless you put enough money aside.

“I see a lot of people retiring today with enough money to cover their annual expenses, but they don’t appreciate what adding two kids or moving to an area with a higher cost of living could add to their expenses” , says Sabatier.

The number that potential early retirees aim for is known as their “FIRE number” — the amount of money they need in their portfolio to sustain themselves over the long term.

The calculation used for this is based on the “4% rule,” an investment concept derived from an influential 1998 financial study that found that investors holding a mix of stocks and bonds return 4% of the value of their portfolio per year could be deducted.

To find your FIRE number, assuming a 4% withdrawal rate, you would multiply your expected annual retirement income by 25. Someone hoping to make a living from $50,000 annual withdrawals from their portfolio would need $1.25 million to retire.

People get themselves into trouble, Sabatier says, if they don’t consider how this equation may change for them over time.

You might have thought that $50,000 was enough to live on when you started your FIRE journey in your 20’s, but by the time you’re 45 your needs may have changed drastically. You may need to adjust your number upwards before you can have the retirement you envisioned.

You may also need to adjust your assumptions about how quickly you could reach your number, Sabatier adds. This is because safely withdrawing from your investments relies on the assumption that the markets will consistently move higher. And while this has been the trend for long periods of time, between now and when you hope to quit, the direction of your investments is far less predictable.

“We know we live in increasingly uncertain times. I see many people underestimating and overestimating the potential future direction of the stock market.”

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