Are you bored during this lockdown? If yes, use the time to think about how you would spend your time if you retire early! Here, we discuss why retirement readiness is important and why you should aim for early financial freedom and not early retirement.
Suppose you are 35, started working at 23, and intend to retire by 50. Your working life will be 27 years and you will enjoy 35 years of post-retirement living, assuming an average life expectancy of 85.
This means you have to save for 1.3 years of post-retirement living expenses for every year you work! Also, you have to meet your current consumption needs and save money to meet your intermediate goals such as buying a house and funding your child’s college education.
Then, there are healthcare costs. Research has shown that you are likely to stay healthy when you are active. If you intend to have a not-so-active lifestyle after you retire, your health could deteriorate. And that could lead to increased healthcare costs. So, you will have to set aside a considerable amount during your working life to provide for post-retirement healthcare needs. This is in addition to providing for living expenses discussed above!
Meaningful planning
This does not mean early retirement is not good. It is just that you should be aware that there is more to retirement than just accumulating money in your retirement fund. You have to be retirement-ready. So, how can you become retirement-ready?
You should first aim for early financial freedom. Why? Retirement is when you stop earning active income and depend totally on your passive income to meet your lifestyle expenses. Financial freedom, on the other hand, refers to the state where your passive income is enough to meet your lifestyle expenses. Active income refers to the income you earn by working; passive income is that earned on your investment portfolio.
Whether you are aiming for early financial freedom or for early retirement, the fact remains that you have to save a significant amount during your working life to achieve this goal. When you achieve early financial freedom, you will most likely continue working. Why? You have an exit route from employment because of your comfortable finances. So, your stress levels are lower, and you might just as well enjoy working. This means you do not have to spend your passive income yet. Also, you can concentrate on becoming retirement-ready.
You have several alternatives to retirement after achieving early financial freedom.
For one, you can look for alternative avenues for work or, you could pursue phased retirement — work three days a week before you decide to retire. The objective is to find a balance between emotional state and financial health.
Working keeps you productively engaged and, therefore, happy. You have to find alternative avenues to maintain a good emotional state before you decide to retire early. Otherwise, you will significantly harm your financial well-being.
(The author offers training programmes for individuals to manage personal investments)
