Early retirement can backfire if lifestyle choices, spending habits and expectations are not aligned

We did not expect to suddenly become anxious about our wealth, the couple conceded. They had held well-paying jobs for the first 20 years of their career. They then decided that they had enough of the long working hours, stress, frequent travels and lack of time for anything else in their lives. During one of their holidays, in a spark of an idea, they decided to quit their jobs. After reviewing their savings and investments, they were convinced they would do fine. It has only been two years since that decision, and they now have doubts.

Whenever people ask me about retirement planning, I tell them: plan to live at least until you turn 90. No harm if you passed earlier, but consider what you would do if you remained alive. Someone in their mid-40s, like the couple we feature this week, had 45 years ahead of them. Not just money, but your preparedness for life, relationships, activities, physical and mental health must consider that time span and the possibility of living to 90 years of age.

To quit early is now the trend. People tire of the job and its demands on their lives. They give up hoping for work-life balance and decide early retirement is better. The most frequently asked question in personal financial forums is about financial independence — how much is needed to retire early. It’s not just the math that should answer that question.

How we spend is more important to understand compared to how much we earn. Our jobs are precious because they support certain spending habits and lifestyle choices that we are very used to. Many assume that they would switch to a minimalistic, simple life, many a times in a remote rural location, once they have quit their jobs. Spending habits come to bite when one has time in hand and a hundred possibilities about pursuing wishlists one postponed for too long.

See where you’re spending

Many of us have grown to become impulsive spenders that do not make a budget, or keep accounts. The power of buying what we desire is an enjoyable product of earning a good income. Before deciding to retire early, it is worthwhile allowing for a period of conscientious and planned spending, and accountability. Three months of examining the credit card statement in detail is a good start. Postponing every large spend and trying to see if we have emotional intelligence to wait is also a good exercise.

Our attitude towards spending will also change when we no longer earn a regular income. When our corpus receives no accretions, but only withdrawals—how ever small they may be—we may feel anxious about large spends. We may find ourselves indulging in complaining and blame games in the household, magnifying the differences in our orientation towards spending. We may find it difficult to prioritise, allocate, and be comfortable with how we choose one expense over another.

Lifestyle creep is very well understood in personal finance. We convert many of the discretionary spends into mandatory spends over time, when we have enough earnings to feed our needs. We like to dine only at specific kind of places; we like only certain brands of clothes and accessories; we drive a certain car and buy a certain phone; and we love how our choices communicate our class and league to our social circles. Before giving up the income that feeds this position, it is important to ask if we will give these up. If not, the corpus we have will be stressed from expenses that are incurred to protect a social image. We may compromise on something else to keep up the image we hate giving up.

Distant perspective hurts

We may have a romanticised view that early retirement will give us the leisure and pleasure that our work life has denied us. But these pursuits of pleasure may come with costs that are new and often quite significant. The couple in focus this week, had travel in their mind when they quit their jobs. They could not take long enough breaks from work to enjoy the many tourist locations on their bucket list. The primary source of their anxiety is from the costs and expenses these travels entail. They fear they underestimated the expense; or overdid the travel; or both.

Allow yourself a trial period

It is theoretically possible to earn a lot in the initial years, invest it to create a corpus and to let the income from these investments fund life after early retirement. That is the conceptual premise where the wealth is large enough to generate income that the human assets had been generating. But whether it will work as envisaged critically depends on our spending habits and attitudes and our orientation towards how we must use our wealth in our lives and how we like it being perceived by the community we live in.

We spend a lot of time strategising how we must invest and grow our wealth. Perhaps paying equal attention to how we spend and whether we are able to modify our spending behaviours to align with our new situation is important. Maybe a trial period in which we budget, account, review, postpone, give up, cut back and reallocate our income, even while we hold the job and earn the income, can reveal to us what kind of spenders we are. Maybe that experiment holds the key to whether we can relax and enjoy early retirement or regret and be anxious about quitting early.

The Author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING