Rounding it up
Early retirement can be a wonderful thing – if you’re financially and mentally prepared for it
It’s not for everyone and there’s lots to consider before walking away from your career
Pros include no boss, relaxation, time for yourself, travel, hobbies, and did we mention no boss?
Cons include boredom, loneliness, dwindling money, and missed financial opportunities
For many of us, the thought of walking away from the grind and retiring early could not be more appealing. Endless freedom. No more demanding bosses or impatient clients. No more passive-aggressive emails from colleagues. No. More. Meetings.
But for others, the uncertainty of an early retirement can seem daunting. No steady paycheque. Question marks about your savings. Too much free time and not enough to do. Loneliness. Boredom.
In the past, it used to be that most folk would work to age 65 (or later) until they reached the more traditional retirement age. But that’s changing – increasingly, people are looking to retire younger.
If early retirement is something you’re exploring, you need to know what you’re getting yourself into. While all that freedom sure sounds appealing… there are some potential drawbacks too.
The why of early retirement
Quitting your day job is high on a lot of people’s dream lists. There are so many preferable things you could be doing instead of “working for the man”. Hiking, writing, traveling, education, crafts, passion projects, sport, and on and on. The list is quite literally endless.
You only live once! YOLO, as they say. For most folks, it’s normal to work the majority of your days for the majority of your adult life. However, all that working doesn’t leave you with a lot of living at the end of your career.
You need money to retire early, though. Quite a lot of it. And that’s what stops a lot of us from stepping away from our careers. For many, getting into a position of financial stability at a young age seems unattainable. We’ve got mortgages, children, health concerns, aging parents, debt – any number of financial responsibilities that seemingly tie us into the Monday-Friday 9-5 life. There are ways you can make it happen, though.
Increasingly, younger people are exploring early retirement and are showing particular interest in the FIRE movement – which stands for Financial Independence, Retire Early. The FIRE movement is all about saving and investing, early and aggressively (50-75% of your paycheques), to set you up with the necessary funds to retire early (often by the time you turn 40).
Pros of early retirement
Picture this: your boss tells you to please sleep in this Wednesday because they need you well rested for brunch with friends and an afternoon at the beach. It’s you, you’re the boss, and you’re finally in charge of your days.
The pros of early retirement include more time with friends and family (or by yourself), freedom to spend your days however you choose, relaxation. Improved health, less stress, more fun.
Less stress, more and better sleep, more exercise, more fresh air, no more rushed meals at your desk or anxiety over deadlines. It’s easy to see how work can be detrimental to your mental and physical health. Breaking free and having more time and more control over your daily life can have obvious benefits. If exercise and healthy eating have taken a backseat during your career, reclaiming them could improve your health.
See the world
It’s difficult to see the world when you’ve only got two or three weeks’ vacation per year. When you’re retired, there’s no more dealing with your manager or waiting for HR to approve time off. It’s time to explore! Of course, travel is expensive, but retirement means you’ve also got more flexibility on dates to find the best flight deals, and you’ve got all the time in the world – so maybe a road trip or two makes sense (or your retirement becomes a never ending road trip).
Maybe there’s something you love but haven’t had the time to do it. Well, now you have time. It could be that you want to volunteer more, you want to perfect your knitting, take up pottery or carpentry, or have aspirations to turn your overrun yard into an idyllic songbird paradise. Whatever it might be, a passion project can help scratch an itch.
Make money in different ways
If you love your passion project, maybe you can make money from it. Same goes for any other type of side gig. If there’s something you do well and think people want to pay you to do it, give it a try. So long as you have the resources and it won’t affect the retirement funds you have saved, a side gig during retirement can help you stay busy, fulfill you, and can add additional money to that retirement kitty.
Don’t feel like doing anything? That’s cool – don’t. If you make it to the point of retiring early and you’re financially stable, that’s amazing. You can do all the things to be healthy and stay busy and broaden your horizons. Or you can just chill. That’s the beauty of retirement.
Cons of early retirement
While the idea of early retirement might seem like candy and roses, there are some negatives you need to consider. In truth, it’s not for everyone. Loss of income aside (presumably you have that under control if you’re taking early retirement), there’s a mindset shift to take into account too.
For some who retire early, the boredom wears them down. The relaxation is too much. The reality of retirement doesn’t match the dream. Some retirees struggle with a sense of loss when they leave behind a career and former colleagues, and want to go back to work. Some people can experience loneliness – after all, not everyone is fortunate enough to retire early alongside you. Every week, you’ll have 40 hours to kill, so make sure you’re mentally prepared.
Well this might seem obvious, but most people’s finances will start going down the moment they retire. You’ve saved and invested a whole lot of money – enough that you feel comfortable retiring early – but without the regular paycheques coming in, you’re likely to now be spending more than you earn. You need to be super duper sensible with your money to ensure it doesn’t run out. Emergencies or unforeseen expenses can also damage that nest egg you’ve saved, such as increased healthcare expenses as you age.
A potential hit (on pension and interest)
Based on average life expectancy, early retirement means your retirement savings will need to last longer. Say you’re going to live to 85 – if you retire at the “usual” retirement age of 65, that’s 20 years you need your funds to last. Retiring early at, say, 45, means you’ve got 40 years to pay for. While that’s obviously not a problem if you’ve saved enough and have planned for it, you need to know you’ll potentially receive less ongoing retirement income if you retire early.
Compound interest is when the interest you earn on your savings earns interest on itself. The longer your savings builds, the more you get – because compound interest is exponential growth. When you’re earning and saving, you’re accumulating money into your savings accounts. The more you add to your savings and the longer your savings stay untouched, the more money your money earns. If you retire 20 years early and start dipping into your retirement savings, you could be missing out on decades of compound interest (potentially hundreds of thousands of dollars).
If you contribute to the Canadian Pension Plan (CPP), you’re entitled to pension payments. In 2022, the average monthly CPP payment is $737.88 if you start receiving it at age 65. However, you can choose to start receiving your CPP early at age 60. But here’s where you’d miss out by doing that: if you start taking it at 60, you stand to receive 36% less than taking it at 65. Conversely, if you’re in a position to wait to start taking it until you’re 70, you’ll end up receiving 42% more than taking it at 65.
The middle ground
The thing about retirement – at any age – is that it doesn’t have to be a cold turkey move away from work. Remember, when you retire, you’re the boss. You make the decisions. Many people decide to phase out work and phase in retirement. Some people decide to switch careers, working fewer hours or working on something they truly love and want to do (instead of grinding away for “the man”). Do something you love. Do fewer hours. It’s up to you.
Sometimes these craft or passion jobs might not pay as much, but maybe that’s okay. It’s about stepping away from the 9-5 and finding fulfillment in your (semi) retirement. This way, you can still earn a little money to keep the bills paid, but also get a lot of the benefits that come from retirement – like improved physical and mental health. Not a bad way to start your retirement journey!
Final thoughts on the pros and cons of early retirement
Not everybody is in a position to retire early. And not everybody wants to. Some people never want to retire at all! Everybody is different, so your retirement plans need to be what’s best for you and your situation. When you’re examining whether or not you should – or can – retire early, it pays to chat with your family and others in a similar position, as well as seeking advice from a financial planner to ensure you’re on the right track.
And if early retirement is indeed in your cards, enjoy!
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.