Forget Retiring Early, Get Back to Work

In the last couple of years, there has been a group of people enthralled in the F.I.R.E. movement. I can see why many think that F.I.R.E. (Financial Independence, Retire Early) is a perfect life. Almost every personal finance site you go to will mention all the perks and joys of early retirement. I think most of us would gladly drop work to spend more time with family, enjoying a leisurely round of golf, or maybe even sailing the Caribbean,  but what many fail to calculate is how much it causes them to miss out on. 

Although the thought of early retirement is appealing, there are a variety of negatives that can come out of it. Sure there may be more time friends/family and freedom on a daily basis, but here are some of the things to consider first: 

A Potential Sacrifice of Quality of Life 

In order for F.I.R.E. to work, we need to have a larger chunk of retirement savings than if we would have retired later. This means that we are often sacrificing some of the finer things in life or extracurricular activities during our working years in order to save more. 

Someone adhering to the F.I.R.E. movement might not go out with friends, eat out, take in a sports game, or go on vacation, etc,. None of these are a necessity in life but are enjoyable in their own right. 

Aside from a likely decrease in quality of life during pre-retirement years, there could be similar carry forward into retirement. Early retirees may have to live more frugally as their savings need to last much longer. 

Financial Loss 

With the F.I.R.E. movement, there is also a greater possibility that its participants will experience financial loss. This doesn't mean they will be more likely to experience investment portfolio losses than their later-retiring counterparts, but it does mean sacrificing earnings in prime working years, compromising CPP and OAS benefits, and there may be more tax expenses. 

1) CPP and OAS 

CPP and OAS (the Canadian version of social security) benefits are based on age, how long an individual has worked and how much they have earned and contributed. By retiring early you are not sacrificing your CPP and OAS benefit, but you could be sacrificing a large portion. 

Not only are you sacrificing a monetary amount, but you will also have to wait a lot longer until you start receiving those benefits. OAS and CPP both start at age 65. However, a reduced amount of CPP can start at 60. So, if someone were to retire at age 45, they would have to wait 20 years for OAS and full CPP or could wait 15 years and get a reduced CPP benefit. 

2) Prime Earning years 

During someones working life there will be stages where they have higher earnings. There are 5 stages in the general earning life cycle of a person; early earning years, family commitment years, mature earning years, pre-retirement, and retirement years. 

The goal of the F.I.R.E. movement is to generally retire between 30-45. Typically this demographic would be in the "family commitment years", whereas, on the older end of this category would just be entering into the"mature earning years". To retire at this point, the saving that is done on an annual basis during early earning years needs to be greatly increased due to the reduced timeline. 

The difference between earnings at the start of a career and during mature earning years is substantial. Workers in their mature earning years take home about 3 times the amount of someone in their early earning years. By retiring early, you are sacrificing a large majority of those prime earning years. 

3) Potential Increased Tax Expense

In order to save an adequate amount of money to participate in the F.I.R.E. movement, capital accumulation needs to happen quickly. If you make $100,000 per year over 20 years, you will be paying a lot less in taxes than if you make $200,000 per year over 10 years. 

In addition, during your early retirement years, you are only eligible for a limited amount of savings in tax-sheltered accounts (TFSA, RRSP). This means that the majority of your savings will likely be through non-registered accounts that don't have the same income tax deferral features as the RRSP and TFSA. 

4) Sacrificing time 

When investing, time is one of the most important aspects and does a lot of heavy lifting. When you invest money and let compound interest do its work, it helps your capital grow exponentially. Assuming a 7% annual return with no additional contributions, your initial investment should roughly double every 10 years. 

That is assuming that you are not withdrawing from it. However, if you start withdrawing, the amount of compound interest and the growth rate will slow. Although you are not necessarily losing your capital, you are loosing out on a large portion of the potential growth.  

Lack of Funds For Education or Legacy 

As noted above, F.I.R.E. can decrease the amount of funds available during retirement. A lot of people also want to help their children or grandchildren with education costs. However, if we are stretching ourselves too thin with the whole F.I.R.E. movement, that may not be a possibility. 

Often times people also want to leave some sort of inheritance for the loved ones when they pass away. This can become increasingly difficult when retiring early. The amount of money available during retirement can be substantially lower than for someone that worked longer in life. 

Increased Stress During Bear Markets 

People in the F.I.R.E. community must depend on their savings for a longer duration of time. Due to how long the savings must last and how early withdrawals start, downturns in the market can be a large source of stress. 

If the market turns into a bear market, it can quickly decrease the value of your portfolio. If the value does not rebound quickly and you continue withdrawing at the same rate there can be a risk of outliving your resources or having to decrease your lifestyle spending. 

Identity Crisis 

This can be more of a problem for some people than for others. A lot of people in the F.I.R.E. community have noted that they faced some form of an identity crisis, especially during the beginning stages of retirement. 

A lot of our day-to-day time is spent devoted to our careers. Our careers can give us structure, meaning, and purpose. As well, a lot of our social circles are intertwined with our work life. Letting go of all that can be daunting and cause people to second guess their decisions. Identity crisis' can be mitigated to some extent with preparation. Make sure that you have some form of plan for retirement; hobbies, social circles, and/or other part-time work.