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Early retirement isn't all it's cracked up to be

Careful planning and frugal living can lead to early retirement if the clients are truly committed to making big changes.

"People always assume there’s an external circumstance: 'Oh, you must have received an inheritance,'" Carl Jensen, recently told the New York Times about his decision to retire at 43.

"We’ve just chosen to live far below our means. That itself is a radical idea."
Jensen was one of a few early retirees the Times interviewed. He’s a part of a movement that goes by the acronym FIRE for Financial Independence and Retire Early.

But is this something financial advisors recommend? What are the benefits to early retirement? What are the drawbacks? Financial Planning cast its net to find out what your peers think of this movement and how and when they’ve helped clients stop working much earlier than normal.

"It’s not a new idea," says advisor Danilo Kawasaki of LPL-affiliated Gerber Kawasaki Wealth & Investment Management in Santa Monica, California. "I’ve had so many clients ask me what it would take to retire in their 40s, some even in their 30s."

But when they see what it takes, "that number quickly dissipates," Kawasaki says.

Scroll through to read more commentary from advisors and get their thoughts on early retirement. Responses have been lightly edited.

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"Early retirement is not something we recommend for clients," says advisor Kelly Hokanson of the Planned Approach in Kansas City, Missouri. "Research shows that people who retire early suffer in many ways — physically, emotionally, etc. We have seen this with our own clients and provide a cautionary tale when asked about it."

That said, some of her clients are enjoying semi-retirement.

"Switching from a fast-paced, high-stress job to one where they are giving back or to consulting seems to provide the purpose that people need," she says, "while allowing them more freedom to enjoy retirement activities such as travelling and hobbies."
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"The FIRE movement has great intentions. However, in my opinion, it misses the mark," says advisor Anthony Badillo of Gen Y Planning in Charlotte, North Carolina. "I see firsthand how difficult it is for people to save for retirement in their 60s and 70s, which is intended to last 20 to 30 years. To condense that timeframe so that they can retire in their 40s and 50s and have their retirement last 40 to 50 years is extremely difficult."

In order to achieve a work-optional lifestyle in their 30s and 40s, many clients will need to live on "shoestring budgets" and forego life's pleasures like vacation, dining out and even going to the movies, Badillo notes.
"Don’t get me wrong, I’m all for aggressive savings strategies, and I firmly believe in savings upwards of 20% of one’s gross income," he says. "But I also believe that there is a better strategy that doesn’t require quite as much sacrifice while allowing just as much satisfaction."
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"Most people on the FIRE path are very deliberate about their expenses. They utilize low-cost passive index funds for the majority of their portfolio and they use advanced personal finance strategies to minimize taxes," says advisor Roger Ma of Lifelaidout in New York City.

While he does talk with clients about using some FIRE strategies, there are negative aspects of joining the movement, he notes. The first thing is clients may reduce their expenses so drastically to fund tomorrow that they deprive themselves of a good life today.

"In addition, some on the path may be pursuing FIRE because they are unhappy with their current situation and looking for an escape," Ma says. "While FIRE may be a worthwhile goal, it doesn't replace the tough work that has to be done to find purpose and meaning."

"I generally recommend a more balanced approach," he adds, "and tell clients they don't need to be financially independent or retire early to live the life they want to live now."
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While it may seem worthwhile to a client to retire early in their 30s and 40s, there are too many what-ifs that go along with that scenario, says advisor Koury of Values Quest in Phoenix.

"One million dollars saved today is a good start, and congratulations to anyone that has achieved that milestone. But you must have a lifestyle plan based on a 60- to 70-year lifespan beyond your working years,” he says. “How would you spend your time? Are you willing to live off a strict budget with little room for doing the fun stuff? What would you do if you decide 10 years from now you want to return to the workforce?"

Koury says he's found that his clients aren't so much focused on quitting work as they are on achieving greater work-life balance.

"I think the biggest risk these people are taking is assuming a safe annual withdrawal rate of 4%" in perpetuity, he says. "They are assuming historical returns will make their plan successful. While nothing in life is a straight line, I do believe in the balance of life."
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One ironic drawback to early retirement is youth itself, says advisor Monica Dwyer of Harvest Advisors in West Chester, Ohio.

"When a person retires this young, they tend to want to do more things because they are healthy, like travel and go out to eat," she says. "Some retirees spend upwards of 30% more in retirement simply because they are so active."

Other considerations are the cost of healthcare and insurance, as well as the impact of not working on their future Social Security benefits, she says.

"Healthcare costs are rising and it is becoming more expensive to purchase private insurance, so unless you are getting your insurance elsewhere, this could be one of your biggest costs," Dwyer says. "Also consider Social Security needs. You must work for 40 quarters, which is 10 years, to qualify for Social Security, but the amount of your payout is going to be based on your highest-earning 35 years."
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Time seems to be the biggest concern for advisors when their clients want to retire early. At least, that's how advisor Mark Hogan of Snowden Lane in San Antonia, Texas, sees it.

"There are two problems with retiring that early," he says. "First, not enough time to accumulate sizable wealth and second, by retiring that early, a person would need assets to last for 40 to 50 years. Retiring at 60 causes a person to only need assets that would last 25 to 30 years."
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"Retiring early is a very personal decision. Most people who do it are people of passion who tend to get involved in various corporate boards or charities," says Greg Friedman, CEO of Private Ocean in San Rafael, California.
But even high-net-worth individuals aren't guaranteed a smooth ride through early retirement, he cautions.

“There's a wide margin for error," Friedman says. "They have to ask themselves if they are truly secure and if they no longer have to work for money. The single biggest thing to consider is expenses relative to capital."
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A few of Davin Carey's clients retired in their 50s, but it took a lot of planning and preparing for life's inevitabilities.

"A huge part of our approach was checking, double checking, and triple checking the math, comparing different plans and scenarios," says Carey, of Carey & Hanna Tax & Wealth Planners in Oxnard, California. "The primary focus was longevity and trying to account for all the things we don’t know about, but that will happen over the next 30, 40, 50 years of their lives."

Even when it's financially possible, stopping work at a young age to just lay around on the beach isn't something Carey recommends.

"Most of these clients have had an idea for a while that they may be able to do something different than the traditional retirement regime," he says, "and they have other interests they can fulfill with a lot of energy, time and
finances to support them."
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For some clients the ability to retire early, first and foremost, requires carefully calibrating investments.

"My clients have lucrative stock grants, so a big part of the process is clearly articulating how stock valuations and taxes impact their ability actualize financial goals," says Evan Schmidt, vice president of Schmidt Financial Group in Kirkland, Washington. “For one client whose primary objective was retiring by age 40, we spent quite a bit of time modeling how different diversification strategies translated into different retirement realities."
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Ben Taatjes, president of Taatjes Financial Group in Willmar, Minnesota, thinks clients should avoid early retirement for two reasons. The first is having a purpose in their lives and the second is being part of something bigger than themselves.

"I have asked hundreds of people in the past 15 years as they approach retirement, 'Tell me about your best days at work, and what made those days your best?' I have never had someone reply, 'Payday!' " Taajes says. "It is almost always a day where they were able to use their talents to help someone or make a contribution to society."

For each of his clients Taajes says there was a circumstance where the person was able to use their abilities to make an impact and he says his goal is to make sure clients hang on to that drive no matter when they stop working.

“We were created to add value and it doesn’t end at retirement,” he adds. The only thing, in essence, that changes is we stop receiving a paycheck for it. If a person can retire early, more power to them. But, my biggest concern is whether someone retires at 30 or 70 years old, they never lose their sense of purpose and avenue to have impact.”