Early Retirement

Early retirement can be at any age, but is generally before the age (or tenure) needed for eligibility for support and funds from government or employer-provided sources. Thus, early-retirees rely on their own savings and investments to be initially self-supporting, until they start receiving such external support.

Savings needed for early retirement

While conventional wisdom has it that one can retire and take 7% or more out of a portfolio year after year, this would not have worked very often in the past. When making periodic inflation-adjusted withdrawals from retirement savings, volatility can make meaningless many assumptions that are based on long term average investment returns.

The chart at the right shows the year-to-year portfolio balances after taking $35,000 (and adjusting for inflation) from a $750,000 portfolio every year for 30 years, starting in 1973 (red line), 1974 (blue line), or 1975 (green line). While the overall market conditions and inflation affected all three about the same (since all three experienced the exact same conditions between 1975 and 2003), the chance of making the funds last for 30 years depended heavily on what happened to the stock market in the first few years.

Those contemplating early retirement will want to know if they have enough to survive possible bear markets such as the one that sent the 1973 retiree back to work after 20 years.

The history of the US stock market shows that one would need to live on about 4% of the initial portfolio per year to insure that the portfolio is not depleted before the end of the retirement. This allowed for increasing the withdrawals with inflation to maintain a consistent spending ability throughout the retirement, and to continue making withdrawals even in dramatic and prolonged bear markets. (The 4% figure does not assume any pension or change in spending levels throughout the retirement.)

Calculations using actual numbers

The effects of making inflation-adjusted withdrawals from a given portfolio throughout history can me modeled with a downloadable spreadsheet. An online retirement calculator allows historical modeling, with provisions for incorporating pensions and other financial support programs or changes in spending that may occur during the course of the retirement.

Life after Retirement

Retirement might coincide with important life changes; a retired worker might move to a new location, for example a specialised retirement village, thereby having less frequent contact with their previous social context.

In some countries, retired workers will continue to participate in the life of their family and their society, often following ancient ethnic roles. Some countries are sponsoring initiatives to help retired workers keep contributing to social and cultural life.

Many people in the later years of their lives, due to failing health, require assistance, the highest degree of assistance - in some countries - being provided in a nursing home. Those who need care, but are not in need of constant assistance, may choose to live in a retirement home. This is a facility giving the retired person some degree of freedom, yet with close-by medical assistance to handle emergencies.

Retirement ceases if the retiree decides to go back to work. A retiree may go back to work for a number of reasons, ranging from financial hardship, to the simple desire for activity or new social interactions.

Old-age pensions are usually not reduced because of other income, so the latter comes on top of the former. This may be different in the case of a disability pension.