Saturday, February 19, 2011

Overcoming Financial Fear

"The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown" — H.P. Lovecraft

When I was considering early retirement, I dealt a lot with fear of the unknown. Since taking my first job, I had never lived without compensation that paid my living expense. With no personal experience, I was unsure that we had enough assets to sustain a successful retirement. However, after a few months, I was able to overcome the fear and retired in my forties in October 2007. Here's what I did to overcome my fear:
  • Get the facts. For most of my life, I had lived without a budget. I simply put 10-20% of my salary in savings and spent the rest. Therefore, I didn't know how much money we needed in retirement. As a first estimate, I used 80% of our take home pay for our retirement budget. Then, I asked our financial advisor to determine whether our retirement savings could deliver that income.

  • Look as worse case scenarios. The first analysis showed that we would be able to comfortably retire with income at 80% of our take home pay. However, I requested analyses of several worse case scenarios: lower stock market returns, no social security, and poor stock option returns. In just about every case, we were still able to maintain our retirement, although sometimes at lower, but acceptable, lifestyles.

    As it turned out, looking at worse case scenarios was very useful since the Great Recession would begin in December 2007.

  • Develop a plan. Several plan options (e.g. pay off mortgage, put short term funds in money market funds, and cut back expenses) were developed to address the scenarios. As it turned out, we used many of the options.
  • After taking the above steps, we felt the future was no longer completely unknown. There was still uncertainty, however, we no longer feared going through with early retirement.

    For more on Reflections and Musings, check back every Saturday for a new segment.

    This is not financial or retirement advice. Please consult a professional advisor.

    Copyright © 2011 Achievement Catalyst, LLC

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