Friday, May 08, 2009

On Surviving Early Retirement during the Financial Crisis

Since retiring in my forties in 2007, it seems we've been living through one financial crisis after another. The bear market started in the month I retired. The recession started two months after I retired. On a personal level, our retirement savings have fallen about 40%.

For now, we are still able to maintain our early retirement despite the plunge in the economy and stock market. While challenging, it has still been doable. Here are the elements that I believe have enabled us to survive thus far:

  1. Spending discipline. Prior to retiring, we were living on 76% of our take home pay. With the economic decline we are consciously cutting back even further through approaches such as eliminating waste , buying below the regular price, taking advantage of free offerings, choosing only the options we need when making a purchase, and to enjoy what we already have. In addition, we only use credit cards for convenience and pay off the balance each month.

    If we weren't used to living below our means, the stock market decline would have been quite a shock to our lifestyle.

  2. Financial cushion. Before retiring, we evaluate a range of savings targets and withdrawal options. We created a margin of safety by retiring after attaining the higher savings target and demonstrating we could live at the lower withdrawal amounts. This approach helped significantly since the stock market decline reduced our savings to the lower target amount, requiring the reduction of expenses to the lower withdrawal rate. In hindsight, we were also lucky to have 3-4 years of expenses in cash, CDs, and bonds.

    If we had retired at the lower savings target, with a higher withdrawal rate and 100% equity investments, the stock market decline would have caused a failure of our retirement plans.

  3. Good health and very good insurance coverage. My spouse, our daughter, and I have been fortunate to have continued good health during our early retirement. I realize that health expenses can be a wild card, significantly depleting savings if there is a major medical event. Thus, we make additional efforts to eat healthy and exercise regularly. Fortunately, my company has excellent retiree health insurance, which also covers dependents. In addition, my spouse and I have taken out a long term care policy, to cover nursing home stays.

    If we had health problems with no medical insurance, I expect it would have been more difficult to stay retired.

At this point, these elements have contributed significantly to being able to maintain our status as early retirees over the past 19 months. While all elements were important, I believe having a large financial cushion has been the most helpful.

For more on Reaping the Rewards, check back every Friday for a new segment

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

Copyright © 2009 Achievement Catalyst, LLC


L. Marie Joseph said...

I think health insurance is my biggest obstacle when it comes to retiring, I have seen $5-7,000 deductibles. I'm so use of my employer's benefits. This is the only thing that stops me going from employee to retiree.

Super Saver said...


I agree that health insurance is a major hurdle to taking early retirement. Qualifying for retiree health insurance was a key factor in our decision, although we pay more than normal since we still have a dependent child.

However, I do know people that retired early from the corporate world without retiree insurance, and feel they have reasonable health insurance costs with high deductible plans.

Either way, health care costs are a factor that one needs to consider when retiring early.

Kaye - SandwichINK said...

Hi, Thanks for joining us in the Boomers & Seniors Blog Carnvial. I enjoyed reading your article. Great suggestions and info on life insurance. :)