Early Retirement Myths That You Should Never Believe
Retirement Realities
Saving for retirement is challenging and sometimes overwhelming work. It's a reality borne out by the numbers: half of American households over the age of 55 have no retirement savings at all, according to the Manhattan Institute. Furthermore, about 40 percent of households headed by people aged 55 through 70 lack the resources to maintain their standard of living during retirement. So, when members of the FIRE movement (Financial Independence Retire Early) brag about accumulating so much wealth they're able to retire in their forties, or when marketers target you with early retirement proposals and gimmicks, it's best to view such claims with a hefty dose of skepticism. Few people manage to save enough money to retire on time, let alone decades early. Here are some of the myths about the ways to successfully retire early.
Maximizing Stock Market Contributions Will Make You Rich
Many people who wish to retire early think they can simply hit it big by playing the stock market, says Chris Abrams, founder of Abrams Insurance Solutions. But this approach doesn't always pan out, particularly if you're trying to accumulate enough wealth to depart the workforce decades early. "While investing in the stock market can certainly help you create a passive income stream, it's far from being a safe bet," says Abrams. "The financial recession taught us that the value of your portfolio can be wiped clean at a moment's notice." It's best to avoid putting all your retirement eggs in the one basket, particularly the stock market basket, adds Abrams.
Forex Trading Is an Easy Way to Get Rich Quick
Another big myth that needs to be debunked is that Forex trading, which is the process of changing one currency into another, is an easy way to get rich overnight, says Paul Sundin, CPA and financial adviser for Emparion. "You can't rely on your savings multiplying itself as soon as you trade. People only perceive this as a quick way to retire primarily because of the high financial rewards being spoken of by successful traders," says Sundin. "The misconception is that it's easy, when in fact there are too many factors to consider to even speak of it as such. Even seasoned traders can't guarantee you a 100 percent success rate." Just like any other profession, being successful requires learning and developing your strategy over time, adds Sundin. "There's no shortcut to learning the ways of the stock market and definitely not a sure and easy way to retire early," he says.
For more smart personal-finance tips, please sign up for our free newsletters.
Passive Income Streams Require Little Work
A steady chorus of FIRE advocates have suggested that creating your own blog or your own brand is one of the key steps to quickly generating the money you need to retire early. Blogs, they point out, create a passive income stream — money that you'll earn with little effort. The reality is that there's quite a bit of work involved in building and maintaining a lucrative blog, especially at the outset. "This myth is perpetuated by the internet marketers who sell e-books about the tactics of creating passive income," says Joseph Meyer, creator of the site The Dollar Soldier. "They focus on the big money but fail to mention that you'll likely spend hundreds of hours on creating content and bringing traffic to your website." Additionally, says Meyer, many businesses require employees, which creates another burden for you. "Unfortunately, the most lucrative business models require the most work," says Meyer.
No More Lattes … Like … Ever
Along with finding ways to generate oodles of passive income, there are also those who espouse doing away with your overpriced lattes. The reality however, is that completely banishing your frothy customized coffee drinks forever is not going to make you rich enough to retire decades early. Sorry to be the bearer of bad news (or good news depending on how much of a latte addict you are). You'd be hard pressed to find a FIRE movement member who got there because they never ordered another Starbucks beverage.
Your Parents' Wealth Will Take Care of You
Another dangerous myth is that your parents' wealth will be your golden ticket to early retirement — which is unlikely unless you're part of the wealthiest 1 percent. "If your parents are still living and working on their businesses or investments, you can never tell how long their money will last the family. Even when you inherit their wealth, if all you're doing is spending and there's no inflow of income, then eventually you'll exhaust it all," says Sundin of Emparion.
Downsizing Will Help
How often have you heard that downsizing your home is one of the best ways to accelerate retirement savings? While that may be true in some cases, it's not always a guaranteed path to early retirement success, says Ben Reynolds, CEO of Sure Dividend. "Switching from a big house to a small one might sound like it will save you money, but it can also depend on the new location you choose and other factors," explains Reynolds. "Figuring out the financial difference of living in a new area means looking at expensive repairs your old home might not have had, as well as property taxes and living costs for your new area." In other words, do your research carefully and make sure you're not simply trading one expense for another. While a smaller house may cost less upfront, you may end up in a community where the property taxes are higher or everyday living expenses are steeper, ultimately saving little to no money at all.
You Plan to Abide by the 4% Rule
A common notion bandied about in association with successfully managing your retirement stockpile, particularly if you start living off of it decades earlier, is the idea that if you just withdraw 4% of your investments during the first year of retirement (whenever that retirement happens to begin) and then withdraw that same amount adjusted for inflation each year thereafter, the money will last forever. "How much do you have saved? Can you live on just 4%?" says John Hill, founder of Gateway Retirement in Rock Hill, South Carolina. "This myth overlooks market downturns and the inflation you may face in retirement." In addition, people are living longer, and therefore could need their money to last well into their nineties.
FIRE Movement Members Are Just Like You
FIRE advocates are generally well-off individuals to begin with, says Jim Pendergast, senior vice president of altLINE, part of The Southern Bank Company. "This is one secret FIRE communities don't want folks to know because it sort of undermines the whole movement," says Pendergast. "Most are already successful business owners or solopreneurs who can dedicate the bulk of their income to aggressive retirement investments."
Early Retirement Is Actually the Goal
If you truly listen to the desires of people, and even what the FIRE bloggers are preaching, all they're really saying is to create a life that you truly enjoy, suggests Daniel Penzing, creator of the personal finance site Maze of Our Lives. "They're saying create a life that you don't need to take vacations from," says Penzing. And mostly, that's achieved by amassing enough money that you don't have to toil away in jobs that don't bring you happiness or joy. With enough money squirreled away, you become your own boss, writing your own ticket and deciding where and how you spend your time – including where and when you work.
This article was originally published on Cheapism
More From Cheapism
Cheapest Oil Change: Jiffy Lube vs. Valvoline vs. Walmart and More
Cheap, Easy, Healthy: 9 Best Bang-for-Your-Buck Foods at Costco
Like Cheapism's content? Be sure to follow us.
