Why Early Retirement Has Become Harder In A High Inflation, Higher Rate Era

The FIRE movement, Financial Independence, Retire Early, captured imaginations throughout the 2010s and continues to be an increasingly popular movement today. The formula has been pretty straightforward, in which you save aggressively, invest smartly, and look to accumulate approximately 25 times your annual expenses and then walk away from full-time work years or decades ahead of schedule.

If you spend any time on Reddit, there remains a very vocal fanbase around the idea of retiring early, but actually achieving this goal has gotten far more complicated. Many of these complications started in 2022 as inflation levels started to spike, and even though inflation has come down, there has been a permanent pricing reset. Everything from mortgage costs to a gallon of milk is now more expensive than they were five years ago.

The new reality is that you have to make significant calculation adjustments in your planning thanks to shifting spending needs, a different market that provides different returns, and, of course, how much longer you can live. The good news is that nobody is making the case against early retirement. Instead, we’re simply acknowledging that the path to achieving such a goal has become increasingly more difficult.

The Inflation Reset Changed the Baseline

The inflation surge of 2022-2023 that achieved 40-year highs didn’t just create temporary pain, it permanently elevated the cost of living. Prices rose 20% or more across a variety of categories, and almost none of these have reset to prior price levels. If you are a retiree who thought that most you might have needed for annual expenses was around $50,000, you’re now in a position where you have to think about needing $60,000 just to achieve the exact same lifestyle you had been hoping for, and this isn’t going to be a one-time thing either. It’s now a permanent reality.

Early retirement math is particularly sensitive to this reset, as the 4% rule assumes you will withdraw an inflation-adjusted amount every year. However, this rate was previously calibrated on a 2-3% inflation average, but when your starting expenses are up 20% over your original planning, ongoing inflation now needs to be factored in at around 3-4%, and the compounding works against you now. A 40-year-old planning for 50 years of retirement faces dramatically different math than someone did in 2019.

The categories where retirees tend to spend heavily, healthcare, housing, food, etc., have all inflated faster than the overall Consumer Price Index. Someone who retired annually, expecting to spend $15,000 annually on health insurance and out-of-pocket costs, now likely needs to factor in $20,000, if not much more. These aren’t even discretionary costs that someone can expect to cut at some point as these increases are now fixed.

Higher Rates Created a Mortgage Lock-In Effect

The interest rate environment we’re in now has transformed housing economics in a major way as well, especially for aspiring early retirees. Those who locked in a mortgage at 3% a decade ago are holding onto valuable assets, but they are also trapped. Selling a home with a 3% mortgage to relocate or downsize means financing the next home or condo purchase between 6-7%, something that locks homeowners in place.

For those hoping to retire early, this understandably creates significant complications, as moving from a high-cost area to a low-cost one was and continues to be a cornerstone strategy for many FIRE believers. Selling a home in San Francisco and relocating to Tennessee and living on the difference was understandably part of planning, and it was possible when mortgage rates were similar to where you had purchased.

Worse yet, the lock-in effect is impacting those who haven’t yet made a purchase, as aspiring early retirees who were saving for a home purchase now face monthly payments far higher than projected. So, they are left with a few different options, including buying a smaller home, delaying a home purchase, or redirecting more savings from retirement accounts to housing costs.

Healthcare Costs Before Medicare Loom Larger

As if housing cost concerns were not bad enough, there is also a healthcare concern that needs to be evaluated, and spoiler, it’s only getting more expensive. Medicare eligibility begins at 65, but someone retiring at 50 or 55 faces 10-15 years of self-funded coverage. During low-inflation years, this cost was manageable for savers who were disciplined, but as healthcare premiums and out-of-pocket costs have escalated faster than general inflation, this is now the biggest area of concern for early retirement.

Let’s assume for a moment that a 55-year-old couple is retiring today, they might face $25,000 or $35,000 annually in health insurance premiums alone through the ACA marketplace before deductibles, copays, and service insurance, just to match the coverage they had with an employer. Now do the math for over a decade, and you’re talking potentially $250,000 dedicated solely to health coverage.

Safe Withdrawal Rates Need Recalculation

Ultimately, the beloved 4% rule that so many fans of the FIRE movement ascribe to needs to be recalculated. This rule, which became popularized in the late 1990s, assumed historical returns and inflation as well as a 30-year retirement horizon, and early retirees violate this last assumption. Someone retiring at 45 might need income for 50 years, not 30, and the original research behind this plan didn’t calculate for anywhere near that long, which suggests extending the model to a lower safe withdrawal rate like 3%.

In the real world, early retirement is now going to require a multiple of expenses beyond, potentially even well beyond what the original 25x rule suggested. Financial planners working with early retirees might increasingly recommend 30x or even 33x annual expenses, translating a $60,000 annual budget from a $1.5 million nest egg to somewhere between $1.8 and $2 million million. This would allow for an additional 6-10 years of accumulation.

There is also a need to be even more flexible, which is now a non-negotiable, as you will need the ability to reduce expenses, perhaps by as much as 20% during bear markets or even consider part-time income if and when necessary. Adjusting lifestyle expectations based on portfolio performance separates sustainable early retirements from those that end in a forced return to work.

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