The Benefits of Early Retirement Planning

May 1, 2023

When planning for retirement, time can be your best friend or worst enemy.

The earlier you start planning, the more of an ally it is.

There are many reasons why you shouldn’t procrastinate.  Here are some of the most important ones.

Unlock the Magic of Compounding

This quote is attributed to Albert Einstein:  

Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn't pays it.

Compound interest refers to the earnings on both your principal and your interest.  Here’s an example provided by the U.S. Securities and Exchange Commission:

If you have $100 and it earns 5% interest each year, you'll have $105 at the end of the first year. At the end of the second year, you'll have $110.25. Not only did you earn $5 on the initial $100 deposit, but you also earned $0.25 on the $5 in interest. While 25 cents may sound like little initially, it adds up over time. Even if you never add another dime to that account, in 10 years, you'll have more than $162 thanks to the power of compound interest, and in 25 years, you'll have almost $340.

Here's another example that is startling to many.

One penny that doubles in value every day for only 31 days would be worth over $10 million!

The earlier you start investing as part of your retirement planning, the longer your money has to benefit from the “magic” of compounding.

Benefit from retirement plans

All of your savings benefit from a longer time horizon, but the impact of time on your retirement accounts can be significant.

Many employers offer matching contributions to 401(k) and other retirement plans.  The longer you have to take advantage of this “free money,” the more compound interest will kick in to increase the value of your retirement accounts.

Take more risk

When you start investing for retirement early, you’ll have decades before you need access to your money.  With such a long time horizon, you can take more risk in your portfolio by allocating a higher percentage to stocks or to mutual funds that invest in stocks.

While doing so may cause a loss in value over short-term periods, the stock market has historically recovered from recessions in about 3.1 years.  Over the last century, the S&P 500 index has had an average annual return of about 10%.

The ability to take more risk has multiple benefits.

● Your expected returns will be higher.

● The increase in the value of your portfolio means you will be more likely to reach your retirement goals sooner.

We often view “risk” as a negative, but it also can be the source of higher returns if you can tolerate increased short-term volatility.

Higher Social Security Benefits

According to the Social Security Administration, your Social Security benefit is based on the highest 35 years of earnings.  If you haven’t worked this long, your benefit amount will be lower.

Maximizing your Social Security benefits is an essential part of retirement planning.

Increased flexibility

If you have planned well and retired early, you’ll benefit from increased flexibility to structure your life as you wish.

If you have saved enough to live off your earnings and reduced or eliminated your debt, you don’t have to wait to reach an arbitrary age (like 65) to begin your retirement.

Having the option to remain employed, retire fully or work part-time provides you with choices that can positively impact your life.

You can elect to pursue your hobbies, travel, or volunteer.

Another benefit of being able to retire early is the ability to reduce certain costs.  Housing is one example.

When you are working, living close to your place of employment or within easy commuting distance may be necessary.  

As an early retiree, you can move to a smaller community, where housing costs are less, or to a place with a milder climate.

You can reduce or eliminate other costs as well.  Perhaps you don’t need as much life insurance or disability insurance as you did while you were working.  

Having that flexibility at a pre-retirement age is far more likely if you start planning now.

Peace of mind

Peace of mind is the most significant benefit of planning early for a secure retirement.

By some estimates, over 70% of Americans are stressed about money.

Financial stress can adversely impact your health.  It can impair your ability to sleep, damage your self-esteem and even cause suicidal thoughts and behavior.

Eliminating the stress caused by a fear of running out of money in retirement is a by-product of sound planning.

At Sensible Portfolios, we encourage clients to start planning early for retirement.  We understand the benefit.