Sometimes the fear of the unknown can prevent us from doing what we actually want to do.
“If I take this new job, what if I don’t like it? If I start my business, what if I don’t make money?”
The same can certainly be said for early retirement – there are some things that seem scary.
Surprisingly, these seemingly scary things aren’t actually that scary when in early retirement:
Inflation – the 4% Rule is inflation adjusted i.e. you can withdraw more money every year.
Insurance – if you retire early, you need life insurance; your portfolio does the same thing.
Healthcare – there is a certain type of insurance for people that retire in another country.
In this post, I talk about withdrawing money from your portfolio each year inflation adjusted.
I also talk about insurance: home, car, and life insurance and how these change in retirement.
Finally, I talk about health care if you want to retire elsewhere, and where to find more info.
Inflation
What is inflation? It is what you call the cost of living going up in value each and every year.
You may have noticed this yourself – the cost of food last year is not the same as it is this year.
If you are reading this post in 2022, the UK has its highest inflation rate in 40 years – over 10%.
It is this high due to factors such as the Russia-Ukraine war and rising fuel and energy costs.
What does this mean for early retirement? Will we run out of money due to all this inflation?
The good news is no – you will not run out of money due to inflation thanks to the 4% Rule:
Withdrawing 4% of your portfolio, inflation adjusted each year, results in a 95% success rate.
Let’s say that you have £1 million in your portfolio and you withdraw 4% a year i.e. £40,000.
The next year you may withdraw £41,200 to adjust for inflation; the following year – £42,800.
Don’t worry about inflation – depending on what inflation is that year, withdraw accordingly.
Home and Car Insurance
There’s no rule for owning a home in early retirement: if you have a home you need insurance.
The last thing you want in retirement is a disaster to destroy your house and not be insured.
In my previous post, I talked about what to do with your home if you are planning to travel.
Unless you plan to sell, you need insurance, which is 0.5% of your home’s value each year.
In which case the only thing to do is shop for the best deal when it’s time to renew your policy.
Similarly there’s no formula for cars in early retirement – you need insurance if you own a car.
Unlike home insurance, it is illegal to drive with car insurance, so you can’t really avoid it.
However, if you’re planning to travel in early retirement, maybe you want to sell your car.
Even if you’re not planning to travel, do you still need a car if you’re not commuting to work?
There are other options, like car sharing e.g. Zipcar, where you rent a car when you need it.
Life Insurance
Unlike the other types of insurance, there is an equation for life insurance in early retirement.
Here is what you need to know about this: If you retire early, you do not need life insurance!
You’re probably thinking – What? How? Let’s remind ourselves the purpose of life insurance:
Life insurance is to make sure your family is taken care of in case something happens to you.
In other words, it is supposed to cover their living expenses so they can survive without you.
You know what else does this? your investment portfolio: it’s the same thing as life insurance.
However, until you are ready to retire early, it is probably a good idea to take life insurance.
The difference is, you only take out as much as you need minus how much you have invested.
This means you’ve enough to cover you incase something happens on your way to retirement.
Once your investment portfolio reaches your early retirement target – goodbye life insurance.
Health Care
If you plan to retire early and live in your home country – you’ll have nothing to worry about.
If you live in the UK, Canada, etc. you will be taken care off by the national health care system.
However, this only applies if you live in that country – what if you decide to retire elsewhere?
Thankfully there’s a type of insurance for those who want to live elsewhere – expat insurance.
It is for people who leave their country and aren’t eligible for their new country’s health care.
There are 2 geographical zones when it comes to expat insurance: USA and everywhere else.
And it’s no surprise: expat insurance will cost you more to live in the USA than anywhere else.
Recap: if you retire early in your own country, you’ll be covered by your national health care.
If you retire early and live outside your own country, you can be covered by expat insurance.
Just like that, health care is no longer as scary as it seems when you are in early retirement.
Don’t Worry; Be Happy
Sometimes things are scary because people tell us they’re scary or we don’t understand them.
However after we do a bit of research, we realise we don’t really need to worry about them.
Regardless of what inflation will be, we know that we’ll adjust our 4% withdrawal accordingly.
In retirement, make sure your family can access your portfolio if something happens to you.
Don’t worry about health care costs in retirement, there is a type of insurance suited for you.
There’ll always be something to worry about; at least we’ll remove these ones from our list.
To find more on inflation, insurance and healthcare check out the book: Quit like a Millionaire.
The authors talk about these scary topics in early retirement, and why they’re not that scary.
Are you on the path to early retirement? How is it going? Please share in the comments below.
If you want me to cover anything in more detail, please let me know in the comments below.
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