While a few are in a position to retire early and choose to do so, most people prefer to continue working for as long as possible (generally up to the regular retirement age of 60).
However, when such people consider retirement, they assume that they will be able to keep working right up to the age of 60. While that has been true to a large extent, things are changing and some are being forced into retirement well before 60. That crucial element of choice, which many still feel they have, can no longer be taken for granted.
It is for this reason that you should start preparing for financial independence well before you reach retirement age.
Also read: Financial Independence vs Early Retirement
Early retirement may not always be planned
What kind of reasons might force someone to retire early?
Health is one big factor. Most people work hard, in fact too hard, and neglect their health for years. They take on too much work-related stress. As a result, a future health condition (or even an injury/disease) may make it difficult for them to continue working. Or it may force one to cut down hours, and take up different low-paying assignments in order to balance recovery and work to an extent.
Work culture itself is becoming super-competitive… and brutal. You may be ejected from your job (laid off) if your skills are obsolete, technological disruption has made you redundant, or your industry itself is in a death spiral. What if this happens at a not-so-young age? What if you are unable to find another job? Today, such scenarios could very well become real.
Also, as older employees earn more, some companies prefer to let them go and hire more younger people. This ensures that companies rein in their salary expenses. So, as you age, your chances of being forced out by your employer increase with each passing year.
Then again, you may remain healthy and may not be kicked out of your job. But what if a family member has some medical issues that force you to take up different jobs with fewer working hours? Or many times, you may have to quit your job altogether if there is no way around this decision. While rare, this is another situation that may force you out of work for a while.
If you dig around your circle a bit, chances are you will find someone or the other who has had to experience one of these three scenarios in the past. I have a couple of relatives who were forced to leave work for health reasons. In their case, at least they had decent savings and rental income to get by.
Without trying to sound too pessimistic, the point here is that the decision to retire may not necessarily be in your hands. And it is for this very reason that everyone should prepare for the possibility of early retirement. If nothing bad happens and you still wish to work, good for you. But if something unexpected happens, at least your savings will be there to cushion the fall.
You still need an emergency fund
Countless articles have been written on what an emergency fund is. But having a large enough emergency fund can help you through the temporary loss of jobs. It will not help much if you are forced to retire from your job, but it will smoothen the impact of a sudden loss of pay and will give you some breathing room to find another job.
Also, if your job profile or industry has a risky profile, and finding the next job might not be easy, then it is imperative that you have a larger emergency fund. The thumb rule is six months’ worth of expenses. But, if need be, make it 6-24 months!
Also read: Size of the Emergency Fund
How to prepare for Forced Early Retirement
Here is exactly what you should do:
Suppose you are 35 and plan to work till 60. That is, you don’t intend to retire early. First find out how much you need to save to retire comfortably at 60 (Do read how much exactly you need to invest for early retirement and other goals. Or ask an investment advisor to figure this).
Now to prepare for forced early retirement, assume that you will only work till 50-55. Redo the calculations to find how much you need to invest now. This number will be definitely higher than the previous one (where you retire at 60).Once you know the new requirement, make an effort to invest at least that if you want to prepare yourself for early retirement.