At Old Lloyd we consider the notion of financial independence as one of the more important goals in life for a person. Financial independence and early retirement go hand in hand as life style choices for many. There is a lot of material on the subject all over the internet. We observe, however, that people seem to be focusing more or less exclusively on money, and quite often rather narrowly - i.e. one needs X dollars per year for expenses as of today, so as long as he/she has a lump sum of Y dollars and, given the magic 4% rule, Bob is your uncle. In our view this a bit lacking on long term planning with regards to potential unexpected events.
If a person retires relatively early, let’s say 40, statistically speaking he/she will have another 40+ years of life. A lot, yes, A LOT can change in this time span. Just think about how different the world was in 1980! China was of no real significance on either political or economical scenes, USSR and US were still fighting for dominance over the world, personal computers were an expensive novelty, John Lennon was still alive (killed in December of that year) and average US inflation was 13.5%!
Things can change again! The inflation can go back from next to zero to double digits, the dollar (or your savings’ currency) can lose value (GBP lost quite a lot in the last 10 years vs USD), sudden changes in circumstances might increase the cost of living dramatically. Young people tend to avoid thinking about later life, however the unpleasant truth is that elderly people might require expensive daily care (think of partial / total disability due to a stroke, cancer or another crippling disease).
There are plenty of other scenarios that can put immediate stress on your financial situation. When one plans for a very tight budget for the rest of their life, this can prove to be disastrous. It might be very hard to rise to the challenge. If a person retires at 40 and 20 years later all of the sudden finds themselves in need of extra 20K per year due to ill health, they might not be in any shape to actually go out and earn the money. First, because of that very health issue and second, because of growing accustomed to, well, if not doing anything, at least not doing much in terms of marketable skills during these two decades.
Let’s look at some of the more obvious sources of future grief:
Medical - with old age comes the infirmity. Of course, one can do a lot in order to delay and reduce the impact of the advanced age on one’s health. We always recommend regular physical activity and avoidance of unhealthy habits. But it is more or less guaranteed that there will be medical issues at least in the late 70-es and beyond. So, one should plan ahead on how to meet the cost. In some countries there is a public health system, which covers some of it. NHS in the UK, MediCare in the USA etc. However, public health systems are notoriously slow and inefficient in most places. If you require a knee replacement, you might have to wait for half a year or more in the UK’s public hospital’s queue. Will it mean 6 months of limited mobility? How will it affect mental health? The physical health, given lack of movement? How much would it be worth to pay for the operation out of pocket, maybe abroad? Of course, if you have a spouse and/or children, then there are potentially more sources for medical expenses.
Prolonged care - a medical condition resulting in long term disability will require some care. This costs money, unless there is someone willing to look after the disabled for free. Can you count on having such a free and generous caregiver late in life? If not, where the money will come from?
Housing - what about the accommodation for the later years of life? While there might not be much sense in buying the “retirement” home at the youthful age of 45, still one should make sure there are enough resources to do so when one is needed. Renting is also possible, however one better make sure there is enough money for rent long term no matter what. Being evicted at the age of 87 isn’t much fun.
Accidents and disasters - this is the capture-all category of “shit that happens”. A car crash mandates buying a new vehicle and 3 months rehabilitation; a house fire leads to expensive repairs and repurchase of all the furniture, an earthquake wipes out the equity in the real estate and makes the last 20 years of sacrifices to repay the mortgage irrelevant.
So, what can we do to deal with these issues? Let’s divide our approach into two categories, but the bottom line - we need more money!
First, one needs more money than the bare minimum, which seems sufficient today. 20K USD times 40 won’t cut it, sorry. This isn’t great news for someone who wants to retire as soon as possible, but it is better to retire somewhat later than to suffer during the last decade of one’s life. And of course, the source of the money can be anything, including part time work. One sort of semi-retires, rather than cutting off all work forever and ever.
Second, one can manage the financial risks of the distant future by buying plain old (and hopefully) good insurance. There are all sorts of insurance products to deal with the scenarios we mention - unexpected medical bills, old age care, injury, natural disasters etc. Since insurance premium is known upfront, this helps a lot in planning the expenses and the whole FIRE thing. One should review the insurance products / policies very carefully, of course, since the insurance companies are notorious for pedaling questionable products from time to time (meaning most of the time).