OFTENTIMES I have heard persons say they want to retire early. For some folks retiring early means no more hard work and more time for leisure; it also means freedom to be their own boss. But without a clear plan of action and long-term strategic planning, the dreams of retirees can soon become nightmares.

Just recently, I met with a male retiree who is now gainfully employed in the private sector; he is not yet at the normal retirement age of 65. His monthly pension from his previous job is only $50,000, and the National Insurance Scheme pension benefit is $16,000 monthly. His combined pension income has not kept pace with the high cost of living. Fortunately for him, the years of experience and training in his chosen career enabled him to secure a full-time job, which required him to train new employees. He is thankful for good health and has recognised the importance of investing.

Cognisant that emergencies can derail his plans, he prioritises building an emergency fund. Long-term investment forms part of his financial plan and he is willing to take the necessary risks to beat inflation, which is the biggest threat to his future financial security. This retiree may spend three decades in retirement. Relying on low-risk investments, such as certificates of deposits and bonds, will not outpace inflation in the long term — he must keep making frequent deposits to his investments for as long as he is still able to work. It was upon the recommendation of his colleague that he sought my advice on what action he needs to take now to create the financial security he seeks for the future.

Employees or employed persons must look before “leaping” too early in retirement. Retiring early lengthens the retirement years and truncates the time that is necessary to accumulate a huge nest egg for this period. Health care, housing, transportation, and utilities costs are more expensive in retirement. Health insurance, in particular, can pose a serious challenge for many retirees. The subsidised employer health plan ends upon retirement. The retiree who opts to retire early should have a plan in place to meet health and wellness needs. Careful consideration must be given to planning for all future expenses.

Studies have shown that a number of retirees overspend in the first two years of retirement. Some retirees still have mortgages in retirement, and for those without mortgages the rising maintenance and insurance costs can prove costly or prohibitive. People who retire early run the risk of running out of money. Always remember that your money should not outlive you.

The key to retiring early is investing early. Unfortunately, many people start their investment journey quite late. One individual who retired early expressed the view that in his first job in the government service employees were introduced to one per cent loans. He said it affected his mindset. This was a sobering point. Unfortunately, it is quite common in Jamaica for employees to become acquainted early with acquiring liabilities instead of assets. Special packaged loans at low interest for particular groups of employees and low-income workers are usually enticing because of the same low interest rates and special offers. Some employees develop the propensity to resort to loans for short-term and long-term goals, therefore a greater percentage of their salaries will pay debts and thus leave little or nothing to save and invest. For too many persons, investment was not placed on the front burner and is sought after much too late.

Some people retire early because their mortgage is paid off and they are of the view that their monthly pension will be adequate for the many years they are likely to spend in retirement.

But without investing in financial (non-tangible) or liquid assets such as stocks, bonds, and certificates of deposits they run the risk of running out of money rather quickly — especially when major unforeseen expenses are incurred.

Choosing early retirement should not be done on a whim, neither should it be an emotional decision. A logical and strategic financial plan should be in place, based on a diversification of assets to minimise risks and maximise the growth of assets for the future.

Also, it’s not just the finances that are in danger when opting for early retirement. Social interaction is important. Early retirement can bring an end to relationships as your friends and family remain in the workforce. What will you do with your time now that the working years are cut short? It’s an opportunity to learn new skills, socialise, develop other interests, and pursue volunteerism. It’s not just your finances that should be mapped out, a holistic plan is also necessary. Everyone who hopes to retire early should consider having multiple streams of income. Over-reliance on one income stream for retirement is likely to be detrimental. Retirement is not just about free time, it’s about having peace of mind.

Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com