Thinking about early retirement? Read this first.

In a year where many Canadians have reassessed their lives and their family priorities, it’s also been a time to re-think their long-term plans—including the possibility of early retirement.

The decision to retire can be complicated or surprisingly straightforward. For business leaders who are financially secure, an earlier-than-anticipated career exit can be an option worth contemplating – and acting on.

“To a large degree, it was the pandemic that triggered my life decision to retire early,” explains Susan, a Newport client who called quits on a successful career as a senior marketing executive in her mid-50s earlier this year.

“There was a realization that life is short, we’ve lost 18 months and there’s some living we want to make up for. I found that my friends were retiring, and I was at my desk working while everyone was hiking, doing yoga and golfing. It was like all the kids were going to summer camp and I was staying home.”

And then of course, there’s the COVID-19 effect. To put it mildly, the pandemic has taken a heavy toll. It’s left many business owners and executives overworked and overstressed, beyond anything they’ve experienced before. A recent report from LifeWorks found that 51 per cent of senior leaders surveyed are considering leaving, retiring or downshifting from their current organization or position due to the pandemic’s impact on their mental well-being.

Reading the signs it’s time to retire

The current crisis aside, there are common triggers for early retirement—most of which are just as unexpected as the pandemic. They include events such as the premature death of a friend or family member, a corporate downsizing or a health scare. In some cases, entrepreneurs will receive a surprise purchase offer for their business and decide to cash out. Often the reasons overlap.

“I had no intention of retiring,” said John, a Newport client and self-avowed workaholic. “But when I turned 60, four of our friends passed away a couple of years apart and I started thinking about what I might want to do next.”

Early retirement offers unique opportunities to enjoy life at a younger age, but it can also present some multifaceted challenges. Some early retirees become disconnected from friends, struggle to adjust to life without work or start to wonder if they’ve made the right financial projections for the long-term.

Others manage the transition with relative ease because they see retirement as a transition, one that they’ve planned for. It’s the next stage of their life journey, rather than a hard stop to doing what they loved.

Preparing for that transition means avoiding several potential pitfalls and finding a new sense of joy after your working years. We spoke to Newport clients who decided to retire early to get their take on what to expect – and what to avoid. Here are their top three lessons:

Lesson 1: Set your retirement vision

While you’re busy successfully building a business or running an organisation, there’s not much time to figure out what you want to do next, and that can be a big problem.

“You need to find something new that you love to do,” says Angie, a Newport client who made an unexpected business exit in her 40s. “For a while after retirement, I was a resident volunteer at a hospital for the elderly. It’s about finding your next passion.”

That means taking the time to outline a vision for what you hope to accomplish before developing and implementing a very clear retirement plan. “We find that the clients who reinvent themselves with a sense of purpose tend to make the retirement transition more successfully,” explains David Lloyd, Newport’s Co-Founder & Chief Wealth Management Officer. “Part of that process is asking yourself the right questions to prompt deeper reflection.”

Based on our experience over the years, Newport has developed a questionnaire that helps clients shape that vision. Amongst other questions, some key things to ask yourself include:

What do you want to do that’s new?

• What new contributions can you make?
• What new things would you like to learn about?
• What new places would you like to see?

What skills do you want to develop and what habits do you want to change?

• What talents can you further develop?
• What strengths do you have/would like to develop?
• What weaknesses would you like to overcome?

What about your lifestyle?

• Where would you like to volunteer?
• What pet peeves/annoyances would you like to eliminate?
• Where would you like to live?
• What experiences would you like to have?

Successful early retirees involve their partner and family in the visioning process, as well as key advisors such as a business coach. In Susan’s case, her executive coach provided some sage advice.

“He encouraged me to pay attention to what gives me energy and what depletes my energy,” she recalls, noting that travel, business consulting and philanthropy fell clearly into the former category as she set priorities for her retirement. “He stressed that at this stage of life, I should only be focused on what gives me energy.”

Lesson 2: You may spend more than you expect, so plan accordingly

“I retired at 56 and kept spending as though I was still earning a high six-figure income,” says Steve, a former C-suite executive. “It was my Newport portfolio manager who flagged my over-spending and helped me budget so that I could still enjoy life, while making sure I wouldn’t outlive my savings.”

Many early retirees who are healthy, active and determined to complete a long bucket list of experiences wind up spending more—not less—when they leave work. And that spending comes early, when retirees are still young and healthy enough to continue to lead active lives.

A 2019 J.P. Morgan Asset Management survey of U.S. retirees noted significant post-retirement spending volatility, with 57 per cent of households spending the same or more after retirement. That surge is most notable in the years immediately after a career exit. Spending then tends to level off before spiking again as retirees age, largely due to increased medical and care-related expenses.

Cash flow modelling and realistic investment return predictions can help reduce the risk of over-spending. So can timing out retirement to avoid ‘sequence of return risk’—or retiring into a down market where low or negative portfolio growth can dramatically impact your long-term financial security.

“The key is to work with your portfolio manager to project expenses and set a yearly income target based on your post-retirement lifestyle and spending goals,” says Newport Portfolio Manager Jordan Schwann.

So, too, is factoring volatility into return projections, while building a lower-volatility investment portfolio that includes alternative asset classes such as real estate, infrastructure and private debt. A focus on income-generating investments and making systematic, tax-efficient withdrawals—while maintaining a cash cushion to protect against surprise expenses—will help deliver a stable (and sustainable) post-retirement investment income that helps protect your financial future.

Lesson 3: Consider retiring gradually—and give yourself time to adjust

“When I first retired, I was very anxious about filling my time,” says Hussein, a Newport client who retired from his business at 60. “What I realize now is that it’s better to take the time to settle into retirement and know there’s going to be that adjustment period.”

Being emotionally ready to retire is just as important as being financially ready, but it’s often a factor that’s not accounted for. One study found that retirees are 40 per cent more likely to experience depression than non-retirees.

Many people dream of an early retirement, but after they leave their careers behind, they long for a return to the bustle and excitement of owning or managing a business. In some cases, they make ill-advised decisions and jump back into challenging situations that compromise their happiness or financial security.

“When business owners or executives retire and take away their work identity, that creates a big void that needs to be filled,” Lloyd says. “But if they make a slow transition out of the business or into a part-time role, that can allow them time to explore new passions and bridge the gap between work and retirement.”

Many Newport clients continue consulting, investing in businesses or volunteering with philanthropic causes not only to remain active, but because they have so much professional experience to offer. The good news: part-time C-suite executives are in high demand, especially at start-ups that need the expertise, but can’t afford to hire experienced full-time professionals at that level.

As Schwann points out, working longer and delaying income withdrawals from your portfolio can enhance long-term financial stability.

“As we explain to many clients who retire early, even if they can earn $50,000 a year working, that is equivalent to a 2.5 per cent return on a $2 million portfolio. That income provides greater financial flexibility. And at a time when remote work is becoming more accepted, it’s easier for retirees to transition into consulting roles without spending long hours in the office.”

So, if you’re thinking about making this next life step change, be ready for it and plan for it. Early retirement can be exhilarating, liberating and ultimately as fulfilling as your full-time career was. And as one successfully retired Newport client observed, “Staying current, relevant, engaged and active gives you purpose and meaning.” And that may be the best anti-aging treatment of all.