Early retirement is a road worth pursuing, but it can also upset people who don’t understand what you are trying to do. Your loved ones may question why you are being unnecessarily frugal when they know you have money in the bank. And friends might encourage you to switch to an investment that made them some fast money, even though constantly changing funds doesn’t fit into your long-term financial plan to retire early. The unconventional behavior of aspiring early retirees can perplex friends and neighbors, unless there’s ample time to thoroughly explain the concept to them. Here are a few examples of what many people don’t understand about those who choose to meticulously build wealth.
Cheer for market declines. Bear markets cause emotions for every investor. Many people start to worry when their account balance declines. Yet, those in the accumulation stage should be excited every time stocks go down because their regular contributions get to buy shares at a discount, increasing future returns. The financial crisis was devastating emotionally, but the depressed prices likely helped many young accumulators who weren’t scared of investing in equities to buy more shares than they otherwise would have been able to afford. Just be careful not to cheer too much whenever the market drops, because anxious investors will almost certainly misinterpret your glee.
Skip the extras. Most people understand the concept of living below your means. But they may not understand your preference to use your money to buy freedom instead of extra niceties. As your peers start to get used to more expensive accouterments, they might even start resisting the more economical options that you propose for gatherings. What they may not understand is that by not paying for the extras now, you are essentially paving the way to be able to stop working sooner. For example, let’s say you decide to skip an expense for $500. That $500 could turn into $4,000 three decades from now if you assume a 7 percent annual rate of return after inflation. Using the 4 percent safe withdrawal rate guideline, you can spend an additional $160 every year in retirement. If you skip enough $500 expenses, you may even be able to retire sooner.
Ignore market events. Staying the course is perhaps the single most important investment concept anyone can ever master. It’s difficult to stay the course when the media is constantly reminding us of possible doomsday scenarios whenever markets decline. Many people wreck their long-term returns by trading in and out of the markets. You’re likely to get better long-term results by investing in index funds and never keeping track of market events. When you don’t follow the minute-by-minute investment news, then you tend to trade less, pay fewer taxes and fees and increase your long-term returns.
Be happy owning less. Buying more than you can comfortably afford can create stress if you accumulate debt or constantly worry about protecting what you own. Owning less stuff gives you more freedom than buying material possessions and then fussing about maintaining all that junk. Buying only the things you absolutely need is a far higher hurdle than the common conception of what’s affordable. This means less stuff, less time taking care of it and more freedom.
Many people aren’t comfortable with the simple, yet powerful truths those pursing early retirement try to implement. But if you spend the time to explain these concepts, it can prevent conflicts and accusations that you are being unnecessarily frugal.
David Ning is the founder of MoneyNing.com .
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4 Ways Retirement Savers are Misunderstood originally appeared on usnews.com
