Golden Handcuffs and Early Retirement – The Mental Challenge of Choosing Freedom when Slavery is Lucrative


Many of us pursuing financial freedom early in life struggle with making the decision to stop our current jobs and make the huge transition into the unknown.  This is a big life decision and it understandably makes everyone nervous.  And a lot about the struggle is about the numbers.

We spend time with our spreadsheets, running scenarios on investment returns, tax rates, asset allocations, spending levels (including health care), and on and on.  Unfortunately there is no certainty, so at best, we get some mild comfort from these actions.

But, how many of you of have run a few possibilities and then stopped with your mind at ease?  If you’re like me, you’ve analyzed and reanalyzed from every angle you could think of.  You’ve become borderline obsessed with it!  But despite all this effort, we are still not at ease.  There are so many assumptions and “what if’s” that the second guessing can make us crazy.

Of course at the heart of it all is the fear of not having enough money.  Since very few of us will truly run out of money, this is a pretty irrational fear so maybe a more accurate way to frame this is whether we will regret stopping work (and hence saving) too early while it was relatively easy to save money from our current job.

Ironically a high income helps you reach your goals faster but also makes it harder to walk away

People with high incomes typically have worked hard to achieve those incomes.  They have advanced degrees in difficult fields.  They have studied hard and/or worked years to build their incomes over years of hard effort.  They have developed specialized knowledge and skills that earn them a high income.  In many cases, part-time work is not a viable option.  It’s 50+ hours a week or 0.  And once you leave, its often very difficult to go back, at least at anything like your prior salary.  This makes the decision to leave extremely difficult.

On the one hard, freedom from such a demanding job is often motivating because hours and demands tend to be high.  On the other hand, giving up a good salary that you’ve worked hard to build is very psychologically difficult.  The transition from a high job income to no job income is stark.

For very early retirees in their 30’s or 40’s it’s even more difficult because this is the point at which your income is still rising the most (usually far outpacing inflation in your 30’s) or is peaking (mid-40’s is typically your peak earning years).

Even if you have reached a reasonable definition of financial independence (FI), which is typically defined by having 25 times your annual expenses saved up and invested (i.e. the common 4% rule), it’s very difficult to feel comfortable making such a big life change.  The possibility of regret seems high.  The golden handcuffs feel tight.

Your Golden Handcuffs Pinch Factor depends on several variables such as your age (when you hit the 4% rule), your after-tax savings rate, your annual expenses, and your invested net worth.  However, these factors are interrelated since your savings rate depends on your income and spending levels and your savings rate determines how long it takes before your investment income covers your expenses (i.e. FI age) so really we can simplify this down to a safe withdrawal rate.

What I’m going to advocate is an adjustment to your target safe withdrawal rate based on your savings rate which correlates to the age at which you hit financial independence.  It’s designed to address the psychological challenge of when it “feels” worth it to keep working for the money.

Essentially it’s a way to determine an “excess” net worth to build in order to minimize your regrets from walking away from a lucrative career at a relatively early age.

15% Savings Rate Scenario

First, let’s look at a scenario of a household that saves 15% of their take-home pay.  I’ll use an income of $100,000 (the income doesn’t matter since it’s all based on percentages so this is just a number to use as an example), a 25% tax rate, 2% inflation, job income that keeps pace with inflation, and an 8% investment return.  The plot below shows the investment income you can generate from your savings using 4%, 3%, and 2% withdrawal rates.

Golden handcuffs 15

At this savings rate, it’s going to take about 32 years to reach financial independence assuming a 4% “safe” withdrawal rate (SWR).  This means someone who started working in their early 20’s would now be in their mid-50’s.  This puts them at a 30-40 year retirement timeframe. Detailed studies have shown that the 4% withdrawal rate is quite safe based on a 30 year retirement.  At this point in the US, the main expense factor make sure you account for is the cost of health insurance from mid-50’s until qualifying for Medicare.

In order to reach a 3% withdrawal rate, it’s going to take an additional 4 years of saving and investing.  This isn’t too bad compared to the 32 years already worked (only a ~13% longer working career).  This is due to the exponential math of investment returns as you can see clearly from the graph.  If you don’t mind your job, it may be worth working those additional years but it probably isn’t necessary in this case.  You can slip out of your golden handcuffs with minimal pain.

You’ve had a long working career and have saved up enough to do other things if you want.  You also have fewer years with energy and good health (sorry, it’s reality) so if you want to make choices with the minimum probability of regret, I’d say retire now on the 4% rule and enjoy your life.  Chances are you’ll be happy you did.

50% Savings Rate Scenario

Next let’s take an example associated with a much earlier retirement.  If you’re able to save 50% of your take-home pay, you’ll reach the 4% rule definition of financial independence in about 16 years.  This is much better than the prior example, and is almost solely due to your savings rate since investments play a smaller role over this shorter timeframe.  If you take the same assumption of starting work in your early 20’s, you’re now able to retire in your late 30’s if you want.

golden handcuffs 50

However, for someone this young, looking at a much longer retirement of 50-60 years, many people including myself would be uncomfortable with the 4% rule as explained previously .  BTW, if you’re interested in an in-depth analysis of safe withdrawal rates, check out the excellent series of SWR posts by Early Retirement Now.  In this case, I think the golden handcuffs are still on tight.  Not pinching and uncomfortable anymore, but still tight enough that you can’t slip out of them easily.

With such a strong savings rate, it will still take another 3 years of work to go from a 4% to a 3% SWR.  At this point in time, particularly since nearly all asset classes have done really well recently and there is such a long retirement timeframe in this scenario, I would strongly advocate hanging in there until a 3% SWR is reached, or at least a 3.5% SWR is achieved.

Remember, the entire purpose is to be happy.  And we want to be happier the rest of our life, not just short-term as we think about how nice it would be to have freedom.

Studies show there is a honeymoon period after retiring, then typically a down period, then a steady-state happiness level as you adjust to your new life.  I think early retirement could be great, but life won’t be just a series of rainbows and unicorn-filled Saturdays for the rest of your life.  It’s good to keep in mind the long game since you have a lot of life ahead of you.  It won’t be as much fun if you look back and have regrets because you left just a little too early because you were too impatient and later realize there was no reason to be in such a rush.

From a happiness cost/benefit risk analysis, I think it makes sense to keep going a while longer in this scenario to add a significant financial cushion.  There is simply too high a chance of regret in walking away from a good income that enables such a high savings rate a few years too early.  There is a reason people struggle with the “one more year” syndrome.  It really does help financially.

A few more years of work after hitting the minimum FI level can make a very big difference in your finances and peace of mind for the rest of your life.  Don’t discount this option!

The opposite consideration is the probability of regret for working a bit longer and saving up even more than you likely will need.  And the best data says the probability is high that you’ll be ok financially but on the other hand, psychologically it’s very comforting to go a bit beyond the minimum safe withdrawal rates.  Again, happiness is the overall goal and math doesn’t always provide the warm and fuzzy feelings we want.

You give up a few years of freedom, which some would say is unacceptable but at this relatively young age, I think it’s a fair trade-off for the lifetime of additional financial benefit.

It’s important to keep in mind that the “cost” in years of freedom is relatively low when saving such a large % of your income.  If you had to give up a lot more of your life-years I would have different advice but at a 50% savings rate, I think it’s worth working a bit longer.

You can also focus on being more happy while working those last few years since you already have reached a good state of financial independence.  Don’t forget that important point.  You shouldn’t hate your job or feel stressed about your work once you hit FI.  If you do, you should think deeply about that since there are other psychological challenges to address, preferably before you retire.

Everyone can make their own judgment but I would say that the future you would prefer you work a few more years to save up a significant cushion.

Once you hit a 3% SWR, regardless of market valuations, and regardless of various what-if scenarios you might have, history gives good confidence that you are safe to let go.  The golden handcuffs have loosened to the point that you are the one holding on to them.  If you choose, you can easily let go and let them fall to the ground.

Beyond a 3% SWR, you should have a strong reason to keep going.  It would take you 8 additional years to reach a 2% SWR from a 3% SWR.  That is a long time and you’re giving up some prime years to achieve this.  More importantly, all the objective evidence indicates it’s not necessary.  However, this is again a personal choice and I wouldn’t throw stones.

But I think this is not a financial decision anymore.  Realistically 3% is as conservative as you need to go even for a forever retirement that none of us will live to see (barring a technology leap that leads to immortality).

Final Example – 75% Savings Rate Scenario

Now we are on the very extreme side of things with savings.  However, this does happen.  It takes a relatively frugal lifestyle and high income but some people achieve this, especially after many years of working and getting promotions/raises while avoiding lifestyle inflation.

To show it’s possible, this is where my wife and I are, although we certainly weren’t always able to save so much.  We saved probably 30% of our income when we started working.  This is a really, really good start but it would not have been realistic to save 75%.  However, after many years of working, despite now having added two young kids and a bigger house, we are saving 73% of our take-home pay.  Most of this was due to increased income but keeping our expenses largely constant for the last 10+ years played a key role here as well.

At this point, someone saving this much of their income is getting a big financial benefit from their job.  Each year of working and saving will provide a net worth increase that is more guaranteed and likely beyond investment returns, even with a relatively large portfolio.  Add this to now-significant investment returns (on the majority of years where investment returns are positive), and net worth increases a lot each year.

By continuing to work and save, it’s like significantly beating the market each year.

Even if you’ve reached a 4% SWR, you may have only worked for about 10 years (typically a few more than this since there is usually a ramp up in savings rates like in my case).  You are still quite young and saving enough each year to fund multiple years of expenses.  This is in stark contrast to the average crazy American saving 5% per year (meaning is takes nearly 20 years to save up enough to cover 1 year of expenses!).

Note that a savings rate like this almost always occurs with a high income which is usually correlated to a specialized skillset.  In many cases, it would be extremely difficult if not impossible to replicate this income doing something different.  The only way to replicate this would be to do the same job, which obviously is not the goal.

I would definitely advocate continuing with such a golden opportunity until you hit the 3% SWR.  As shown in the plot below, it should only take another year or so.  The risk of regret clearly rests on the side of stopping a bit too early with such a high savings rate.

1 year to go from a somewhat risky 4% withdrawal rate to an extremely safe 3% withdrawal rate is a pretty awesome deal!

golden handcuffs 75

As with the 50% savings rate example, I feel it’s financially unnecessary to continue until something more conservative like a 2% SWR is reached though in this case it would only take an additional 4 years.  However, remember the point is happiness, not some target number.  And happiness depends on your thoughts.  So we’re back to personal choice.

I can think of some valid reasons to continue working when you have such an incredible savings rate.

Maybe you find you enjoy your work and would like to continue even though money is no longer a driving factor.

Maybe investing in volatile assets like stocks makes you uncomfortable and you’d rather work longer so you can have a larger portion of your savings in bonds or even cash.  In this case a 2% withdrawal rate might be necessary.  Personally I wouldn’t take that route for a very long retirement but it’s a personal decision.

Maybe you have plans for large charitable contributions or want to create a large inheritance so that you need to go beyond your personal lifetime spending needs.  In this case, I would say you’re not actually going to a lower withdrawal rate.  Instead you are operating at the higher withdrawal rate by spending more money on others, even if that spending will occur in the future.

Maybe you just want to spend more.  Nice house, more expensive location, more vacations…..whatever you would like.  Feel free to save up more so you can spend more.  But again, you aren’t really going beyond the 3% SWR……you’re just spending more.  There is no need to restrict your withdrawals to below 3%.  Just up your spending while staying at that 3% SWR if you save more.

What am I doing?

Let me share some details from a personal perspective since this is point where my wife and I are at.  As mentioned before, we are saving a lot (73% of our take-home pay) and are already around a 2% SWR, partly due to the fact that we are lucky to have a pension (not inflation-adjusted) that would cover about 1/3 of our spending needs.

However, for now we are both still working.  There are certainly some disadvantages to this, but we also like a lot about our jobs and don’t feel a strong urge to walk away at this point.  The pros of working outweigh the cons at this point for us.

A big factor is that we are still trying to sort out what we’d do next anyway.  I’m a bit jealous of those that have clear dreams and are super-anxious to get started.  That would be nice.  But in our case we have been very slow to ideate and think about a future with open options, having really internalized the idea of early financial independence only over the last few years (as it became more obvious that our savings and investing results were going to give us an early option for freedom).

We’ve just been following script too long and now it’s taking some time to think differently.  I take to heart the advice of retiring “to” something and not just run away from something.  I think this is critical.  At this point, I want to take the time to jointly define what we’re excited to run “to”.  Our ideas are not very clear at this point.

We are also responsible for 2 young kids.  A 3% SWR is enough cushion that I don’t feel concerned about this but my wife is not as comfortable.  If an even bigger financial cushion makes her feel less stressed about making some bold life changes, then it’s worth slowly convincing her of the numbers while we save up more.  I want the next phase of our life to be fun, with minimal anxiety so if additional savings helps this, despite the fact that all evidence indicates we are being excessively cautious, then I’m okay being patient for a while longer.


Those of us saving a large portion of our income eventually reach an enviable position of being able to generate enough money from our savings that work is optional.  And since we’re saving a much larger % of our income than average, we reach this point much earlier in life than most others.  Many of us also tend to have higher incomes than average as well, although it’s not not necessary as long as you are careful with your spending.

At this point we are left with the option of leaving the careers that have enabled us to build our wealth.  But making the decision to walk away from saving a lot of money is difficult, especially at an early age when long-term future expenses and market returns have so much uncertainty.

This post outlines my opinion on how to be less stressed about this decision.

My advice, especially for those reaching FI early in life, is to keep working a little longer to go from a “probably” safe 4% portfolio withdrawal rate to a nearly bullet-proof safe withdrawal rate of 3%.  There is a real-life benefit between 4% and 3%.

The great thing about this is that it won’t take that much longer to go from 4% to 3% if you are saving a lot of your income.  And anything beyond 3% is unnecessary based on all the global historical data on financial investments so you should feel very comfortable with a 3% SWR.  In fact, in the vast majority of cases, you will end up with a lot more money and be able to spend more later on.

If you are tempted to keep saving to get below the 3% withdrawal rate, then you should really reflect on why that is because it’s not really about financial facts at this point.  What you are really doing is saving up more so you can spend more than you are currently planning, whether through lifestyle inflation upon “retiring”, charitable giving, spending more on your kids, etc.  But you can’t take it with you when you die so you should understand that you are working longer to increase your spending, even if it’s on the day you die.  You are beyond the risk of running out of money due to poor financial returns.  Additional savings are not needed at your current spending plans.

Whatever your individual situation is, I hope this provides some useful perspective.  In particular, for those struggling to achieve peace of mind with the big life decision of stopping a lucrative career to spend your life doing something else, I hope the guidance (and math) of working just a while longer (but not too much longer!) will help you be happier and more at peace with what is likely a stressful but exciting life change.

After all, the goal of your efforts is happiness so anything you can do to improve happiness and reduce stress, is worth considering.  The goal is not just to retire as soon as possible.  The goal is to maximize your lifetime happiness.  Remember that.

As always, I wish you the best on your own journey!



4 thoughts on “Golden Handcuffs and Early Retirement – The Mental Challenge of Choosing Freedom when Slavery is Lucrative”

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