Planning Our 21st Century Retirement
Wiki defines retirement as “the point where a person stops employment completely.” The link explains that retirement is a relatively new idea in society, introduced in Germany in 1889. Prior to this, lifespan for most was short and there was no social system to assist people if they stopped working. People simply worked until they couldn’t, then their family cared for them until they died. This link to the Radical Personal Finance Podcast gives a more interesting and detailed history of retirement. Retirement wasn’t traditionally seen as a desirable thing. It simply was a way to remove less efficient older workers and make room for employment of younger, healthier and more efficient ones in an industrialized society. People didn’t retire, they were retired.
Out of this model has grown American society’s retirement system built upon social security and pensions built to support people for a few years when life spans were much shorter. As life expectancy increased these systems began failing which we’re seeing more each day and so we’ve switched to a 401(k) system. This system depends on people to save and plan for retirement themselves when many have no education on how to even manage day to day finances effectively. Luckily, the financial industry is there to help (EXTREME SARCASM INTENDED!).
Despite having a very broken system, most of us continue to slave away at our jobs for 40+ hours per week for 40-50 years to reach retirement. In the worst case scenarios, we will have lived the traditional consumer lifestyle, saving little and now dependent on pensions which may not be there, or the social security system which was not designed to support people’s living costs for 30+ years and that is destined for change or failure. This situation is summarized well, if somewhat sensationalized, in this Forbes magazine article about America’s retirement crisis.
But that is the worst case scenario. What about the best case scenario? There are many people that will have comfortable retirements. They play by the rules. They also work 40+ hour work weeks for 40-50 years saving 10-20% of income along the way for retirement like you’re “supposed to”. They spend the vast majority of their waking hours working while missing their kids grow up, only to have tons of free time when their kids are grown and no longer around. They spend the prime years of their lives focused on working and saving for retirement to have a better life later. Unfortunately, at best they will be older and not able to do everything they could when younger. At worst, their health will fail and they will never enjoy the fruits of their labor. Many people make their careers such a focus for so long that they don’t even know how to separate from their work. These people don’t retire anyway when they can or they quickly become depressed in retirement. In many ways, success sounds worse than failure.
This is because the traditional idea of retirement simply doesn’t make sense in a time where our society is more productive and technology has made life cheaper and easier than it has ever been in history. We’re taking an idea of retirement that may have made sense in the time of our parents and grandparents and applying it to this much different time. Think about how much life has changed and compare that to how ideas of retirement have not.
I grew up gaining my love of baseball from my grandfather. He would sit on his back porch every night and listen to broadcasts of the Pittsburgh Pirates (his only option as they were the local team) on AM radio. He would check the box scores of the other games in the following day’s newspaper. Today, I could watch any game played by any team any night of the week on tv or the internet. I could follow the scores of any game in real time by pulling a phone out of my pocket.
I grew up listening to music in my parent’s house on a stereo that took up half of a room. We listened to music on vinyl albums the size of dinner plates that played all of 5-6 songs before having to be flipped over to listen to the other side. The speakers couldn’t play very loud or the sound was distorted and the album may start to skip. Today I carry thousands of songs, podcasts and complete books on an IPod that can easily slide into the back pocket of my jeans. Add a pair of speakers that I can carry in my hand and I have a stereo system that plays louder and with better sound quality than the massive stereo system of my youth and it goes anywhere I go.
Even when I was in college in the mid 90’s, when I wanted to talk to someone long distance, I picked up a hard wired phone and called them. I then received a bill every month and was charged by the minute for these conversations. Calling internationally was even far more expensive. Today, I can sit on Skype and have a crystal clear conversations with anyone, anywhere in the world with an internet connection absolutely free while seeing the person I’m talking to.
I would never follow baseball the way my grandfather did 50 years ago. I would never listen to music on a stereo like my parent’s owned 30 years ago. I no longer own a land line phone like I did 15 years ago. So why in this rapidly changing world would I define and plan my retirement based on a system developed for 1889 Germany and reinforced in America by post Great Depression government social policies? We’re not. Are you?
We’re taking advantage of the great inefficiencies in the system in the way most people pay for education, housing, cars and food to build a high savings rate. We’re leveraging this with the significant tax advantages available for those with a high savings rate. We’re essentially eliminating the potentially massive costs of investing by learning to do it ourselves. In doing so, in only about 15 years we’ll build our investments to 20-25X our annual expenses which SHOULD be able to support us indefinitely (avoiding the mistakes we’ve made with investing, lack of tax planning and poor housing decisions anyone could easily follow this path and achieve these results in less than 10 years). We’ll then do whatever we want in retirement. We will not tie ourselves down with the traditional definition of retirement where “a person permanantly stops employment”. We realize that we have many skills, interests and hobbies that can be used to make small amounts of income periodically when, where and how we find it fun, interesting, educational or challenging. Better yet, these skills can be leveraged to further decrease our living costs making our lives even cheaper and more tax efficient. We anticipate growing our wealth substantially in retirement. We will utilize these strategies of continuing to earn money on occasion while spending less in retirement to decrease the stress on our investment portfolio and eliminate the longevity risk of running out of money that most “successful” retirees will have even if working to a traditional age with a traditional plan.
If you think this sounds impossible, you’re probably used to thinking of retirement in terms of more traditional concepts and definitions. This isn’t your grandparents’ retirement plan!
*Image courtesy of ratch0013 at FreeDigitalPhotos.net