With the advent of increased life spans, retirement has become an established topic. Prior to the beginning of the industrial revolution, retirement was not really even an option nor discussion for the majority of the world. To give up working, meant to give up food on the table.
In the last 100 years or so, retirement has well, gone mainstream one could say. This led to the commencement of the United States Social Security and Medicare programs, ensuring that all Americans can have a retirement, even if they fail to plan. Unfortunately, with increased life span and cost of living, these programs will not be able to support everyone, even partially. No matter your opinion on the matter, these programs have ensured that retirement has and will continue to be a social norm.
In the last few decades, we have seen a huge change in what retirement means to the average American. With the reduction and sometimes elimination of employer profit sharing, pensions, and stock options, saving for retirement has transitioned from the employer to the employee. Yes, my friend, the ball is in your court.
This is definitely a challenge for many Americans as they begin to think about their futures and their lives after work. It is also a new and exciting time, as we get to rephrase the tried and true definition of retirement. So below, we will outline the many forms of retirement (some new and some old). Try to find where you fit in, if you are undecided, try and find what fits your retirement mission statement.
Conceptually, this is working for 30 or 40 years and you save a small amount of income every year. Likewise, you are paying off your single-family home over the same time period and retiring at 55 or 60, perhaps sometimes even a bit later. This is the quintessential American retirement. Work hard throughout life, live well and retire to the golf course (or Florida). This is the advertised version of retirement, what you see in the commercials, the products sold to you, what your financial advisor preaches (if you have one, which I do not always recommend). This is simply a tradeoff, where you work for 30 or 40 years for 10 to 20 good years.
The challenge here is that most Americans start too late. They do not save enough throughout the early part of their career, resulting in them not taking advantage of compound interest. (link out here) Additionally, 65 and 70 will be the new 55 or 60, meaning that the normal retirement age will continue to be pushed back, meaning 50 or 60 years of work for 10 to 20 good years. Meaning the tradeoff will get worse as time progresses.
I dive into how one knows how to save the correct amount of money in this post. I am not a proponent of this methodology as I believe the goal should be Early Retirement or Fat FIRE (which I will shortly define). Though, you have to do what works for you and your family.
(Regular) Early Retirement
Early retirement is the same concept as regular retirement, save money, let it grow and retire. In practice, it requires significantly saving more and usually a reduction of expenditures. For example, one could save 40% to 50% of their income and choose to not increase their normal expenditures. The normal American spends their entire raise, those focused on early retirement put every raise away for that moment of early retirement. The goal here is to have your investments support your standard of living, this can happen for some earlier than others. This is often broken down into subgroups, such as FIRE, Fat FIRE, and Lean FIRE.
This is the camp I am in. I prefer to work hard now, run my businesses, earn a high income, save a lot and retire early. It sounds easier than it is, but this blog’s goal is to guide you through that process.
FIRE (Financial Independence Retire Early)
The Financial Independence Retire Early subgroup of early retirement is simply that, save lots of money, learn to live below your means and retire early. This is very achievable for the average American, as it is simply a choice anyone can make, sacrifice today for a better work free tomorrow.
Let’s talk numbers. The average American family earns $50,000 to $60,000 annually, the FIRE community saves anywhere from 20% to 50% of that income, with the goal of retiring very early and continuing to live below their means. The Average FIRE family’s goal is to save 25 times their annual expenditure and for the average American, this is roughly $1,300,000. For those that “Lean FIRE”, this would be below and those that “Fat FIRE”, this would be above. The variance depends on what lifestyle you want. In a future posting, I will help you calculate this.
This can be broken into two subsets; the Fat FIRE, where families are high earners and high savers allowing for the above-average lifestyle in both the current sense and future retirement while retiring early. The other group is the Lean FIRE, where the family is an average earner but an above-average saver, compounding savings to allow them to retire early and live a lifestyle below the average Americans income.
Fat FIRE is early retirement for entrepreneurs and high-income professionals that choose to balance their creature comforts with their goal of financial independence. This means that they do not have to fully embrace frugality, its financial freedom with the perks.
The ability to spend $100,000 a year based on the 4% rule requires retirement savings of $2,500,000 or passive income streams that add up to gross earnings. No, $100,000 a year isn’t first-class international or cases of champagne. Though with a paid of mortgage and no work-related expenses, $100K can go a really long way.
Fat FIRE can be more than $100K if you have consistently been making more. This could be 10x that if you fall into that camp. The math is simple, save the right amount, have the liquidity event or compound your real estate portfolio to build the life you want. Additionally, the Fat FIRE club is not restricted to the $100,000 plus club, if you make $91,000, you can still join this club too.
What is like to retire early and live off of less, that is Lean FIRE. Less can simply mean relative to the average, usually to Lean FIRE, one needs significantly less savings to reach their retirement goals.
Unlike Fat FIRE, this is the concept of living below your means before and after retirement. This is the opposite end of the spectrum for Fat FIRE. This would require living not in a major metro, not in an expensive state, etc. The key here is that you do not need to acquire and retain as much investment savings to ensure this lifestyle. This can often be attained with a sub $1,000,000 retirement savings (4% of $1,000,000 is $40,000 a year, slightly below the average American income).
Without any debt and a mortgage paid off, $40,000 can provide a simple lifestyle for the average American family in a low-cost area of the country. This may be a lifestyle with limited vacations and public school, but there is nothing wrong with that, especially if you have the financial freedom that we all dream about.
The best goal with Lean FIRE is to meld it with semi-retirement (outlined later in this article), which means you take up some part-time work to supplement your income. Anyone should be able to generate an extra $10,000 or more a year in side income working 10 hours a week. If you’re living a lean lifestyle, a 25% boost to your passive income is a big step up and means lots of free cash flow to do with what you want (family vacation anyone?).
Similar to the concept we will touch on shortly, this is the concept of mini-retirement, though for an extended period. The goal is to work for 10 to 20 years and then take 10 to 15 years off. Sometimes this turns into permanent retirement, sometimes this requires going back to work after the temporary retirement. This is an interesting premise, as it allows for all the freedoms of enjoying your best years doing what you love. Additionally, when you return to work, the goal would be to attain a higher level of income with a more senior role. This could potentially be challenging as the workplace constantly changes every decade or so with the advent of technology. One of the major concerns about temporary retirement is finding quality healthcare whilst on your mini-retirement, which can be challenging.
Semi-Retirement (Working Retirement)
Find the balance, isn’t that our life’s goal? Semi-retirement is this the concept of working part-time but ensuring that you have both time and resources to enjoy your life at the same time. For some, this does not mean a career change but a restructuring of work in a reduced capacity. For others, this may mean a complete job change with potentially less income, but the freedom to live comfortably and do work that is fulfilling. Other semi-retirees believe this may mean running their business or investment life part-time and relaxing the rest. An entire other subset believes semi-retirement could mean living partially off their investment income and taking a care-free job bagging groceries or serving coffee.
One of the key benefits of this strategy is the ability to continue to earn money at either your previous corporate rate or in a part-time capacity. This means instead of living solely off or your investments or retirement savings, you are able to supplement these and still grow your principal, to live an even better life in the future.
This is a combination of Early Retirement and FIRE, requiring discipline and commitment, but having a huge upside if executed correctly. In a world where our careers and industries will now change almost every decade, isn’t it time we think about retirement a bit differently? Mini retirement, the concept coined by Tim Ferris’s 4-hour workweek (a great read for those of you who have not read), is the concept of taking retirement breaks throughout your life, instead of putting off the retirement benefits and joys well into the future that we may never see. These tend to range from under a year to up to two years.
I will preface this by saying, this requires real discipline and planning. This requires forethought and a certain kind of work ethic and self-motivation. You may leave the workforce with one skillset and have to return prepared to learn an entirely new one. You may have to be a meticulous spender and understand that you cannot draw down your principal even in this scenario.
Which one of these retirement options is right for you? This depends and only you know the right answer to this. There are always many factors to include, such as; How is your health? Do you like your job or career? How much money do you have saved and in what format? What is your life mission or purpose? What are your goals in the next few years and over the next few decades? These questions and more will guide you to the right retirement fit for your life.
Photo by Trish Hartmann