The term “retirement age” is generally defined as between 62 and 70, based on standards set for claiming social security benefits. But practically speaking, retirement is not an age, but rather a function of finances—having adequate income to sustain a desirable lifestyle without needing a job. A friend of mine coined the word “preferment”—a season of life which allows her to do whatever she prefers. An ideal retirement focuses on productive, purposeful work which fulfills a personal calling or mission whereas employment aimed to provide for immediate necessities.
Do What You Love
Retirement is a modern concept. Prior to the industrial age everyone would normally work and serve productively for an entire lifetime. When laborers began leaving the rural, farm life to work in factories and offices in cities, jobs for many became monotonous, unsatisfying, repetitive, just something to pay the bills while offering little personal fulfillment. Retirement, then, became the dream of a time when one could finally start living life. Many muddled through long years of drudgery in hopes of cramming in a few golden years at the end.
However, rather than being the slave to a job, a better goal is living in freedom with money as the slave. Warren Buffet is perhaps the greatest modern example of a perfect “retirement”. At age 95, he still loves his life – all aspects of it. He talks about tap dancing to work. “I do not want to retire so I can spend a week planning my next haircut. I’m having the time of my life, and it keeps me young! When you fall in love with what you do, you never retired from it because it’s not work anymore. The ideal is to get money out of the picture and do what you were called to do.” Although no one is expected to attain the wealth of Buffet, we can all aspire to achieve our own perfect picture of retirement.
The Process
For most Americans, however, the prospect of a dream retirement is out of reach. And yet, the idea still seems to be the culmination of all dreams because everything else flows into it. Arriving securely, happily and permanently on this island is more than just a matter of finances. The journey requires careful planning, working, saving and collaborating with family. It involves elements of the vocational, physical, mental, emotional, relational, as well as financial. Failing to consider just one of these elements can derail the process. A few brief thoughts will make the point.
Vocational.
Choosing a lifetime vocation based on personal fulfillment is common. But at some point, reality must set in and everyone is forced to consider the financial implications of vocational choices.
Physical.
Good health is not optional for those who want to retire well, so the first specific step is diligence in maintaining personal health. The next step is acquiring adequate insurance, for health, disability, critical illness and long-term care, just in case these are ever needed.
Mental.
Financial literacy and wealth thinking are a top priority for the mental component of the magic formula. Developing and implementing a financial plan requires these.
Emotional and Relational.
The entire tribe of family members should be brought along the wealth journey with the prospective retiree. Personal fulfillment without family and friends is meaningless.
Financial.
Now we are ready for a deep dive into the most obvious aspect of retirement. Adequate savings is generally the first consideration, but research shows that not many know the minimum requirements. For the average person, upwards of $1.6 million is the goal, but for various reasons, few will reach it. Some will fail to set aside the needed funds in a 401k or other retirement instrument. Then, since the retirement savings process is normally tied to an employer, the average working adult who changes jobs six to eight times has a problem. These disruptions force about 70% to cash in 401k’s. Despite the taxes and penalties involved, retirement savings become a backup emergency fund. As a result, in the U.S. only about 5 people out of 100 are financially independent at age 65. The others will continue to work or live with relatives.
Generations
Looking at the various generations, we find that baby boomers (already over 65), must have a minimum of $1 million in retirement savings right now in order to be financially free. And yet the average baby boomer has only $152,000—a far cry from the minimum required. The number one fear of this generation is not death, but rather the fear of out-living their money—and most have reason to fear.
Generation X (around 50 years old) have 15 years until retirement. Considering inflation, they will need $2 million in savings. If both husband and wife combined have 401k’s valued at $400,000 or more right now, they are on track to be in the 5% who can retire on their own terms. But the average 50-year-old has just $66,000—significantly short of the $400,000 needed. Although Gen X-ers have time to catch up, the odds are against them. They will need to save and invest $3,500 a month every month until they hit age 65. Because most 50-year-olds have mortgage payments, kids’ tuition, normal living expenses, occasional travel and debt, they don’t have an extra $3,500 at the end of the month.
We could crunch the numbers for those in their 40’s, 30’s and 20’s, but let’s spare ourselves the pain. Suffice it to say that the vast majority of all adults are in jeopardy of having to work until death, with no prospect for retirement. Unless there is another way.
Options
Yes, there are at least two options! Building businesses that produce passive, residual income, and acquiring assets that grow faster than inflation are workable strategies. Anyone at any age can retire as soon as the sustainable income flow is adequate. So, grab a good financial planning professional and get on track. Don’t delay! We have no time to waste. The dream awaits.
Read more of Gail’s article on Plaid or connect with her on her website.
