It used to be that retirement was an attainable vision for just about everyone in the U-S-of-A.
Definition of Retirement: sit around the home, read the paper, play some golf, drive around town in a Cadillac, catch the early bird special at the local diner, watch some TV, go to bed, and do it all over the next day. Mix in an occasional RV or European vacation to take some photos and all was right in the world.
Retirees had a simple financial formula for achieving that dream:
- Hit age 65.
- Stop Working.
- Collect your pension check, replacing the majority of your annual income before retirement.
- Collect your Social Security benefits to fill in the rest.
- Rely on your retiree health benefits from your employer.
- Collect your medicare benefits to fill in the rest.
Those days are all but over. Why?
- Pensions are dead – our generation won’t get them, and if you are lucky enough to get one, good luck keeping most of it.
- Most individual investors fail miserably at investing. With 401K’s, any hopes we have of retiring are dependent on a.) you becoming a good, patient investor, b.) the market performing well (just look at the last decade’s miniscule returns if you aren’t scared yet).
- Social security benefits will not deliver what they have in the past (Social Security has historically replaced 40% of income). That is, if one of our political parties does not successfully push through the privatization of Social Security first, which would result in an impact similar to shifting pensions to 401K’s – that is, placing more burden on individual investors to get it right. Check out my comprehensive Social Security overview for more info.
- Retiree health benefits are about as rare as pensions will be for our generation – almost non-existent.
- For better or worse, medicare as it stands is under attack by Republicans. According to the non-partisan Congressional Budget Office, Ryan’s medicare altering proposal would shift more and more burden to individual retirees as it encourages a move to individuals buying health insurance through the private sector and is tied to general inflation vs. medical inflation. Whether Ryan’s plan passes or not, the U.S. has a budget problem that is going to encourage shifting more and more burden to retirees over the years. We can’t escape that.
Traditional Retirement is Dead
Scary stuff. If you don’t start hoarding a significant amount of your income (50%+), average double digit returns, and stay in impeccable health… retirement, in the traditional sense, is all but dead to you.
The system itself was designed when we were primarily a blue collar society and our bodies could not take working much beyond age 65. As we have shifted more and more towards and information based economy, perhaps we simply don’t need the 65 and quit formula. We may not have a choice.
You simply won’t have have the same entitlement programs to fall back on and private sector employers won’t foot your bill either. For better or worse, IT’S ALL ON YOU.
I’m not taking a political stance here. I’m trying to warn you that you will really have to look out for yourself starting yesterday and get a little bit lucky if you want to have a traditional retirement in today’s political and economic climate.
Is that such a bad thing?
The New Retirement
Perhaps my views will change as I age. I just can’t imagine a life centered around doing nothing.
It sounds like preparing for death.
When I’m 65, 70, and beyond, I want to live it up!
I can’t imagine NOT working in some capacity. Sure, at the age of 70, I don’t want to be slaving away in a factory line somewhere or on a computer (I almost said ‘pushing paper’) for 40 hours a week, but I do want to pursue creative interests, do meaningful work, and engage with others.
And if I have to take a part-time job to grab partial health insurance, so be it.
I think this will be the norm for our generation. And it might not be all that bad.
Shifting Our Mindset About Retirement
Retirement is all about situation and mindset.
I view it as a gradual or potentially even sudden move from following monetary pursuits to following personal objectives.
In other words, achieving enough financial freedom to do what you want in life.
There may be some peaks and valleys along the way that force you to seek a meaningless job part-time that offers health insurance or force you to take a full-time job in order to replace lost retirement savings.
Maybe retirement for you is becoming debt free and quitting your corporate 9-to-5 at age 40, working part-time at a Starbucks for health insurance, and gaining the bulk of your income from passion-related multiple income streams.
Does that sound so bad?
The New Retirement Formula
Your mileage may vary, but I think the new retirement will look something like this:
- Become debt free.
- Pursue interests that result in income.
- Supplement health insurance through income or part-time work with health benefits.
- Enjoy the nice added benefit of Social Security, Medicare, or other entitlements, but certainly don’t count on them.
Notice the lack of retirement age or ‘stop working’ from the equation.
What Steps Can you Take to Prepare for the New Retirement?
Maybe I’m wrong, but I just don’t see our society moving to a heavier benefit entitlement system and our current system isn’t even sufficient for our generation to realize a traditional retirement. As a result, the traditional retirement is dead. In order to be prepared for and embrace that:
- Stop worrying, it only causes inaction and a victim mentality. Start acting.
- Attack debt with a vengeance. The sooner you can become debt free, the sooner you will be able to achieve the new retirement.
- We’ve lived like many of our parents who have a cushy pension and who will get full Social Security payouts. We need to stop that. Keep your living expenses low. Consider downgrading or selling your vehicles and buying a tiny home instead of a larger one.
- Save like you never have before, particularly outside of your retirement accounts. Still put significant funds into your retirement accounts, but realize that those accounts are designed for the traditional retirement model. If you withdraw early, you will be penalized. The new retirement will require you to have a larger savings base outside of retirement accounts that you can withdraw from when needed.
- Start figuring out what your marketable hobbies and creative interests are and start pursuing them. Whether you achieve the new retirement or not, you should consider this.
- Become multi-skilled so that you can be flexible and recession proof.
Whether you believe that traditional retirement is dead or not, these actions will only improve your financial standing and freedom to pursue your interests in life.
Traditional & New Retirement Discussion:
- Which retirement – old or new – sounds more appealing to you?
- Do you believe that the traditional retirement system is dead?
- What is your new retirement vision?
- How are you planning on preparing for the new retirement?
My plan is to be debt free and out of the rat race by age 40. That is a very short 8 years away. I believe, much like you, that looking out for yourself is paramount because you can’t count on your government or your employer to do it for you. I currently have a multiple income stream, but it is not as robust as I would prefer. Within the last year I have been very focused on reducing debt where possible. Once my debt is completely gone I plan to focus on raising my savings rate, both retirement savings and personal savings.
I would recommend a very diligent savings and debt reduction plan at an early age, because it gets harder to manage when you are married with kids. It can be done, but not without greater sacrifice on your part.
Throughout history, you stopped work at retirement when…
a) You could afford to live off your savings.
b) You could afford to live off your kids.
c) You got too sick to work or you died.
Here in the enlightened west, we have somehow got the idea that at the magic age of 65 we mysteriously stop work and do nothing (except for CEOs and politicians — how ’bout that?) and the State will pick up the tab.
I don’t plan on ever “retiring”, but I hope that I one say have enough put by that I can afford to work when and how I want to without having to worry about getting paid.
I’ll pass on the best piece of retirement advice that I have ever heard; it was given to me back in 1989: “Don’t assume that the State will have anything for you when the time comes for you to retire.”
That is all.
My goal is not to retire but to be able to afford not to work, there is a difference. People have gotten in their minds retirement exists and it does not. Those who were not rich stopped working, and went to live with their children and helped with their grandchildren allowing both parents to work.
I don’t think it’s all doom and gloom. Just because the current system is unsustainable doesn’t mean that there will be nothing for retirees in 2040. Dont confuse political scare tactics for reality.
Certainly it seems like more responsibility is being hoisted upon the individual to ensure they can support themselves through retirement, but the elderly will not be left out to rot, or be forced to work at Starbucks for benefits. Our politics won’t allow it, not when the elderly is essentially one of the most powerful and reliable political forces.
Old retirement sounded more appealing because it was less to worry about and almost guaranteed. Stay at your job, work hard for 25+ years, get money that you paid in. The traditional system is DEFINITELY DYING, not necessarily dead yet, because my grandparents are still reaping the benefits of their pension and social security. My parents will probably get the last of it. My new retirement vision is to not have to work traditionally in the first place. I don’t want to be tied down to an office for 40-80 hours a week. I want to be able to work from home and watch my (future) family grow up. Hopefully I’ll get to continue my career and legacy well into old age, but continue to invest religiously until maybe about 70, then start living off of that money. As for preparing, I’m working on reducing my debt, then going to build an emergency fund, then work on continuously working on a Roth IRA or 2.
Everything involving the economy is cyclical. I wasn’t around for the last recession but I am sure the same rhetoric was being thrown around then too. I am a fed so I do have a pension and with the way legislation has been going, benefit reduction is being taken out on new hires. Let’s hope it stays that way.
And just a point of clarification, you can only have one Roth IRA per SSN.
With compounding interest, despite the low maximum contribution to retirement accounts, i dont necessarily think you need to sock away 50% of your income and receive consistent double digit returns. You do need to temper our expectations of the future a little, but quite honestly, was social security going do all that much for us anyways? Those who are prospering in retirement now most likely arent relying all that heavily on social security…though I feel it’s important for the lower income groups.
My wife & I have already decided that when I retire in 20 years (making it a total of 30), we won’t be able to afford living in CA on a % of what I currently make. We’ve decided that once I do (and hopefully I would have a pension intact) retire, we would move to a foreign country and live like kings.
I agree with you that traditional retirement is dying out. But with the stats we have on people in debt in this country, I don’t think your original plan is actually that workable. I don’t know that most people are actually capable of getting debt-free. I know my wife and I are trying, but I can’t speak for everyone else.
I don’t ever plan to retire. I’ll cut back to part-time but retiring just sounds boring. What would I do? Golfing every day would kill me.
I want to retire as early as I can. Saving X percent; is meaningless if you don’t have a goal. Just like those ING commercials; “What is your number?”. Without knowing that; it’s pretty hard to come up a sound plan to get there.
I’m not even factoring social security or the pension that my company currently offers. So that will be just be just bonus money if it’s there when I retire.
My goal is to retire by 55 with at least 2 million in assets (not including the house). I figure that I could live off 5% interest (100k/year) and not even touch the principal. I’m 35 and if I keep my saving up I should hit that goal. Though if I ever get married with kids; then that plan may change (work longer/bigger nest egg).
Which retirement – old or new – sounds more appealing to you?
The first one sounds more appealing, because in that scenario you would have slaved away for 25-30 years with adjusted wages to pay into the pension bucket and then pursued other interests later in life. Pensions were always defined contribution – defined benefit plans. 401k is defined contribution only. Pension funds would be managed by fund managers quite like today’s hedge fund managers but would not take away the 25-35% of returns on the money. Greed at the top has dismantled the old scenario so we have to be ready to face the worst.
Do you believe that the traditional retirement system is dead?
For the most part, but it may revive. See a dollar an hour wage is ok for the Chinese or Indian when they’re starting from 10 cents a day, but aspirations are a wonderful infection. Wages are rising around the developing world faster than here. In India some industries are seeing 25% annual wage increases in the whole wage pool. As the wage differences disappear, it will make sense again to manufacture locally, produce and consume locally. With transportation costs escalating this is going to happen. The other benefit that developing countries have right now is the absence of environmental regulation, which most MNCs are exploiting by moving production there. Labour movements around the world have been weakening, so China and India have Special Economic/Export Zones/Areas where they have suspended their labour laws and even their environmental laws (rat race to the bottom). As affluence increases, these conditions will change knocking the second half of the globalisation regime.
What is your new retirement vision?
Same as before, make enough money to be able to travel the world, do good things, read well, eat well, talk to people all this while living off of interest on the earnings till that point. I assume a 3% interest rate regime (after tax) and to live the life style I want to live, maybe $60k to $120k a year. This puts my savings goal at $2 million – $4 million. Mostly, this money will be left as an endowment when I cease to be. An endowment to further women’s education in the third world.
How are you planning on preparing for the new retirement?
Currently, I am just working my rear end off. Being an engineer I do have somewhat of a sheltered existence, economically speaking, but I want to go to law school part time and move up the corporate ladder. That is my diversification plan.
When I get to the point that I want to retire, I will start learning a new language and travel to that country and establish a school there to teach young kids and even adults. This is my dream, I hope I make it :)
Right now I am 30 and have personally created net asset value of between $150-200k. All of it has come in the last 4 and a half years. I am saving aggressively (in the 60-70% range) with base salary as the divisor and 401k included. I also have approximately $150k invested by my parents for me, which I hope not to ever use for my own needs. They have made me able to create wealth by my hard work and that is the best inheritance I can ask for.
My retirement target is Fall of 2026
Wow, 60-70% savings is impressive. I thought I was doing pretty good at 35%. I make pretty good money (100k+), have only mortgage debt, and no kids. I know I could be saving more, but as my salary has increased so has my spending unfortunately. To me, what’s the point of hoarding all my money for the future and not enjoying any of it now.
Early on though, I decided that I would make maxing out my 401k and Roth every year 1st priority as my salary went up. I’ve been doing that for several years now. Now I’m working on increasing my taxable investments as well.
Is it bad that I want to retire at age 50 and not work? Like ever again?
I’ll work my ass of until I’m 50.. but after that, I don’t know. I want to do things I enjoy.. like volunteering, traveling, spending times outdoors.. etc.
Maybe I am all wrong and I’ll be bored out of my school and want to work part time or something.
Yes, it is bad. Why the heck would you want to wait until 50???
I would definitely love to save up for the new retirement. Dude, life is short – what if all my investments for the long-term will not even be dipped into because I’m already a goner???
The article above does not take in the consideration that you need to pay for a Family ( Children etc.) I know I had to shell out quite a bit to get my kids through College to say nothing about how much was spent raising them…Retirement Savings was pushed to the side for a long time. I do not have anywhere near what I need, And I am way over the average savings for retirement!