Today is the first in a multi-part series about what we
think of when we think of “retirement.” In today’s discussion we analyze what “retirement”
means colloquially, how it differs from “financial independence,” and we’ll
touch on re-thinking it entirely. Let’s get started shall we?
Retirement as we know it
When you mention the word “retired” to the average person we
all have a similar mental picture: a silver haired septuagenarian relaxing on a
golf course with no boss or job to report to each day. It comes with advanced
age, many of us tying it to the age at which you can claim Social Security or
start withdrawing penalty free from your IRA and 401(k) accounts. “Retirement”
as we think of it is an inevitability that happens someday when you’re too old
to keep working.
I’m going to propose a new definition for “retirement”: retirement is
removing yourself from the workforce.
That’s it. Full stop. Retirement means deciding you don’t
belong in the workforce anymore and simply removing yourself from it.
Oftentimes this is voluntary because you’ve finally reached “financial
independence” (we’ll get to that concept in a moment) while for others it’s
less of a choice due to the impact of health issues and disability as we age.
With the concept of retirement defined let’s consider a new
thought: retirement is meaningless without financial independence. So what the
hell is that?
True “f*ck you” money
I’ve talked about the best career decision I ever made in a previous article. By saving up an
emergency fund I could ensure that even if my wife or I lost our jobs our
family would be okay for paying our expenses for months at a time. That gives
me an immense sense of comfort at work and has allowed me to focus on excelling
in my career instead of fretting about whether we could afford to pay our bills
each month.
“Financial independence” is sort of like a permanent
emergency fund. No longer do you have to worry about the money coming in from
your salary each month; instead, your savings provide you a stream of income
equal to what you need to live off of. That’s the moment where you’re
financially independent: you no longer rely on an employer in order to afford
your life.
Being financially independent is the key to successfully retiring. When
your money employs you, you don’t need your employer.
The key to being happy in retirement, then, is saving enough
to reach financial independence so that you can afford to remove yourself from
the workforce.
Financial independence
Here’s the thing about being financially independent (FI):
some people start life FI, while others live their whole lives without ever
achieving it. Consider the likes of a Paris Hilton, born into millions of dollars
of wealth, successfully financially independent before she had even drawn her
first breath on the earth. Then consider the woman I wrote about who was in too deep. Poor planning, poor life circumstances, and advanced age
combined to prevent her from ever reaching financial independence. She would
spend her silver years struggling to get by at a time when her mind and body
were least prepared to help her change that situation.
Somewhere in between a life of decadence and one of extreme
poverty are the rest of us, hoping to build enough wealth so that we can reach
financial independence and thus retire. The key to doing that is how much we save
now to build the wealth we’ll need to generate our income later. You want to
hire as many magic dollars to harness the most powerful force in the universe as you can, as
early as you can. By building that wealth you’ll create the critical mass of
compound interest to push you across the finish line so that those magic
dollars are paying you each month the equivalent of your old salary.
Rethinking retirement
In order to reach a successful retirement, to remove
yourself from the workforce in a manner that’s comfortable and allows you to
continue enjoying the life you’re accustomed to, you need to reach financial
independence first. Retirement, then, is really a meaningless byproduct of the
pursuit of financial independence. Who cares whether you’ve removed yourself
from the workforce so long as you’ve reached enough generated wealth to hire
yourself full-time at the salary level you used to earn?
Under that circumstance the perception of retirement I
proposed at the opening of this article is totally off base. Instead of
imagining ourselves as elderly golfers in “retirement,” we should imagine
anyone who has saved enough money to pay themselves 100% of what they need to
live on indefinitely being able to call it quits. Age is irrelevant.
What is the impact of pursuing financial independence
instead of what we used to think of as retirement? For starters an immense
amount of security at work. If my fully funded emergency fund allowed me to
work confidently knowing my finances were okay if I suffered a sudden job loss,
reaching FI means never having to go into the office again. That means each day
you are in the office, you’re there
on your own terms. Don’t like a responsibility you’ve been handed? Push back
with your leadership and let them know you’re not interested. The most
significant leverage they have is letting you go, and that’s not leverage at
all when you’re financially independent.
Security in retirement is another big gain. In our initial
definition of retirement we talked about people who choose to remove themselves
from the workforce because they have enough money to do so, and a group of
people who remove themselves from the workforce because they have no choice.
When you reach financial independence you can ensure you’re not in the second
class by making sure you’ll never be in a position to remove yourself from the
work place by force and instead being able to do so on your own terms. Let’s
look at a new definition of
retirement.
Retirement is voluntarily removing yourself from the workforce once you
have achieved financial independence.
No age requirement. No specifics other than being in control
of the decision and being able to afford it. The key to a successful retirement
is the all-powerful goal of financial independence. In our next installment we’ll
dive deeper in to financial independence and a group of people who set
themselves on F.I.R.E.
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